Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Trade between symmetric countries,heterogeneous firms,and the skill premium

Abstract This paper examines the effects of trade liberalization between symmetric countries on the skill premium. I introduce skilled and unskilled labour in a model of trade with heterogeneous firms à la Melitz (2003) and assume a production technology such that more productive firms are more skill intensive. I show that the effects of trade liberalization on wage inequality crucially depend on the type of trade costs considered and on their initial size. While fixed costs of trade have a potentially non‐monotonic effect on the skill premium, a drop in variable trade costs unambiguously and substantially raises wage inequality.     

Heterogeneous firms,trade liberalization and agglomeration

Abstract In this study, we develop an economic model to examine agglomeration of heterogeneous firms following trade liberalization. In a closed economy, we show that high‐productivity firms are more likely to agglomerate because they benefit more from agglomeration than their low‐productivity counterparts. However, trade liberalization, especially with a high‐productivity partner, favours partial agglomeration; that is, low‐productivity firms relocate away from the region where high‐productivity firms agglomerate. Consequently, the welfare gap between the domestic regions of an economy narrows following trade liberalization. The latter result suggests that trade liberalization promotes regional economic development.     

Labour unions and multi‐product firms in closed and open economies

Abstract This paper sets up a general oligopolistic equilibrium model with multi‐product firms and union wage setting. In this model, we conduct two policy experiments. First, we show that deunionization induces a general decline in firm scale and scope, the respective reduction being more pronounced in non‐unionized industries. Second, we study the consequences of trade liberalization, and show that access to foreign markets lowers firm scope in all industries as well as the scope differential between unionized and non‐unionized firms. Adjustments in firm scale turn out to be less clear‐cut and, inter alia, depend on the degree of product differentiation.     

Intra‐industry Trade Liberalization and the Environment

This paper examines how trade liberalization affects national and global pollution in a multi‐country model incorporating monopolistic competition and intra‐industry trade as well as inter‐industry trade. Each country produces skill‐intensive differentiated goods and labor‐intensive goods. Pollution is a by‐product of production but pollution abatement can be undertaken. Regardless of country characteristics, if the differentiated‐good sector is sufficiently cleaner (dirtier) then, without any change in environmental taxes, a multilateral reduction in import protection accorded to the differentiated good or to both goods typically leads to a decline (rise) in pollution in all countries. Pollution havens tend not to arise.     

Does trade stimulate product quality upgrading?

This paper investigates whether increased import competition leads firms to engage in incremental innovation reflected in product quality upgrading using Chilean manufacturing firm‐product data and measuring product quality with unit values (prices). We identify causal effects of import competition using an effective trade barrier measure – transport costs – as instruments for import penetration ratios across industries. Transport costs have a negative and significant effect on product quality. The evidence suggests that estimated unit value increases capture product quality upgrading, imports’ competition effects drive quality upgrading, and benefits depend on firms’ industrial specialization. Easier access to intermediate inputs also fosters quality upgrading.     

The puzzle of quality upgrading of Chinese exports from the trade liberalization perspective

Trade liberalization could accelerate the process of quality upgrading through the competition effect. However, that the quality of Chinese exports exhibits an opposite performance pattern is puzzling. The present paper uses a framework based on multiproduct firms to analyse the mechanism of how the product quality of exports is affected by trade liberalization to explain this puzzle. The model includes two major mechanisms: the competition effect and the market effect. There is a huge gap in the influence on the product quality of exports between a decrease in tariff barriers and non‐tariff barriers: firms' product quality increases (decreases) when non‐tariff barriers (tariff barriers) fall. The data of Chinese firms from 2001 to 2011 supports this conclusion. Further research reveals that the influence of trade liberalization on the product quality of exports in China varies among different types of firms.     

Intra‐firm trade,exporting, importing,and firm performance

Abstract This paper examines firm heterogeneity in terms of size, wages, capital intensity, and productivity between domestic and foreign‐owned firms that engage in intra‐firm trade, firms that export and import, firms that import only, and firms that export only. As previously documented, heterogeneity between different groups of trading firms is substantial. Taking into account intra‐firm trade in addition to exporting and importing yields new insights into the productivity advantage previously established for exporting firms. The results presented here show that this premium accrues only to exporters that also import and to exporters that also engage in intra‐firm trade, but not to firms that export only. Using simultaneous quantile regressions, the paper illustrates that heterogeneity within different groups of trading firm is equally large. Some of this within‐group heterogeneity can be attributed to differences in trading partners.     

Unionization,international integration,and selection

Abstract We study how unionization affects competitive selection between heterogeneous firms when wage negotiations can occur at the firm or at the profit‐centre level. With productivity specific wages, an increase in union power has: (i) a selection‐softening; (ii) a counter‐competitive; (iii) a wage‐inequality; and (iv) a variety effect. In a two‐country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit‐centre bargaining, we show how trade liberalization can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).     

