Trade and Relative Wage in a Global Economy

The effects of trade among similar countries and that among dissimilar countries on the relative wage are examined. Product quality is a choice variable by firms. Quantity production is assumed to satisfy constant costs, while quality production is more skilled-labor intensive than quantity production and obeys increasing costs. Compared to autarky, free trade, by fostering more competition, leads to quality improvement, which in turn tends to increase the relative wage. Trade among similar countries increases the relative wage in all trading countries, while trade among dissimilar countries, in a two-country model, increases it in one country but may increase or lower it in the other.     

International trade and the division of labor

This paper develops a model of international trade based on the division of labor under perfect competition. International trade, by eliminating the duplication of coordination costs, leads to a greater variety of tasks, each produced at a larger scale than in autarky. The greater variety of tasks implies greater division of labor and hence gains from trade. Extending the model to two factors of production yields the additional result that if the two countries are sufficiently similar in their relative endowments, then both factors of production can experience gains from trade.     

Endogenous trading bloc formation in a North-South global economy

Abstract .  The majority of the trading blocs to date are between similar countries, rather than between developed and developing countries. This paper provides a rationale for why trading blocs among similar countries may arise as an equilibrium phenomenon. It develops a model of an asymmetric world economy in which there are at least four countries. The countries are differentiated with respect to their market size and they choose their trading partners. In the coalition-proof Nash equilibrium, either there is global free trade or free trade areas are formed among similar countries.     

Spillovers from Foreign Exporters

We develop a general equilibrium model of international trade with heterogeneous firms that accounts for productivity spillovers transmitted by foreign exporters. Everything else equal, stronger spillovers increase welfare. We embed the model framework into a trade policy scenario where countries strategically set inter‐country variable trade costs for the trading partner. In the strategic Nash‐equilibrium policy, governments trade‐off welfare gains from protectionism and those that are due to spillovers from foreign exporters. The equilibrium degree of protectionism is decreasing in the strength of the spillover. Policy coordination induces welfare gains but these gains can be hump‐shaped in the spillover strength.     

Industry-level emission trading between power producers in the EU

This paper investigates how restrictions for emission trading to the energy-intensive power sector will affect the magnitude and distribution of abatement costs across EU countries vis-à-vis a comprehensive EU emission trading regime. It is found that emission trading between European power sectors allows the harvest of a major part of the efficiency gains provided by full trade as compared to strictly domestic action. However, trade restrictions may create a more unequal distribution of abatement costs across member states than is the case for a comprehensive trade regime. The reason for this is that restricted permit trade enhances secondary terms-of-trade benefits to EU member countries with low marginal abatement costs at the expense of the other EU member states.     

REAL GROSS DOMESTIC INCOME,RELATIVE PRICES,AND ECONOMIC PERFORMANCE ACROSS THE OECD

This paper uses OECD data to examine changes in labor productivity, real gross domestic product (GDP) and real gross domestic income (GDI), economic aggregates, and relative economic growth over time. Real GDI combines changes in production (real GDP) with a trading gain derived from relative price changes. The paper considers two sources of trading gains: the terms of trade, and the real exchange rate. For OECD countries, the terms of trade is the more important price ratio, making a contribution to real income growth that is, on average, an order of magnitude larger than the real exchange rate. Over long time periods, the most important source of real income growth is changes in production. Over shorter time horizons, however, the trading gain can make noteworthy contributions. Changes in aggregates like real private consumption, or the relative economic performance of nations, are shown to be particularly dependent on the trading gain during the large swings in resource prices that occurred post‐2002.     

Randomized double auctions: gains from trade,trader roles,and price discovery

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially among those who have little to gain under equilibrium pricing. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation, leading to some redistribution of gains from high to low expected earners. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear to enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

     

Increasing Returns and International Trade

The paper develops a model of international trade with increasing returns toscale by taking into account the possibility of cooperation among agents in an egalitarian economy. It is shown that each country gains from trade in a trading world in which there are arbitrary numbers of increasing-returns-to-scale goods, constant-returns-to-scale goods, factors of production, and countries.     

