Does Trade Integration Contribute to Peace?

We investigate the effect of trade integration on interstate military conflict. Our empirical analysis, based on a large panel data set of 243,225 country‐pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace. It also suggests that the peace‐promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflict. More importantly, we find that not only bilateral trade but global trade openness also significantly promotes peace. It shows, however, that an increase in global trade openness reduces the probability of interstate conflict more for countries far apart from each other than it does for countries sharing borders. The main finding of the peace‐promotion effect of bilateral and global trade integration holds robust when controlling for the simultaneous determination of trade and peace.     

Trade and the Recognition of Commercial Lingua Francas: Russian Language Laws in Post‐Soviet Countries

Trade has the potential to influence a wide range of political and social outcomes. Using the post‐Soviet context, we examine how language policies – vital components for how minorities are treated with far‐reaching economic consequences – are influenced by trade. We argue that while ethnic politics and colonial legacies are both important in shaping language laws, it is important to recognize that the Russian language remains a significant commercial lingua franca in the region. When economic exchanges between Russia and other post‐Soviet republics are frequent, governments are more likely to adopt pro‐Russian language laws as a practicality and to maintain favor with the Russian government and Russian‐speaking businesses. Using an original dataset covering all Russian language‐related laws in the former Soviet states from 1992 to 2009, we find a significant and positive relationship between trade and pro‐Russian language laws. These results are robust even when we (1) instrument for Russian import levels and (2) consider the Baltic effect, spillovers from cultural affinity, and the uniqueness of fuel exports.     

Does Ease of Communication Increase Trade? Commonality of Language and Bilateral Trade

Gravity model explanations of trade volumes frequently include dummy variables to account for the commonality of language among trading partners. In this paper we use a data set for the number of people in a country who speak English as a first language or English as a second language (Crystal, 1997) as an indicator of the ease with which trade with the United States occurs. Controlling for commodity fixed effects we use SITC three digit industry data centred on 1995 United States bilateral trade with 33 countries to determine the effect of the degree of language commonality on bilateral trade. Both English as a first language and English as a second language are found to be less important for exports than for imports. This is true for all three digit industries as well as when the specific industry groups identified in Rauch (1999) are considered.     

Estimating the Euro Effects on Trade with Propensity Score Matching*

We investigate the effect of the euro on trade among EMU members. Using various semi‐nonparametric methods based on matching, we find that the euro has a statistical and economic impact on trade. The results show that two countries sharing the euro currency trade somewhere between 9% and 14% more than other country‐pairs. In addition, we find no evidence of trade diversion due to the euro.     

Trade Liberalisation and the Trade‐Off Between Growth and the Balance of Payments in Latin America

The broad purpose of trade liberalisation is to raise the rate of growth of countries on a sustainable basis, consistent with the achievement of other macroeconomic objectives. In this article we consider whether trade liberalisation in 17 countries of Latin America has improved the trade‐off between gross domestic product (GDP) growth and the trade balance, allowing the countries to grow faster without sacrificing foreign exchange. We find that in the aftermath of liberalisation, the majority of countries did grow faster, but at the expense of a deteriorating trade balance. Testing formally for the impact of trade liberalisation in a full model of trade balance determination, we find that only in Chile and Venezuela has the trade‐off unequivocally improved. In other countries there has been a significant deterioration or no change. Nine out of the 17 countries have grown faster post‐liberalisation than pre‐liberalisation but, except for Chile and Venezuela, at the expense of a wider trade or current account deficit.     

Output volatility,composition of trade,and transmission of economic shocks across countries

In this paper we investigate how supply and demand shocks in one country affect output volatility in other countries. While the evidence for cross‐country transmission of demand shocks is mixed, we find that volatile supply in one country leads to larger imports and output volatility in other countries. As a result, the effect of trade openness on output volatility is highly heterogeneous across countries and depends on the composition of their trade. Those countries whose imports originate in economies with volatile supply experience a greater impact of trade on output volatility.     

The Border Effect and the Nonlinear Relationship between Trade and Distance

The border‐effect literature confirms that sub‐national units tend to trade more with the rest of their country than with foreign markets. However, it is likely that ongoing processes of trade integration will generate a trade‐off between internal and external integration for sub‐national units within countries. In this paper we estimate the internal and external border effect, using a novel dataset that captures intra‐ and international shipments between Spanish regions and regions in eight European countries with alternative treatments of the nonlinear relationship between distance and trade.     

