Interacting factor endowments and trade costs: A multi-country,multi-good approach to trade theory

We provide a synthetic analysis of the different ways in which countries participate in the world economy. Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multiple goods or multi-stage production, and country-specific trade costs. Each country's production specialization, trade and welfare is determined by the interaction between its relative endowment and its trade costs. We consider the effects of allowing one good to ‘fragment’ into component and assembly production. The volume of trade and welfare levels are higher with fragmentation for most countries, although for many countries these variables fall with fragmentation.     

General equilibrium trade modelling with Canada–US transportation costs

Transportation costs are an important topic in international trade, but seldom have researchers paid attention to general equilibrium trade modelling with transportation costs and explored their relevant effects. This paper uses numerical general equilibrium trade model structures to simulate the impacts of transportation costs on welfare and trade for a Canada–US country pair case. We compare two groups of model structures: Armington assumption models and homogeneous goods models. Within these two groups of models, we also compare balanced trade structures to trade imbalance structures and production function transportation costs to iceberg transportation costs. Armington goods models generate more absolute welfare gains from transportation cost elimination than homogeneous goods models. Welfare gains under balanced trade structures are larger in production function transportation cost scenarios than in iceberg transportation cost scenarios, but under trade imbalance structures, welfare gains are greater under iceberg transportation cost scenarios. Canada's welfare gains in the iceberg transportation cost scenario are significantly larger than gains in the production function transportation cost scenario. On trade effects, homogeneous goods models generate more export and import gains, balanced trade structures have more trade variations, and iceberg transportation costs generate more trade effects.     

Productivity, terms of trade and the ‘home market effect’

This paper analyzes the international transmission and welfare implications of productivity gains and changes in market size when macroeconomic adjustment occurs both along the intensive margin of trade (changes in the relative price of existing varieties of tradable goods) and the extensive margin (creation and destruction of varieties). We draw a distinction between productivity gains that enhance manufacturing efficiency and gains that lower the cost of firms' entry and of product differentiation. Countries with lower manufacturing costs have higher GDP but supply their products at lower international prices. Instead, countries with lower entry costs supply a larger array of goods at improved terms of trade. Output growth driven by demographic expansions, as well as government spending, is associated with an improvement in international relative prices and firms' entry. While trade liberalization may result in a smaller array of goods available to consumers, efficiency gains from deeper economic integration benefit consumers via lower goods prices. The international transmission mechanism and the welfare spillovers vary under different asset market structures, depending on trade costs, the elasticity of labor supply, and consumers' taste for varieties.     

Intra-industry trade and heterogeneity in pollution emission

This paper develops a model of intermediate goods firms heterogeneity with respect to a pollution parameter to analyze the effects of intra-industry trade on final good output, pollution and welfare. By focusing on intra-industry trade we consider trade between similar countries. We analyze both trade between developed countries, and trade between developing countries. In our model, final good producers pay an environmental tax on the total pollution emitted in their country. Therefore, final good producers determine the overall level of pollution by demanding ‘cleaner’ or ‘dirtier’ intermediate goods. To focus on intra-industry trade we consider only intermediate goods firms trade. We analyze three scenarios: closed economy; open economy with no impediments to trade; and open economy with transportation cost. Our main findings are: i. a developing country closed to trade faces lower final good output and higher total pollution and is thus worse off than a developed country; ii. countries are better off under trade than under autarky, regardless of their development level; and iii. an open economy with low transportation costs are better off than an open economy with no impediments to trade.     

Administrative barriers to trade

We build a model of administrative barriers to trade to understand how they affect trade volumes, shipping decisions and welfare. Because administrative costs are incurred with every shipment, exporters have to decide how to break up total trade into individual shipments. Consumers value frequent shipments, because they enable them to consume close to their preferred dates. Hence per-shipment costs create a welfare loss.We derive a gravity equation in our model and show that administrative costs can be expressed as bilateral ad-valorem trade costs. We estimate the ad-valorem equivalent in Spanish shipment-level export data and find it to be large. A 50% reduction in per-shipment costs is equivalent to a 9 percentage point reduction in tariffs. Our model and estimates help explain why policy makers emphasize trade facilitation and why trade within customs unions is larger than trade within free trade areas.     

Per capita income,market access costs,and trade volumes

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. The key element of the model is an association between trade costs (both variable and fixed) and countries' development levels, which can account for the effect of per capita income on trade volumes and explain many zeros in bilateral trade flows. I find that market access costs play an important role in fitting the model to the data. In a counterfactual analysis, I find that removing the asymmetries in trade costs raises welfare in all countries with an average percentage change equal to 29% and larger gains for smaller and poorer countries. Real income inequality falls by 43%.     