International trade and renewable resources under asymmetries of resource abundance and resource management

This paper examines the interaction between relative resource abundance and resource management regimes in determining trade patterns and gains from trade in a two-country model with a renewable resource. A model developed by Brander and Taylor [Brander JA, Taylor MS (1997b) Resour Energy Econ 19:267–297] is extended. It is shown that relative resource abundance determines trade patterns if resource abundance is similar in both countries and the relative demand for the resource good is moderate, or if resource abundance is sufficiently different and the relative demand is not so high. Otherwise, a difference in resource management regimes determines trade patterns. Even under an open-access regime, the resource-scarce country gains from trade unless resource abundance is similar and the relative demand is low.      

Ricardian productivity differences and the gains from trade

This paper evaluates the role of sectoral heterogeneity in determining the gains from trade. We first show analytically that in the presence of sectoral Ricardian comparative advantage, a one-sector sufficient statistic formula that uses total trade volumes as a share of total absorption systematically understates the true gains from trade. Greater relative sectoral productivity differences lead to larger disparities between the gains implied by the one-sector formula and the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries and 19 sectors we show that the multi-sector formula implies on average 30% higher gains from trade than the one-sector formula, and as much as 100% higher gains for some countries. We then set up and estimate a quantitative Ricardian–Heckscher–Ohlin model in which no version of the formula applies exactly, and compare a range of sufficient statistic formulas to the true gains in this model. Confirming the earlier results, formulas that do not take into account the sectoral heterogeneity understate the true gains from trade in the model by as much as two-thirds. The one-sector formulas understate the gains by more in countries with greater dispersion in sectoral productivities.     

China's potential future growth and gains from trade policy bargaining: Some numerical simulation results

Numerical simulation analysis of bargaining solutions is little developed in existing literature. In this paper, we use a numerical general equilibrium model which captures China and her major trading partners and examine the outcomes of trade policy bargaining solutions (bargaining over tariffs and financial transfers) over time, and then measure both absolute and relative gains to China from trade bargaining. These measurements are important for policy making. Our simulation results indicate that China's welfare gain from trade bargaining will increase over time if countries keep their present higher GDP growth rates for several decades, but there are major difference when using different bargaining solution concepts. These differences have not been noted in existing literature but have an intuitive explanation. Our results also indicate that if China jointly bargains along with India, Brazil and other developing countries with the OECD, and when we use PPP to adjust China's relative GDP size China's gain will further increase.     

Gains and losses from potential bilateral US–China trade retaliation

Two closely related numerical general equilibrium models of world trade are used to analyze the potential consequences of US–China bilateral retaliation on trade flows and welfare. One is a conventional Armington trade model with five regions, the US, China, EU, Japan and the Rest of the World, and calibrated to a global 2009 micro consistent data set. The other is a modified version of this model with monetary non-neutrals and including China's trade surplus as an endogenous variable.Who may gain or loss from global trade conflicts spawned by adjustment pressures in the post crisis world is much debated. In a US–China trade conflict, Europe and Japan would seem gainers from preferential access to US and Chinese markets. The loss of markets would hurt the US, but moving closer to an optimal tariff could be the source of terms of trade gains. And the ease of substitution across trading partners' practices would determine costs for China.Results from the conventional model suggest that retaliation between the two countries can be welfare improving for the US as it substitutes expenditures into own goods and improve its terms of trade with non-retaliatory regions, while China and non-retaliatory regions may be adversely affected. Results in the endogenous trade surplus model from the central case model specification, however, suggest that both the US and the EU (the deficit regions) have welfare losses in most cases, while the surplus region, China, and the ROW have welfare gains. In both models, when the bilateral tariff rates are very high, gains accrue to the EU and Japan from trade diversion if the substitutions elasticities of imports are high. Costs are borne by the US and China in lost exports, lowered terms of trade and adjustment costs at home.     

Water on Fire: Gains from Electricity Trade

In light of the ongoing liberalization of electricity trade in the Nordic countries, and perhaps in Northern Europe, we argue that gains from electricity trade may be different from those traditionally associated with comparative advantages and economies of scale. In particular, we consider gains arising from the exploitation of technological complementarities between hydro and thermal systems. Our theoretical framework highlights essential features of the two systems and allows for an analysis of effects of trade. We study three trading regimes, which may arise either endogenously or because of trade regulations: day–night power exchange, seasonal energy banking and unbalanced trade. The analysis suggests that gradual trade liberalization may be costly.     

Country of Origin Labeling (C.O.O.L.): How cool is it?