Testing creative destruction in an opening economy

This paper analyses the relationship between trade liberalization and economic growth using a Schumpeterian framework of technological innovation and applies it to sector‐level South African data. The framework examines direct and indirect effects of trade liberalization on productivity growth. Indirect impacts operate through a differential impact of trade liberalization on firms conditional on their distance from the international technological frontier. Results confirm positive direct impacts of trade liberalization. Results confirm also that the greatest positive impact of trade liberalization will be on sectors that are close to the international technological frontier and that experienced a low level of product market competition before liberalization.     

Skill‐biased heterogeneous firms,trade liberalization and the skill premium

We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand facing highly competitive skill‐intensive firms. In our model, only the lowest‐cost firms participate in the global economy exactly along the lines of Melitz ( 2003 ). In addition to differing in their productivity, firms differ in their skill intensity. We model skill‐biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm‐level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest‐cost/most‐skilled firms expand to serve the export market while less skill‐intensive non‐exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill‐abundant and skill‐scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper‐Samuelson effects because import competition affects all domestic firms equally.     

Differentiated Products,Divided Industries: Firm Preferences over Trade Liberalization

The recent focus on firms in international trade suggests two conjectures about preferences over trade policy – only the most productive firms should support freer trade, and industries can be internally divided over reciprocal liberalization. This paper clarifies the content and scope of these claims. The most productive firms are generally not the greatest beneficiaries from trade liberalization and may oppose further liberalization due to increased competition in export markets from compatriot firms. Exporting industries will feature no support for trade if foreign competition is too strong or barriers too unequal. The key analytic factor generating intra‐industry division is product differentiation, both directly, by increasing export opportunities for less efficient firms, and by inducing home market effects wherein larger countries are more competitive. The implications of these findings for the distributional effects of liberalization and the study of trade politics are discussed.     

Trade liberalization,forward‐looking firms,and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.     

A welfare analysis of unilateral trade and FDI liberalization

This paper uses a heterogeneous‐firms model to examine the pro‐competitive channel through which FDI affects national welfare. The model shows that the country from which FDI originates experiences a welfare gain following liberalization. However, a counterintuitive finding is that the welfare of the host country deteriorates. This is explained by the production relocation process that leads to an increase in the mass of domestic firms in the source country and a decrease in the host country. The model also confirms that unilateral trade liberalization brings a similar result even in the presence of bilateral FDI flows.     

Trade policy and quality leadership in transition economies

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).     

Trade Liberalization and the Degree of Competition in International Duopoly

This paper analyzes how a reduction in trade costs influences the possibility for firms to engage in international cartels, and hence how trade liberalization affects the degree of competition. We consider a particular intra‐industry trade model amended to allow for firms producing differentiated products. Our main finding is that trade liberalization may have an anti‐competitive effect. We find that there is no unique relation between a reduction in trade costs and the degree of competition. When products are differentiated, a lowering of trade costs is pro‐competitive if trade costs are initially high, but anti‐competitive if trade costs initially are low. Hence, trade policy is not necessarily a substitute for competition policy.     

Conditional versus unconditional trade concessions for developing countries

Abstract We examine how trade liberalization by a large trading partner affects the ability of a small country’s government to sustain free trade through a reputational mechanism. Unconditional liberalization by the large trading partner has an ambiguous effect on the small country’s dynamic incentives. Liberalization through a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country. However, if capacity in the import‐competing sector can be reduced only gradually, a conditional, reciprocal agreement may require an asynchronous exchange of concessions, where the large country liberalizes before the small country does.     

Sustaining Collusion under Economic Integration*

In this paper, we aim at investigating from a game‐theory perspective whether trade liberalization can promote a collusive two‐way trade. We show that, under Cournot competition, economic integration is anti‐competitive if collusive trade is a possible outcome of the repeated game; under price competition, the likelihood of collusive trade is a necessary but not sufficient condition for trade liberalization to be pro‐competitive. Furthermore, we show that economic integration may increase the scope for collusion irrespective of the firms’ strategic variable.     

China's export growth and the China safeguard: threats to the world trading system?

Abstract Is there evidence from China's pre‐WTO accession period that newly imposed U.S. or EU import restrictions deflect Chinese exports to third markets? We examine this question by drawing on a newly constructed data set of U.S. and EU product‐level import restrictions on Chinese trade imposed between 1992 and 2001, and we estimate their impact on Chinese exports to alternative markets. We find no systematic evidence that the import restrictions imposed during this period resulted in Chinese exports surging to third markets. To the contrary, there is weak evidence of a chilling effect on China's exports to third markets.