On necessarily welfare-enhancing free trade areas

The well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union - whether final or intermediate - be allowed to be traded freely. The proportion of domestic value added in final goods does not enter as a criterion in the rules of origin.     

Investment liberalization and international trade

This paper estimates the cross-price elasticity of exports with respect to investment costs for bilateral relations between 36 countries. We show that the effect of reducing foreign direct investment costs on exports depends on country characteristics and trade costs as predicted by the [Markusen, 1997] and [Markusen, 2002] model. When countries differ in relative factor endowments and trade costs are low, investment liberalization stimulates exports, whereas when countries are similar in terms of relative factor endowments and size, and trade costs are moderate to high, investment liberalization reduces exports.     

Why some countries trade more,some trade less,some trade almost nothing: The effect of the governance environment on trade flows

We examine the effect of a country's governance environment on its propensity to trade. Using an updated framework of governance environment, we classify countries based on the dominant mode of governance into three types: (1) rule-based (strong public rule of law), (2) relation-based (weak rule of law and strong informal network based on private relations), and (3) family-based (absence of both public rules and private network). We then examine how different governance types affect trade patterns among 44 countries representing 89% of world trade. We find that overall, rule-based countries trade more than relation-based or family-based countries. A large positive effect on trade flows exists between two highly rule-based countries and between two relation-based countries. Any trade relationship involving a family-based country negatively affects trade flows, even between two family-based countries. Our study contributes to the trade literature by examining the effects of different types of governance environment on trade flows and more successfully explaining why some countries still trade almost nothing even after scholars and policy makers have convincingly proven that freer trade leads to higher welfare for a country.     

Economic determinants of free trade agreements

The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements (FTAs) and of the likelihood of FTAs between pairs of countries using a qualitative choice model. We develop this econometric model based upon a general equilibrium model of world trade with two factors of production, two monopolistically-competitive product markets, and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents. The empirical model correctly predicts, based solely upon economic characteristics, 85% of the 286 FTAs existing in 1996 among 1431 pairs of countries and 97% of the remaining 1145 pairs with no FTAs.     

A Ricardian model of trade and growth with endogenous trade status

We formulate a two-country, continuum-good Ricardian model of trade and endogenous growth with endogenous trade status. After establishing the existence, uniqueness, and global stability of a balanced growth path, we show that, compared with the old balanced growth path, a permanent fall in the trade cost in any one country: (i) raises the growth rates of capital in all countries for all periods; (ii) increases both the range of the imported varieties and that of the exported varieties in all countries for all periods; and (iii) raises welfare in all countries. Our theoretical predictions are qualitatively consistent with the empirical evidence.     

Establishment heterogeneity,exporter dynamics,and the effects of trade liberalization

We study the effects of tariffs and iceberg trade costs in a two-sector dynamic variation of the Melitz (2003) model extended to include a sunk cost of exporting, establishment-level uncertainty in productivity, capital accumulation, and material usage. We calibrate the model to match both cross-sectional and dynamic aspects of US producers related to export participation and the establishment lifecycle. We find a tariff equivalent of fixed export costs of 30 percentage points. We also find that a sizeable share of export profits is a return to the organizational capital from investing in export capacity rather than creating an establishment. We use the model to estimate the effect of reducing tariffs on welfare, trade, and export participation. We find that eliminating an 8 percent tariff increases the ratio of trade to GDP from 3.9% to 7.4% and raises welfare by 1.02%. Along the transition, consumption overshoots its steady state, even as trade and the capital stock grow gradually, so that the change in steady state consumption understates the welfare gain. Models without a dynamic export decision generate more gradual aggregate transition dynamics and smaller gains from trade. Capital accumulation and material usage are important sources of the welfare gains to trade.     

Trade and the gains from trade with imperfect competition

A simple two-country model is constructed in order to show how imperfect competition can form a basis for trade. Under the assumption of Cournot-Nash behaviour, it is demonstrated that trade will lead to a bilateral welfare improvement when countries are identical in all respects. When countries differ in size, trade will always increase total world real income, but the large country may experience a welfare loss. Increasing returns to scale in the production of the monopolized good complicates the situation further, but it generally remains true that trade increases world real income.     

Establishment heterogeneity,exporter dynamics,and the effects of trade liberalization

We study the effects of tariffs and iceberg trade costs in a two-sector dynamic variation of the Melitz (2003) model extended to include a sunk cost of exporting, establishment-level uncertainty in productivity, capital accumulation, and material usage. We calibrate the model to match both cross-sectional and dynamic aspects of US producers related to export participation and the establishment lifecycle. We find a tariff equivalent of fixed export costs of 30 percentage points. We also find that a sizeable share of export profits is a return to the organizational capital from investing in export capacity rather than creating an establishment. We use the model to estimate the effect of reducing tariffs on welfare, trade, and export participation. We find that eliminating an 8 percent tariff increases the ratio of trade to GDP from 3.9% to 7.4% and raises welfare by 1.02%. Along the transition, consumption overshoots its steady state, even as trade and the capital stock grow gradually, so that the change in steady state consumption understates the welfare gain. Models without a dynamic export decision generate more gradual aggregate transition dynamics and smaller gains from trade. Capital accumulation and material usage are important sources of the welfare gains to trade.     

