nep-int New Economics Papers
on International Trade
Issue of 2010‒12‒11
seventeen papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Labor Market Institutions, Firm-specific Skills, and Trade Patterns By Heiwai Tang
  2. Theories of Heterogeneous Firms and Trade By Stephen J. Redding
  3. Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries By Rodney D. Ludema; Anna Maria Mayda
  4. Processing Trade, Firm's Productivity, and Tariff Reductions: Evidence from Chinese Products By Miaojie Yu
  5. The role of trade costs in global production networks : evidence from China's processing trade regime By Ma, Alyson C.; Van Assche, Ari
  6. Are trading partners complementary in international trade? By Hayakawa, Kazunobu; Tanaka, Kiyoyasu; Ueki, Yasushi
  7. How iPhone Widens the US Trade Deficits with PRC By Yuqing Xing; Neal Detert
  8. Free Trade Agreement between People’s Republic of China and India: Likely Impact and Its Implications to Asian Economic Community By Swapan K. Bhattacharya; Biswa N Bhattacharyay
  9. Bilateral Trade, Openness and Asset Holdings By Alexandra Peter
  10. International Fragmentation of Tradable Business Services: the Case of Hungary By Magdolna Sass
  11. Are Imports from Rich Nations Deskilling Emerging Economies? - Human Capital and the Dynamic Effects of Trade By Auer, Raphael
  12. How Offshoring Can Affect the Industries’ Skill Composition By Daniel Horgos; Lucia Tajoli
  13. Looking Beyond Averages in the Trade and Poverty Debate By Martin Ravallion
  14. Welfare gains from imported varieties in Spain, 1988-2006 By Asier Minondo; Francisco Requena Silvente
  15. The Gravity Model By James E. Anderson
  16. Location choice of multinational enterprises in China : comparison between Japan and Taiwan By Chang, Kuo-I; Hayakawa, Kazunobu; Matsuura, Toshiyuki
  17. Production Chains By David K. Levine

  1. By: Heiwai Tang (Tufts University and Centro Studi Luca d’Agliano)
    Abstract: This paper studies how cross-country differences in labor market institutions shape the pattern of international trade, focusing on workers’ skill acquisition. I develop a model in which workers un-dertake non-contractible activities to acquire firm-specific skills on the job. In the model, workers have more incentive to acquire firm-specific skills relative to general skills in a more protective labor market. When sectors are different in the dependence on these two types of skills, workers’ skill acquisition turns labor laws into a source of comparative advantage. By embedding the model in an open-economy framework with heterogeneous firms, sectors with different levels of dependence on firm-specific skills, and countries with varying degrees of labor protection, I show that countries with more protective labor laws export relatively more in firm-specific skill-intensive sectors through both the intensive and extensive margins of trade. I then estimate returns to firm tenure for different U.S. manufacturing sectors over the period of 1974-1993, and use the estimates as sector proxies for firm-specific skill intensity to test the theoretical predictions. By implementing the Helpman-Melitz-Rubinstein (2008) framework to estimate sector-level gravity equations for 84 countries in 1995, I find supporting evidence for the predicted effects of labor market institutions on both margins of trade.
    Keywords: Labor market institutions, heterogeneous …rms, margins of trade, trade patterns, firm-specific skills
    JEL: F10 F12 F14 F16 L22 J24
    Date: 2010–11–30
  2. By: Stephen J. Redding
    Abstract: This paper reviews the recent theoretical literature on heterogeneous firms and trade, which emphasizes firm selection into international markets and reallocations of resources across firms. We discuss the empirical challenges that motivated this research and its relationship to traditional trade theories. We examine the implications of firm heterogeneity for comparative advantage, market size, aggregate trade, the welfare gains from trade, and the relationship between trade and income distribution. While a number of studies examine the endogenous response of firm productivity to trade liberalization, modeling internal firm organization and the origins of firm heterogeneity remain interesting areas of ongoing research.
    JEL: F1 L80
    Date: 2010–12
  3. By: Rodney D. Ludema (Georgetown University); Anna Maria Mayda (Georgetown University, CEPR and Centro Studi Luca d’Agliano)
    Abstract: In the literature on the economics of international trade institutions, a key question is whether or not terms-of-trade effects drive international trade agreements. Recent empirical work addressing terms-of-trade effects has been restricted to non-WTO countries or accession countries, which differ markedly from existing WTO members and account for only a tiny fraction of world trade. This paper investigates whether MFN tariffs set by existing WTO members in the Uruguay round are consistent with the terms-of-trade hypothesis. We present a model of multilateral trade negotia-tions featuring free riding on MFN that leads the resulting tariff schedule to display terms-of-trade effects. Specifically, the model predicts that the level of the importer’s tariff resulting from negotia-tions should be negatively related to the product of exporter concentration, as measured by a Her-findahl-Hirschman index (sum of squared export shares), and the importer’s market power, as measured by the inverse elasticity of export supply, on a product-by-product basis. We test this hy-pothesis using data on tariffs, trade and production across more than 30 WTO countries and find strong support. We estimate that the internalization of terms of trade effects through WTO negotia-tions has lowered the average tariff of these countries by about 20% compared to its non-cooperative level.
