nep-int New Economics Papers
on International Trade
Issue of 2010‒09‒03
fifteen papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. History, Culture, and Trade: A Dynamic Gravity Approach By Douglas L. Campbell
  2. Trade Regionalisation and Openness in Africa By Lelio Iapadre; Francesca Luchetti
  3. Estimating Gravity Models of International Trade with Correlated Time-Fixed Regressors: To IV or not IV? By Timo Mitze
  4. Gradualism in Free Trade Agreements: A Theoretical Justification By Richard Chisik;
  5. Export Industry Policy and Reputational Comparative Advantage By Richard Chisik;
  6. Reputational Comparative Advantage and Multinational Enterprise By Richard Chisik;
  7. Trade Disputes, Quality Choice, and Economic Integration By Richard Chisik;
  8. Limited Incremental Linking and Unlinked Trade Agreements By Richard Chisik;
  9. The Exporter Productivity Premium along the Productivity Distribution: First Evidence from a Quantile Regression Approach for Fixed Effects Panel Data Models By David Powell; Joachim Wagner
  10. Estimating Import-Demand Function in ARDL Framework By Abdul Rashid; Tayyaba Razzaq
  11. Limiting Cross-Retaliation when Punishment is Limited: How DSU Article 22.3 Complements GATT Article XXVIII By Richard Chisik; Harun Onder
  13. Regional Integration, Fragility and Institution Building: An Analytical Framework Applied to the African Context By Thierry Verdier
  14. Fair Trade-Organic Coffee Cooperatives, Migration, and Secondary Schooling in Southern Mexico By Seth R. Gitter; Jeremy G. Weber; Bradford L. Barham; Mercedez Callenes; Jessa M. Lewis
  15. From Regional to Intercontinental Trade: The Successive European Trade Empires from the Sixteenth to the Eighteenth Century in Asia By Sami Bensassi

  1. By: Douglas L. Campbell
    Abstract: What determines trade patterns? Habit persistence in consumer tastes and learning-by-doing in production imply that history and culture matter. Deriving a dynamic gravity equation from a simple model, it is shown that cultural similarity is a product of history, so that trade patterns are a function of bilateral GDP, current trade costs, and the past history of trade costs. Using a trade data set which spans from 1870 to 2000, I demonstrate that many gravity variables operate via lagged trade, that historical trade shocks matter, and that trade patterns are persistent, even across centuries.
    Keywords: Dynamic Gravity Equation, Endogenous Preferences, Habit Persistence, Learning By-Doing.
    JEL: F10 F12 F22 N70
    Date: 2010–08–26
  2. By: Lelio Iapadre; Francesca Luchetti
    Abstract: The intensity of trade among countries belonging to the same region depends not only on the existence and effectiveness of a regional integration agreement, but also on other factors, which include the overall trade policy orientation and the relative level of geo-graphic and economic barriers affecting intra- and extra-regional trade. After presenting a set of indicators aimed at measuring correctly the intensity of bi-lateral trade preferences, this paper shows that most African countries tend to trade more intensely with partners belonging to the same region than with the rest of the world. However, this is not so much the result of the weak regional integration agreements that are in force in Africa, as a consequence of the manifold barriers limiting the degree of international openness of African countries. Under this perspective, a relatively high level of intra-regional trade, far from revealing the success of preferential integration policies, confirms that Africa’s participation in the process of globalisation is still very limited.
    Keywords: Regional integration, Trade, Africa, Statistical indicators, Network analysis
    Date: 2010–06–23
  3. By: Timo Mitze
    Abstract: Gravity type models are widely used in international economics. In these models the inclusion of time-fi0xed regressors like geographical or cultural distance, language and institutional (dummy) variables is often of vital importance e.g. to analyse the impact of trade costs on internationalization activity. This paper assesses the problem of parameter inconsistency due to a correlation of the time-fixed regressors with the combined error term in panel data settings. A common solution is to use Instrumental-Variable (IV) estimation in the spirit of Hausman-Taylor (1981) since a standard Fixed Effect Model (FEM) estimation is not applicable. However, some potential shortcomings of the latter approach recently gave rise to the use of non-IV two-step estimators. Given their growing number of empirical applications, we aim to compare the performance of IV and non-IV approaches in the presence of time-fixed variables and right hand side endogeneity using Monte Carlo simulations, where we explicitly control for the problem of IV selection in the Hausman-Taylor case. The simulation results show that the Hausman-Taylor model with perfect-knowledge about the underlying data structure (instrument orthogonality) has on average the smallest bias. However, compared to the empirically relevant specification with imperfect-knowledge and instruments chosen by statistical criteria, simple non-IV rival estimators performs equally well or even better. We illustrate these findings by estimating gravity type models for German regional export activity within the EU. The results show that the HT specification is likely to overestimate the role of trade costs proxied by geographical distance.