The effect of the Internet on international trade

We find that the Internet stimulates trade. Evidence from time-series and cross-section regressions shows a significant effect of the Internet on trade in recent years. Our results suggest that a 10 percentage point increase in the growth of web hosts in a country leads to about a 0.2 percentage point increase in export growth. For the average country in our sample, the Internet contributed to about a 1 percentage point increase in annual export growth from 1997 to 1999. We also find evidence of proximity-biased trade growth, i.e. that trade growth is lower for more distant countries, but we do not find evidence that the Internet has directly affected this bias. The evidence is consistent with a model in which the Internet reduces market-specific fixed costs of trade. In particular, we show that an Internet-related reduction in fixed costs is likely to enhance export growth. The model also shows that the Internet does not directly affect the relationship between distance and trade; however, to the extent that competition is enhanced as a result of its development, the Internet will increase the overall effect of distance on trade.     

Welfare-optimal trade and competition policies in small open oligopolistic economies

Standard trade theory claims that free trade is welfare-enhancing. We show that this is not the case if at least one sector of the economy is a Cournot oligopoly. In a simple small open economy with one oligopolistic and one competitive sector, welfare is an inverted U-shaped function of tariffs. Hence, an optimal tariff rate can be determined. The optimal rate depends on the number of firms in the oligopolistic sector. Below the optimal level, the competitive sector overproduces, i.e. oligopolistic good have a higher marginal effect on welfare. Increasing tariff rates stimulate the production of the oligopolistic sector by dampening imports. Under balanced trade, this reduces exports and production in the competitive sector, thus shifting resources to oligopolistic goods production. We also find that given certain levels of protection, perfect competition is not welfare maximal and, hence, not desirable. The finding explains why developing economies with imperfect competition are often reluctant to embrace trade liberalization and why, conversely, countries with high levels of external protection may be unenthusiastic about competition theory.     

R&D policies, trade and process innovation

We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.     

Costly investment and complementarities in an international trade model with directed technological change

We investigate the impacts on the skill premium and on economic growth in an innovator‐imitator general equilibrium growth model assuming: (a) directed technological change; (b) international trade of intermediate goods; (c) internal costly investment in both physical capital and R&D; and (d) complementarities between intermediate goods in aggregate production. With trade of intermediate goods, the complementarities degree and investment costs influence the economic growth of both countries, but do not affect the countries' skill premia, which are directed by technological knowledge. Additionally, in agreement with related empirical literature, openness to trade of intermediate goods leads to a higher equilibrium skill premium in both countries, whereas its impact on the common growth rate can vary in sign.     

Welfare and trade elasticity with multinational production

We explore welfare properties in a firm heterogeneity model with multinational production and export. The presence of multinational production plays a crucial role in delivering a partial trade elasticity of total sales by exporters and affiliates that is no longer constant, and depends on both supply and demand parameters. We then analyse counterfactual scenarios. Multinational production with intra-firm trade increases welfare gains by up to 4% with respect to a model with only export and no truncation. Multinational production à la Helpman et al. (American Economic Review, 2004, 94 , 300) generates the largest welfare gains from liberalisation.     

China and the Trans‐Pacific Partnership: A Numerical Simulation Assessment of the Effects Involved

The Trans‐Pacific Partnership (TPP) is a new negotiation on cross‐border liberalisation of goods and service flows going beyond WTO disciplines and focused on issues such as regulation and border controls. This paper uses numerical simulation methods to assess the potential effects of a TPP agreement on China and also China's inclusion or exclusion on other countries. We use a numerical 11‐country global general equilibrium model with trade costs and inside money. Trade costs are calculated using a method based on gravity equations. TPP barriers potentially removable are trade costs less tariffs. Simulation results reveal that China will be slightly hurt by TPP initiatives in welfare when China is out, but the total production and export will be increased. Other non‐TPP countries will be mostly hurt in welfare, but member countries will mostly gain. If China takes part in TPP, she will significantly gain and increase other TPP countries' gain as well. The comparison of TPP effects and global free trade effects show that the positive effects of global free trade are stronger than TPP effects. Japan's joining TPP would be beneficial to both herself and most of other TPP countries, but which negative effects on China's welfare when out of TPP will increase further.