    Date: 2010–07–31
  4. By: Miaojie Yu (China Center for Economic Research)
    Abstract: This paper explores how processing trade, jointly with tariff reduction, can improve a firm's productivity. Tariff reductions generate productivity gain via competition, whereas processing export does so via spillovers. Using mostly disaggregated Chinese product-level trade data and firm-level production data from 2000--2006, after constructing firm-level tariffs based on product information and controlling for possible endogeneity, I found that a 10% tariff decrease generates a 12% increase in a firm's productivity gain. In addition, processing firms enjoy significant productivity gains via spillovers, with heterogeneity across firms divided according to ownership. These findings are robust to various econometric methods, disaggregated specifications, and measures.
    Keywords: Processing Trade, Productivity, Firm's Heterogeneity, Chinese Plants
    JEL: F1 L1 O1 O2
    Date: 2010
  5. By: Ma, Alyson C.; Van Assche, Ari
    Abstract: In a seminal contribution, Yi (2003) has shown that vertically specialized trade should be more sensitive to changes in trade costs than regular trade. Yet empirical evidence of this remains remarkably scant. This paper uses data from China's processing trade regime to analyze the role of trade costs on trade within global production networks (GPNs). Under this regime, firms are granted duty exemptions on imported inputs as long as they are used solely for export purposes. As a result, the data provide information on trade between three sequential nodes of a global supply chain: the location of input production, the location of processing (in China) and the location of further consumption. This makes it possible to examine the role of both trade costs related to the import of inputs (upstream trade costs) and trade costs related to the export of final goods (downstream trade costs) on intra-GPN trade. The authors show that intra-GPN trade differs from regular trade in that it not only depends on downstream trade costs, but also on upstream trade costs and the interaction of both. Moreover, intra-GPN trade is more sensitive to oil price movements and business cycle movements than regular trade. Finally, the paper analyzes three channels through which intra-GPN trade have amplified the trade collapse during the recent Global Recession.
    Keywords: Economic Theory&Research,Free Trade,Trade Policy,Emerging Markets,Currencies and Exchange Rates
    Date: 2010–12–01
  6. By: Hayakawa, Kazunobu; Tanaka, Kiyoyasu; Ueki, Yasushi
    Abstract: We use a unique dataset on trading transactions at the firm level to investigate a complementary effect in international transactions between sellers and buyers; trading transactions are more likely to be international when both sellers and buyers are large in size than when either sellers or buyers are large. Our econometric analysis provides evidence for the complementary effect between trading partners on the likelihood of international trade, which is most prominent for exports from North to South.
    Keywords: Self-selection, Firm heterogeneity, Matching, Developing countries, Developed countries, International trade, Business enterprises
    JEL: D24 F10
    Date: 2010–08
  7. By: Yuqing Xing (National Graduate Institute for Policy Studies); Neal Detert (Asian Development Bank Institute)
    Abstract: IIn this paper, we use the iPhone as a case to show that even high-tech products invented by American companies will not increase the US exports, but to the contrary exacerbate the US trade deficits. The iPhone contributed US$1.9 billion about 0.8% of the US trade deficit with PRC in 2009. Unprecedented globalization, well organized global production networks, repaid development of cross-country production fragmentation, and low transportation costs all contribute to rational firms such as Apple making business decisions that contributed directly to the US trade deficit. Global production networks and highly specialized production processes apparently reverse conventional trade patterns so that developing countries, such as PRC, export high-tech goods—like the iPhone while industrialized countries, such as the US, import high-tech goods they themselves invented. In addition, conventional trade statistics greatly inflate bilateral trade deficits between a country used as export-platform by multinational firms and its destination countries. Based on the value-added approach, the iphone trade would generate US$48 million trade surplus for the US.