The high road and the low road to international competitiveness: Extending the neo‐Schumpeterian trade model beyond technology

Extending the neo‐Schumpeterian trade model, we estimate a ‘social‐gap’ model for a group of 17 OECD countries over the period 1975–1995. We find that government spending on social protection, employment protection regulations, union density, strike activity, and income security in the labor market (all measured in ‘gap’ form) are statistically significantly related to changes in international competitiveness. Specifically, we find some support for a Calmfors–Driffil, nonlinear, relation between cooperative labor relations and social spending patterns on the one hand, and international trade (and inward foreign investment) competitiveness on the other, implying that countries with relatively stronger institutional arrangements have better international economic performance than countries in the middle of the scale of conflict and cooperation. Our results indicate that models focusing solely on innovative effort are misspecified, and may suffer from an omitted variable bias caused by the absence of consideration of other institutional factors influencing international trade and investment.     

Firm‐Level Evidence for the Language Investment Effect on SME Exporters

Both analysis of international trade and the knowledge resource theory of the firm imply that language skills should play a vital role in exporting. This may be apparent to large multinationals with sites in many different linguistic locations, but we show it is less obvious to smaller companies. With data on the language used by each of a large sample of European small‐ and medium‐sized enterprises in their export markets, we test and estimate the effects of language assets on language performance in export markets and on export sales. Controlling for the possibility that language skills may be acquired by exporting, we find a very substantial export return to linguistic expertise, indicative of unexploited gains from investment in languages. There is also evidence of greater under‐investment in language skills in English‐speaking Europe.     

IMMIGRATION AND NATIVE WELFARE*

This article unifies two approaches for identifying the welfare and wage effects of immigration, one emphasizing the immigration surplus, the other stressing a potential welfare loss due to a terms‐of‐trade effect. We decompose the native welfare effect into a standard complementarity effect, augmented by a Stolper–Samuelson effect, and a terms‐of‐trade effect. We illustrate the welfare and wage effects of endogenous goods prices in a stylized‐specific factors model. Finally, we calibrate this model to a generic OECD economy and provide simulation results. The key insight is that endogenous goods prices play a quantitatively important role, sometimes even overturning received results.     

A model of firm heterogeneity in factor intensities and international trade

Empirical evidence suggests that exporters are, in addition to being more productive, significantly more skilled‐labour intensive than non‐exporters. In a setting that captures both these features, we show that the firm selection induced by trade liberalization works along two dimensions. First, export growth increases competition for skilled labour. This leads to the exit of some of the skilled‐labour intensive firms, while benefitting unskilled‐labour intensive ones. Second, within the group of firms with the same factor intensities, the reallocation of factors is towards the exporters. We show that the increased competition for skilled labour dampens the positive effect of trade liberalization on sector‐wide TFP and real income.     

Pecking order and core‐periphery in international trade

This paper analyzes the impact of market size and trade costs on bilateral trade flows. A multi‐country trade model with firm‐level heterogeneity in productivities and countries’ market potential provides a simple micro foundation for the link between these variables. In the model, market size and trade costs jointly determine a country‐specific pecking order of exporters serving their destination countries. In a counterfactual setting where bilateral trade costs are homogeneous across country pairs, market size predicts a common ranking of exporters among destination countries. This leads to a unique core‐periphery structure of the world trade network. With heterogeneous trade costs, we illustrate the impact of market size and trade costs on bilateral trade flows and its margins in a simple gravity‐like setting. Using an instrumental variables approach, we find that both market size and trade costs (measured through the network position of countries) have a significant impact on bilateral exports: countries in the core bilaterally trade more with other countries in the core than with peripheral countries, conditional on typical observables.     

Transfers in the gravity equation

This study integrates development aid into a theoretically founded structural gravity model that considers primary and secondary effects of aid as an income transfer and as a bilateral trade cost determinant. We identify the parameters of our model using a two‐stage approach that includes a state‐of‐the‐art Poisson pseudo‐maximum likelihood gravity estimation for a sample of 132 countries over the period 1995 to 2012. The main findings indicate that bilateral aid only increases bilateral trade for countries that do not have a common language, a past colonial relationship or an RTA. On average, 1 USD of additional foreign aid from all donors increases recipients’ net imports by around 0.36 USD. Our comparative statics indicate that donors experience a reduction in real consumption due to aid and recipients an increase. We also analyze the effect on third countries. The modelling framework also applies to the study of other transfers such as remittances.     

Language and foreign trade

While language plays an important role in gravity models, there has been little attention to the channels through which a common language promotes bilateral trade. This work proposes separate series for a common language depending upon whether ease of communication facilitates trade through translation or the ability to communicate directly. The series related to direct communication is far more important in explaining bilateral trade, but the other series, based on translation, makes a distinct contribution as well. Either measure of a common language outperforms the measure in popular use, which is implicitly related to translation, and a combination of the two does far better. In addition, the paper examines the effect of two country-specific linguistic influences on trade: Literacy and linguistic diversity at home. Both of these influences promote foreign relative to domestic trade. Finally, the article studies the separate roles of English and network externalities.     