    Keywords: Gravity model, Exports, Instrumental variables, two-step estimators, Monte Carlo.
    JEL: C15 C23 C52
    Date: 2010–08–22
  4. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: A notable feature of many recent trade agreements is the gradual, rather than immediate, reduction of trade barriers. In this paper we model trade liberalization as a cooperative relationship that evolves gradually in a non-cooperative environment. We show that specialization, capacity irreversibility and the development of trade-partner specific capital increase the benefit of continuing the liberalizing relationship and decrease, over time, the lowest obtainable self-enforcing tariff. By increasing the penalty of future defection, sunk costs ensure that the self-enforcing trading relationship starts slowly, but once in progress the level of cooperation continues to improve.
    Keywords: Trade Negotiations, Gradualism, Irreversibilities, Economic Integration, Dynamic Games.
    JEL: F13 F15 C73
    Date: 2010–08
  5. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: Country-of-origin reputations are endogenized in this paper and it is shown that otherwise identical countries can be correctly perceived as differing in their percentage of high-quality producers. These self-fulfilling reputations determine not only the average quality of a country’s exports but also the type of products in which a country specializes. Hence, the pattern of international trade can be determined by this “reputational comparative advantage.” An inferior country-of-origin reputation leads to lower national welfare, therefore, several trade and industrial policies that can improve country-of-origin reputation are examined.
    Keywords: Country-of-Origin, Quality Reputations, Statistical Discrimination, Industrial Policy.
    JEL: F12 F13 J71 L15
    Date: 2010–08
  6. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: For a firm without a readily identifiable brand name, quality reputation may solely reflect the country of origin. In this paper we endogenize country-of-origin reputations and show that these selffulfilling reputations determine not only the average quality of a country’s exports but also the type of products in which a country specializes. Hence, the pattern of international trade can be determined by reputational comparative advantage. Specialization according to reputational comparative advantage can also establish the location of the host and the parent firm in a multinational enterprise. Furthermore, multinationals that internalize production in a single firm can eradicate a low reputation equilibrium and, therefore, can increase host-country welfare by a greater amount than under a licensing arrangement. Finally, this reputation effect can identify whether internalization, or licensing, is more likely to occur.
    Keywords: Country-of-Origin, Quality Reputations, Multinational Enterprise, Internalization, Statistical Discrimination.
    JEL: F12 F23 J71 L15
    Date: 2010–08
  7. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: Recent work demonstrates the importance of developing high quality output in order to compete in export markets and other recent studies verify the prevalence of fixed and ongoing trade costs while participating in those markets. I consider the joint choice of quality and export promotion costs when trade relationships are subject to temporary disputes. When transparency is low and macroeconomic instability is high, disputes arrive more frequently and, therefore, firms may inefficiently choose lower levels of quality and export promotion. These, in turn, build shallower trading relationships with less trade volumes and higher tariffs, and generate greater trade reductions during the more common trade disputes. Several institutional features of the WTO that are generally lacking in preferential trade agreements such as improved transparency, dispute investigation, and the provision to recommend asymmetric continuation payoffs can ameliorate these inefficient quality choice outcomes. Hence, lower quality output and lower quality trading relationships may be more endemic to countries that depend on preferential trading areas as opposed to the WTO.
    Keywords: Quality Choice, Irreversibilities, Economic Integration Dispute Settlement, Dynamic Games, WTO, Preferential Trade Agreements.