    Date: 2010–11
  8. By: Swapan K. Bhattacharya; Biswa N Bhattacharyay
    Abstract: Open regionalism and trade cooperation between the world’s two largest developing countries, the People’s Republic of China (PRC) and India, can foster outward-oriented development and intra-regional trade based on comparative advantage and available factor endowments. In view of the recent wave of worldwide subregional and bilateral trade cooperation, and the recent suspension of Doha negotiations by the World Trade Organization, the opportunity costs of not moving toward greater trade integration between the PRC and India could be increasing. This paper presents the recent trends in the PRC-India trade and examines empirically the likely impact of their preferential and free trade agreements using Gravity Model under different comparative-static scenarios. It also discusses the implications of PRC-India trade cooperation on the formation of the Asian Economic Community. [ADB Institute Discussion Paper No. 59]
    Keywords: India, China, Economic Cooperation, Trade, Free Trade Agreement, Gravity Model, Asian Economic Community
    Date: 2010
  9. By: Alexandra Peter
    Abstract: This paper analyzes the relationship between bilateral trade flows, trade openness, and asset holdings in a three-country stochastic general equilibrium model. The threecountry model set-up enables me to disentangle and separate the effects bilateral trade flows and trade openness have on bilateral portfolio patterns. I find that both factors independently influence bilateral asset holdings. Higher bilateral trade as well as higher trade openness lead to a higher bilateral foreign asset position. Furthermore, the two factors show an interaction effect, where increasing trade openness diminishes the influence of bilateral trade flows on asset holdings. I provide supporting empirical evidence for these theoretical findings using a data set on the geographical composition of international portfolio holdings.
    Keywords: International Portfolio Holdings, Bilateral Trade Flows, Trade Openness
    JEL: F10 F30 F41
    Date: 2010–12
  10. By: Magdolna Sass (Institute of Economics - Hungarian Academy of Sciences)
    Abstract: Hungary is increasingly appearing on the map of trade in services. This is mainly due to the appearance of foreign owned shared services centres, regional or even global headquarters of multinationals. First, data problems are listed in detail when analysing tradable services (applying, extending and analysing in-depth the problems indicated by Kirkegaard, 2005). It draws the conclusion that using available statistical data on trade and FDI is misleading in trying to assess the extent of Hungary's participation in the international division of labour in services. Moreover, lack of data hinders the analysis of other aspects. That is why the paper relies on detailed company case studies (8 companies interviewed in 2008 out of around 50 such centres in Hungary). Two aspects of export oriented services projects are analysed in detail: locational advantages of Hungary which attract such projects to the country and the impact of these projects on the host economy. Vertical FDI associated with this type of efficiency seeking and highly export oriented projects, has completely different localisation requirements and local impact than horizontal FDI, which up till around 2000 dominated services FDI inflows in Hungary. As an analytical framework, Barba Navaretti, Venables, 2004 is used. The paper identifies the various elements of locational advantages connected to different elements of investment motives, in terms of cost reduction, reducing costs of disintegration of production, reducing other costs, and motives arising from the confluence of vertical and horizontal FDI, and relates these elements to the specificities of the business services sector. It differentiates general motives, which play a role in compiling the "longer list" of possible investment locations and motives which play the most important role in deciding about the final location of the investment. Analysis of Hungary is supplemented with a comparison with the other three Visegrad countries. The paper also presents the most important channels through which FDI in business services may affect the host country. The analysis is based on theories, dealing mainly with the impact of manufacturing FDI, and especially of vertical FDI on the host economy (e.g. Dunning, 1993, Lall, 1980, Blomstr”m, Kokko, 1997, Barba Navaretti, Venables, 2003, Caves, 2007), taking 3 into account specificities of business services. The paper identifies the following areas in which business services FDI impacts upon the host economy: job creation (type of activities and categories of employees affected), backward and forward linkages with local companies and with other local actors, and other spillovers (impact on the business environment and infrastructure, spillovers through trained employees).
    Keywords: offshore outsourcing, business services, locational advantages, local impact, Hungary, East Central Europe
    JEL: F21 F23 L8
    Date: 2010–10
  11. By: Auer, Raphael (Swiss National Bank)
    Abstract: This paper starts by documenting that during the last decades, the human capital embodied in imports from skill abundant nations has noticeably reduced skill accumulation in the less developed world. To identify the causal relation between these variables, the analysis utilizes over-time variation in the supply of skilled labor and the extent to which this variation affects the skill content of trade given the bilateral distance between im- and exporter. In a panel estimation covering 41 non-OCED members, a one standard deviation higher geographic pressure to import human capital is associated with a 12% reduction in the national average length of schooling. The paper next develops a model to analyze the income and welfare consequences of such trade-induced human capital disaccumulation. The model is based on heterogeneous workers who make educational decisions in the presence of complete markets. When heterogeneous workers invest in schooling, high type agents earn a surplus from their investment. Trade shifts this surplus to rich countries that can use skills more efficiently. Consequently, the dynamic effects of liberalization tend to occur to initially rich countries, thus leading to divergence.
    Keywords: Factor Content of Trade; Employment; Human Capital; Economic Growth
    JEL: F11 F14 F16
    Date: 2010–10–13
  12. By: Daniel Horgos (Helmut Schmidt University and Centro Studi Luca d’Agliano); Lucia Tajoli (Politecnico di Milano and KITeS – Bocconi University)
    Abstract: While most offshoring literature focus on the effects on relative wages, other implications do not receive the necessary attention. This paper investigates effects on the industries’ skill ratio. It sum-marizes the empirical literature, discusses theoretical findings, and provides first empirical evidence for Germany. As results show, effects are mainly driven by the industry where offshoring takes place. In high skill intensive industries, the high skill labor ratio increases (vice versa for low skill intensive industries). Since this result is in line with other empirical findings but seems to contradict with theory, the paper additionally discusses possible explanations.