IMPACT OF EXCHANGE RATE UNCERTAINTY ON COMMODITY TRADE BETWEEN THE US AND AUSTRALIA*

Exchange rate volatility is said to have negative or positive effect on trade flows. Previous studies that considered the impact of exchange rate uncertainty on the trade flows of Australia employed trade data either between Australia and rest of the world or between Australia and her few major trading partners. They were unable to discover any significant impact. In this paper when we disaggregate trade data by commodity between Australia and one of her major trading partners, the US, we find exchange rate volatility to have short‐run effects on trade flows of most industries. However, the short‐run effects last into long run, only in limited cases, though more in export commodities than import ones.     

The effect of free trade agreements revisited: Does residual trade cost bias matter?

This paper revisits a prominent gravity model‐based empirical literature on the effects of free trade agreements by accounting for a potential bias caused by unobservable trade costs that operate through general equilibrium constraints. It embeds state‐of‐the‐art panel estimation techniques in a recently proposed two‐step remedy that features a constrained ANOVA‐type estimation. Using a dataset on manufacturing trade flows in eight sectors in 40 countries and a rest‐of‐the‐world aggregate for the period 1990–2002, it finds evidence of significant residual trade cost bias. The direction and magnitude of bias vary across sectors, with the standard one‐step approach used in the literature overestimating or underestimating the partial effect of free trade agreements by up to 110 percent. Overall, coefficients on trade costs variables are jointly significantly different between the standard method and the two‐step method. The biases in partial effect estimates translate into biases in general equilibrium effects.     

How deep is your love? A quantitative spatial analysis of the transatlantic trade partnership

This paper explores the quantitative effects of trade liberalization envisioned in a transatlantic trade and investment partnership (TTIP) between the United States and the European Union. We use a quantitative trade model that, in contrast to other works, features consumptive and productive uses of land and we allow for labor mobility and a spatial equilibrium. Our calibration draws mainly on the world input–output database (WIOD). The eventual outcome of the negotiations is uncertain. Tariffs in E.U.–U.S. trade are already very low, however, so that an agreement will have a major impact only by eliminating nontariff barriers. These are extremely hard to quantify. We address these uncertainties by considering a corridor of trade‐liberalization paths and by providing numerous robustness checks. Even with ambitious liberalization, real income gains within a TTIP are in the range of up to 0.46 percent for most countries. The effect on outside countries is typically negative, yet even smaller. Taking land into account scales down the welfare effects strongly. Interestingly, we find that all German counties derive unambiguous welfare gains even though the model allows for negative terms‐of‐trade effects. Our analysis also implies that in order to arrive at the same welfare gains as under a TTIP, a multilateral liberalization would have to be much more ambitious for the U.S. than for the E.U.     

Asymmetric effect of exchange rate volatility on India's cross‐border trade: Evidence from global financial crisis and multiple threshold nonlinear autoregressive distributed lag model

This paper examines the asymmetric effect of exchange rate volatility on India's cross‐border trade with its major trading partners: Japan, Germany, the United States, and China. We extend previous studies in two ways. First, we examine whether global financial crisis changes the asymmetric effect of exchange rate volatility on India's cross‐border trade. Next, we divide exchange rate volatility into quintiles and examine the effect of each quintile on cross‐border trade by using the multiple threshold nonlinear autoregressive distributed lag (MTNARDL) model. Our findings from standard nonlinear ARDL (NARDL) indicate that the asymmetric relationship between exchange rate volatility and cross‐border trade changes as a result of global financial crisis. In addition, findings from MTNARDL indicate that in short‐run, exchange rate volatility symmetrically affects India's cross‐border trade with all sample countries whereas in long‐run it asymmetrically affects cross‐border trade. Overall, these findings are very important for policy implications and open a new dimension to exchange rate volatility and trade flows.     

Trade Creation,Replacement, and Destruction in Regional Trade Agreements: Micro‐level Evidence for the UK*

Empirical questions surrounding the effect of regional trade agreements on international trade have typically been answered with reference to macro‐level gravity equations. Prominent within this has been whether they create or divert trade. In this paper, motivated by the recent development of theories of export‐platform FDI, we use micro‐level data to explore the part of trade diversion that follows from FDI. Using information on acquisition FDI in the UK manufacturing sector between 1988 and 1998 we find evidence of trade creation, replacement, and destruction from FDI external and internal to the EU.     

Will India Be the Next China? Challenges,Prospects and Implications for Australia

India's recent growth performance has been impressive and it appears set to again become a major global economic power. But, sustaining this growth poses formidable challenges. Australia stands to gain much from India's growth. In this article, we review recent developments in the Indian economy, identify policy challenges and discuss short‐to‐medium term prospects, noting some of the main similarities and differences between China and India. Then, we look at opportunities for significant growth in Australian–Indian economic links and policy implications including the possible role of a free trade agreement.