This paper develops a partial-equilibrium model of a small open-economy trading an unsafe product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. The welfare gains from trade in the absence of COOL are ambiguous, may justify the imposition of a trade ban. Even if a full ban does not improve welfare and some restriction of trade is always welfare-enhancing. Under a tariff regime, more COOL trade is better than less trade. Independently of domestic market power, free trade coupled with a COOL program maximizes national welfare.     

The determinants of bilateral trade

Abstract.  In this paper we present a monopolistic competition model that incorporates asymmetric trade barriers and international differences in production costs. The model implies a highly non‐linear bilateral trade equation. Estimation of this equation yields parameters for the elasticity of substitution and trade costs that are more reasonable than those found in previous studies. A simulation indicates that trade liberalization will shift trade from rich countries to poor countries and from within continental trading partners with preferential trade agreements to intercontinental trading partners. JEL Classification: F1     

International Trade Without Autarkic Equilibria

It is possible that wealthy trading countries nevertheless have no autarkic equilibria. However, if a country has no autarkic equilibrium, the offer curve of that country may consist of disjoint segments, which implies that a worldwide trading equilibrium does not always exist, that international exchanges do not always take place in equilibrium, and therefore that econometric estimates of the structure of open economies must be viewed with scepticism. In the present paper, I provide conditions that are necessary and sufficient for the existence of a worldwide free-trade equilibrium and for the existence of gains from free trade for individual countries.     

Trade and expropriation

We examine the effect of international trade on expropriation in a setting where law enforcement is costly. We show that, in general equilibrium, trade liberalization can reduce expropriation activities and have a first-order effect on the gains from trade. One interpretation of our results is that unskilled-labor abundant countries facing popular militia or rebel groups will experience amplified gains from trade, as expropriation levels and cost of enforcement decline with trade liberalization. However, the model also admits the possibility that globalization causes an increase in crime, particularly for skilled-labor abundant countries.     

Product quality and the theory of comparative advantage

We develop a simple model to investigate the possibility that two countries that differ significantly in income levels may be unable to gain from trading with each other. We consider two countries with identical preferences and different technologies. There are two types of goods: one homogeneous, and one quality-differentiated. We show that if one country has an absolute advantage in both types of goods, then no trade may be possible between the two countries, despite differences in relative autarky prices.     

Multinational taxation and international emissions trading

Many studies have shown that the activities of multinational corporations are quite sensitive to differences in income tax rates across countries. In this paper I explore the interaction between multinational taxation and abatement activities under an international emissions permit trading scheme. Four types of plans are considered: (1) a single domestic permit system with international offsets; (2) separate national permit systems without trade; (3) separate national permit systems with limited offsets; and (4) an international permit trading system. For each plan, I model the incentives for the multinational firm to choose abatement activities at home and abroad and to transfer emissions credits between parent and subsidiary. Limits on trading across countries restrict efficiency gains from abatement, as is well known. But if available offset opportunities are limited to actual abatement activities, those activities are also more susceptible to distortions from incentives to shift taxable income. Transfer-pricing rules can limit but not always eliminate these distortions. In a system of unlimited international trading, abatement is efficiently allocated across countries, but tax shifting can still be achieved through intra-firm transfer pricing. From the basis of efficiency for both environmental and tax policies, the best design is an international permit trading system with transparent, enforceable transfer-pricing rules.     

Price discovery and intermediation in linked emissions trading markets: A laboratory study

Many new and proposed emissions trading systems involve multiple countries and regions. The introduction of interregional trading raises questions about how flexible state- or national-level authorities should be in allowing individual firms to trade with firms or authorities in other states or countries. This paper uses laboratory methods to evaluate the efficiency and pricing performance of linking trading across regions at the firm-to-firm level. In one treatment, individual firms trade directly with firms or authorities in other regions. We compare performance in this treatment to an intergovernmental trading treatment, where emissions trading is restricted to occur only between intermediaries. A baseline treatment of autarky, where firms only trade with other firms in their country or region, provides a benchmark to assess the efficiency benefits of allowing linking. Although efficiency and price discovery are both improved by allowing intermediation in linked permit markets, we find that further gains can be realized through direct firm to firm trading. Buyers in high cost regions and sellers in low cost regions benefit the greatest from linking.