    Keywords: oshoring; labor market implications; skill ratio; skill composition
    JEL: F16 J21
    Date: 2010–07–31
  13. By: Martin Ravallion
    Abstract: There has been much debate about how much poor people in developing countries gain from trade openness, as one aspect of ‘globalization’. The paper views the issue through both ‘macro’ and ‘micro’ empirical lenses. The macro lens uses cross-country comparisons and aggregate time series data; the micro lens uses household-level data combined with structural modelling of the impacts of specific trade reforms. Case studies are presented for China and Morocco. Both the macro and micro approaches cast doubt on some widely heard generalizations from both sides of the globalization debate. Additionally the micro lens indicates considerable heterogeneity in the welfare impacts of trade openness, with both gainers and losers among the poor. A number of covariates of the individual gains are identified. The results point to the importance of combining trade reforms with well-designed social protection policies. [Research Paper No. 2005/29]
    Keywords: trade, globalization, poverty, inequality, China, Morocco
    Date: 2010
  14. By: Asier Minondo (Dpto. Economía); Francisco Requena Silvente (Universitat de València)
    Abstract: This paper investigates the welfare gains due to Spanish imports of new varieties over the period 1988-2006 using the methodology proposed by Feenstra (1994) and Broda and Weinstein (2006). After calculating the elasticities of substitution of a large number of Spanish imported products, we estimate that the total welfare gain due to imports of new varieties in Spain is equal to 1.2% of GDP in 2006 (a very conservative estimate). Next we decompose the contribution of each country to the total welfare gain. By countries, China accounts for about 12% of the total gain, almost the same as the entire EU-15. Este trabajo calcula las ganancias de bienestar generadas por la importación de nuevas variedades en España desde 1988 hasta 2006, utilizando la metodología propuesta originalmente por Feenstra (1994) y mejorada por Broda and Weinstein (2006). Después de calcular las elasticidades de substitución para más de 4500 categorías de productos importados, estimamos que la ganancia total de bienestar por importación de nuevas variedades en España equivale al 1,2% del PIB en 2006 (basado en una estimación muy conservadora). A continuación calculamos la contribución que cada país ha tenido a dicha mejora de bienestar: China acumula el 12% de la ganancia total, casi el mismo porcentaje que el conjunto de la UE-15.
    Keywords: welfare gains from trade, trade in variety, Spain.
    JEL: F12 F14
    Date: 2010–11
  15. By: James E. Anderson
    Abstract: The gravity model in economics was until relatively recently an intellectual orphan, unconnected to the rich family of economic theory. This review is a tale of the orphan's reunion with its heritage and the benefits that have flowed from it. Gravity has long been one of the most successful empirical models in economics. Incorporating the theoretical foundations of gravity into recent practice has led to a richer and more accurate estimation and interpretation of the spatial relations described by gravity. Recent developments are reviewed here and suggestions are made for promising future research.
    JEL: F10 R1
    Date: 2010–12
  16. By: Chang, Kuo-I; Hayakawa, Kazunobu; Matsuura, Toshiyuki
    Abstract: This paper examines and compares the location choice of Japanese and Taiwanese MNEs in China. Furthermore, we investigate the relationship between location choice and firm characteristics, specifically firms' productivity. Due to Taiwan's linguistic and cultural advantages in China, it is expected that the location choice mechanics are different between Japanese and Taiwanese MNEs. As a result, our main findings are that, while the less productive Japanese firms prefer a location in an area with a larger agglomeration of Japanese affiliates or in an area closer to Japan, the more productive Taiwanese firms prefer a location in an area with a larger agglomeration of Taiwanese affiliates or in an area closer to Taiwan.
    Keywords: Multinational enterprises, China, Productivity, Taiwan, Japan, International business enterprises, Industrial management
    JEL: D24 F23 M10
    Date: 2010–08
  17. By: David K. Levine
    Abstract: More advanced technologies demand higher degrees of specialization – and longer chains of production connecting raw inputs to final outputs. Longer production chains are subject to a “weakest link” effect: they are more fragile and more prone to failure. Optimal chain length is determined by the trade-off between the gains to specialization and the higher failure rate associated with longer chain length. There is a kind of reverse “Keynesian multiplier” that magnifies the effect of real shocks. Consequently, more advanced economies should have higher unemployment rates and be more prone to crisis. The implications of the theory both for measurement and government policy are examined.
    JEL: A1 A10 D00 E00 E01
    Date: 2010–12

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