nep-int New Economics Papers
on International Trade
Issue of 2009‒09‒11
six papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Firm Entry, Trade, and Welfare in Zipf's World By Julian di Giovanni; Andrei A. Levchenko
  2. Energy in a Bathtub: Electricity Trade between Countries with Different Generation Technologies By Førsund, Finn R.
  3. Trade as Aid: The Role of the EBA-Trade Preferences Regime in the Development Strategy By Katerina Gradeva; Inmaculada Martínez-Zarzoso
  4. How much of South Korea's growth miracle can be explained by trade policy? By Michelle Connolly; Kei-Mu Yi
  5. Domestic Repercussions of Different Types of FDI: Firm-level Evidence for Taiwanese Manufacturing By Wan-Hsin LIU; Peter Nunnenkamp
  6. Cross-border lobbying in preferential trading agreements: implications for external tariffs By Subhayu Bandyopadhyay; Sajal Lahiri; Howard J. Wall

  1. By: Julian di Giovanni (International Monetary Fund); Andrei A. Levchenko (University of Michigan and International Monetary Fund)
    Abstract: Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of macroeconomic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade in which the parameters are calibrated to match the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- vanishes. The extensive margin of imports accounts for only about 3.5% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, inframarginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in entry barriers are an order of magnitude larger, while the gains from trade liberalization are an order of magnitude smaller.
    Keywords: Zipf's Law, welfare, entry costs, trade barriers
    JEL: F12 F15
    Date: 2009–09
  2. By: Førsund, Finn R. (Dept. of Economics, University of Oslo)
    Abstract: Many countries have followed a policy of being self-sufficient in electricity. However, in the last two decades exchange of electricity across borders has become more widespread, and the European Union's policy is to encourage a gradual expansion of crossborder trading and integration of electricity markets. It is therefore of interest to study what happens with the price formation in home markets when borders are opened up for trade in electricity and generating technologies differ. There is a common international market, Nord Pool, between the Nordic countries since 1996, and trade now takes place between many European countries on a bilateral basis. A stylised general equilibrium model of trade of electricity between two countries; Hydro and Thermal, with hydro and thermal technologies, is used to investigate price and quantity consequences going from autarky to trade in a competitive market, as revealed by using a social planning perspective for cooperation between countries.
    Keywords: Electricity; hydropower; thermal power; international trade
    JEL: F14 Q40
    Date: 2009–08–06
  3. By: Katerina Gradeva; Inmaculada Martínez-Zarzoso (University of Göttingen / Germany)
    Abstract: This study focuses primarily on trade preferences offered by the European Union (EU) and in particular on the Everything But Arms (EBA) trade preferences regime, which is targeted exclusively on least developed countries (LDCs). Using the gravity model, an estimation of the influence of the EBA preferences on exports from the ACP LDCs to the EU-15 is presented. The model is applied to the time period 1995 to 2005 for the ACP countries’ exports to the EU-15 and estimated with the help of different econometric techniques. The core questions of the investigation are two: First, to examine the influence of the EBA preferences on the ACP LDCs’ export performance and second to compare the impact of the EBA scheme with the one of official development assistance. In addition to their separate effects the combined impact of EBA and aid flows is also analysed. The main results show a very poor performance of the EBA regime. However, the combined effect of the EBA and aid on exports is positive, indicating that the development strategy of the developed countries, in this case of the EU, needs to include both sorts of assistance, aid and trade preferences.
    Keywords: development aid; trade preferences; Everything But Arms; panel data
    JEL: O24 C23 F13 F35
    Date: 2009–08–18
  4. By: Michelle Connolly; Kei-Mu Yi
    Abstract: South Korea's growth miracle has been well documented. A large set of institutional and policy reforms in the early 1960s is thought to have contributed to the country's extraordinary performance. In this paper, the authors assess the importance of one key set of policies, the trade policy reforms in Korea, as well as the concurrent GATT tariff reductions. They develop a model of neoclassical growth and trade that highlights two forces by which lower trade barriers can lead to increased per worker GDP: comparative advantage and specialization, and capital accumulation. The authors calibrate the model and simulate the effects of three sets of tariff reductions that occurred between the early 1962 and 1995. Their main finding is that the model can explain up to 32 percent of South Korea's catch-up to the G7 countries in output per worker in the manufacturing sector. The authors find that the effects of the tariff reductions taken together are about twice as large as the sum of each reduction applied individually.
    Keywords: Trade ; Tariff ; Economic policy
    Date: 2009
  5. By: Wan-Hsin LIU; Peter Nunnenkamp
    Abstract: Abstract: It is widely feared that outward FDI gradually hollows out domestic manufacturing and displaces local workers. We address this concern by drawing on exceptionally informative firm-specific data on Taiwanese multinationals in manufacturing. In particular, we assess whether repercussions at home depend on the size, location and type of outward FDI. We control for firm heterogeneity and estimate ordered probit models with the firms’ own assessment of domestic production and employment effects as dependent variables. We find that the probability of negative effects increases slightly with the size of FDI. The effects of locating in China differ from those of locating in advanced countries not only in size but also in sign. In contrast to vertical and export-platform FDI, employment effects of horizontal FDI tend to be positive. The quantitative impact is typically small, however
    Keywords: FDI location, type of FDI, domestic employment, home production, firm heterogeneity
    JEL: F23
    Date: 2009–09
  6. By: Subhayu Bandyopadhyay; Sajal Lahiri; Howard J. Wall
    Abstract: This paper examines the effect of cross-border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two-stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent-seeking activities type. We find that cross-border lobbying unambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.
    Keywords: Free trade ; Tariff
    Date: 2009

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