    JEL: F13 F15 C73 K33
    Date: 2010–08
  8. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: The broadened scope of the GATT/WTO through successive rounds of trade liberalization is explained as a result of trade-partner specificity, linked agreements, and cross retaliation. In more recent years, however, countries have pursued trade liberalization through sector specific zero-for-zero agreements and preferential trade agreements, both of which have a reduced chance of suffering cross retaliation. This increase in unlinked agreements is explained by imperfect observability of trade policies generating gratuitous trade disputes and unjustified cross retaliation. If the dispute generating noise is perfectly correlated across sectors, however, then it provides no reason not to link agreements in a static sense and in many cases incremental linking still produces more liberalization than static linking. It is only when the noise is imperfectly correlated that linking and cross retaliation are problematic so that some sectors can enforce more liberalization in an unlinked agreement. If the correlation drops, the noise increases, or the number of sectors already covered is large, then incremental linking of more sectors is inefficient and countries pursue unlinked agreements.
    Keywords: Trade Disputes, WTO, Dispute Settlement, Dynamic Games.
    JEL: F13 F15 C73 F51 F53 K33
    Date: 2010–08
  9. By: David Powell (RAND Corporation); Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: An emerging literature on international activities of heterogeneous firms documents that exporting firms are more productive than firms that only sell on the national market. This positive exporter productivity premium shows up in a large number of empirical studies after controlling for observed and unobserved firm characteristics in regression models including firm fixed effects. These studies test for a difference in productivity between exporters and non-exporters at the conditional mean of the productivity distribution. However, if firms are heterogeneous, it is possible that the size of the premium varies over the productivity distribution. In this paper we apply a newly developed estimator for fixed-effects quantile regression models to estimate the exporter productivity premium at quantiles of the productivity distribution for manufacturing enterprises in Germany, one of the leading actors in the world market for goods. We show that the premium decreases over the quantiles – a dimension of firm heterogeneity that cannot be detected through mean regression.
    Keywords: Exporter productivity premium, quantile regression, fixed effects
    JEL: F14 C21 C23
    Date: 2010–08
  10. By: Abdul Rashid; Tayyaba Razzaq
    Abstract: We develop a structural econometric model of import demand for Pakistan, with binding foreign exchange constraint. ARDL and DOLS techniques are used to estimate the log-run coefficients of price and income elasticities. The empirical results from ARDL bound testing approach and Johansen’s method for cointegration show strong evidence of the existence of a long-run stable relationship among the variables included in the import demand model. The price and income elasticity estimates have correct signs and are statistically significant. The coefficient of scarcity premium, as it appeared statistically significant with correct sign, confirms the presence of a binding foreign exchange constraint on aggregate import demand, particularly before the period of trade liberalization.
    Keywords: Import Demand, Foreign Exchange Constraint, ARDL, DOLS, Pakistan.
    JEL: F14 O16
    Date: 2010–08–15
  11. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Harun Onder (World Bank)
    Abstract: This paper analyzes two prominent institutional rules in the international trading system: a lim- ited cross-retaliation rule characterized by the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) Article 22.3 and a limited punishment rule characterized by the General Agreement on Taris and Trade (GATT) Article XXVIII. In general, both rules are designed to limit the countermeasures upon a violation; however, the former rule species the limits of composition in retaliation, whereas the latter one designates the limits of retaliation magnitude. We show that, albeit seemingly unrelated, the limited cross-retaliation rule complements the limited punishment rule in per- mitting greater trade liberalization. Specically, we show how the limited cross-retaliation rule also helps limit the incentives to violate the trade agreement when the limited punishment rule prevails.
    Date: 2010–08
  12. By: Cabral, Manuel Heredia Caldeira; Veiga, Paula
    Abstract: This paper studies the political and economic factors that determine successful export diversification (ED) and export sophistication (ES) strategies in the Sub-Saharan African (SSA) countries and also the way in which successful ED and sophistication strategies contribute to explain the improving in some of the millennium development goals (MDG). We run separate regressions for the determinants of ES and ED, using disaggregated data of the 48 SSA countries, from 1960 to 2005. The results suggest that better governance is an important determinant for the success of diversification and sophistication strategies in SSA. In particular the level of corruption, transparency and accountability are important factors in limiting or promoting the scope of diversification and the level of sophistication of the exports. The results also suggest that increases in human capital in SSA countries promote both ED and ES, showing that the level of education of the workforce is positively related with ES and ED, with higher levels of education (tertiary) playing a more important role in explaining ES, while lower levels of education (primary) being more important as determinants of ED. In the second part we explore the links between ED and ES and growth presenting evidence that ED and ES are linked to growth stability in SSA. This study also suggests that the Sub-Saharan countries that were more successful in achieving ED and ES tend to be more successful in improving the living conditions of their population. Using different variables of Infant Mortality (one of the MDG) and life expectancy as dependent variables, we present evidence that suggests that in SSA higher ED and ES are associated with lower infant mortality and higher life expectancy. We show that this result is robust, presenting positive and significant results even when a large number of different control variables are introduced, or when fixed effects and instrumental variables are considered. The evidence suggests that ED and ES are part of the solution for a successful development of SSA. JEL codes:
    Date: 2010
  13. By: Thierry Verdier
    Abstract: The purpose of this paper is to discuss how regional integration processes may contribute to statebuilding and promote exit from fragility for countries characterised by weak state institutions. After presenting a simple conceptual framework to discuss the effects of external and regional integration on fragile states, we analyse the policy trade-offs that may arise in such contexts. The paper then reviews the specific regional experiences of Sub-Saharan countries and their inter-actions with fragility issues. Finally, we discuss policy implications for the EU in the context of its regional trade and development policies with African fragile countries. The central conclusions of the analysis are the following: I) a two-tier approach to regional integration, which combines both top-down and bottom-up processes, is necessary; 2) the EU approach to regional integration in Africa should promote “Building-Blocks” and not “Stumbling-Blocks”; and 3) specific considerations should be given to make the trade integration strategy “fragility responsive”.
    Date: 2010–06–23
  14. By: Seth R. Gitter (Department of Economics, Towson University); Jeremy G. Weber (University of Wisconsin-Madison); Bradford L. Barham (University of Wisconsin-Madison); Mercedez Callenes (Grupo de Analisis para el Desarrollo (GRADE), Peru); Jessa M. Lewis (University of Wisconsin-Madison)
    Abstract: From 1995 to 2005 educational attainment of youth in rural Southern Mexico rose dramatically. Three distinct trends emerged in the region that could explain the rise in education. First, thousands of coffee-producing households joined cooperatives that have entered Fair Trade relationships and/or began adopting organic practices. Then, beginning in approximately 2000, US migration took off, while intra-Mexico migration steadily increased, providing remittance income and more lucrative alternatives in labor markets outside of coffee production. Third, Progresa/Oportunidades, a conditional cash transfer program aimed at promoting education, became available to families in the region in 1998 and 1999. Using survey data from 845 coffee farming households in Oaxaca and Chiapas, Mexico, this paper explores how participation in Fair Trade-organic cooperatives coffee price premiums, migration, and Progresa/Oportunidades shape education attainment for young adults (16-25). Results from a household fixed-effects model show that participating in a Fair Trade-organic cooperative contributed to a one-half year increase in schooling for girls over the study period. The impacts of US migration opportunities appear to have even stronger positive impacts on years of schooling for females, while for males increased migration opportunities tend to diminish the positive effects of being in a Fair Trade- organic cooperative on educational attainment.
    Keywords: Latin America, Mexico, Fair Trade, Organic, Migration, Education.
    JEL: N56 I20 F22
    Date: 2010–08
  15. By: Sami Bensassi
    Abstract: For a very long time, the areas available for continuous long-distance trade were limited to territories the size of Braudel's Mediterranée (1949). Whatever the commercial organizations (merchants in the Roman or the Fatimid Empires, the Hanseatic League, the Florentine Companies), their trade was not able to directly handle branches more than a month's sailing from their main base (in the best conditions). During the three centuries after Vasco de Gama had reached India, European trading areas dramatically expanded to the shores of Asia, and a long period of harsh competition set the East India Companies of the main European powers of the time against one another. This paper intents to provide answers to two questions: what were the elements that allowed these companies to maintain transactions over such vast areas? And why were some of these companies far more successful than the others? To answer these two questions we have available extensive literature covering the intersection of history, business and economy, generally focusing on one company or on a particular aspect of trade (Chauduri, 1978; Israel, 1989; Subrahmanyan, 1993; Ames, 1996). Our task will be to briefly review these sources, to extract information from them and to compare the economic adaptations and innovations that allowed these companies to be the greatest of their time.
    Keywords: European Trade Empires; Estado da Índia; Dutch East India Company; English East India Company.
    JEL: B52 F02 N70
    Date: 2010–08–11

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