Trade,growth, and convergence in a dynamic Heckscher–Ohlin model

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher–Ohlin model—a combination of a static two-good, two-factor Heckscher–Ohlin trade model and a two-sector growth model—with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.     

Open-access renewable resources and pollution: Trade and policy implications in a two-country model

We examine the interaction between the relative inter-industry pollution externality and resource stock externality of harvesting in deciding trade patterns and welfare gains from trade in a two-country model (less-developed countries) with renewable resources in the absence of resource management. This paper focuses on the impacts of trade policies on resource conservation and welfare outcomes in two countries with different environmental management regimes. Differences in pollution management standards between both countries determine the direction of trade flow and gains from trade in a diversified production case. The country with a lower pollution intensity parameter, an exporter of resource goods, certainly experiences welfare loss in the post-trade steady-state and may also suffer a decline in utility throughout the transition path. However, a country with higher pollution intensity and importers of resource goods tend to gain from trade. Under national open-access resources, given that pollution is regulated up to a certain point in both countries, this study finds that implementing better restrictions on only one externality factor is not optimal from a post-trade welfare perspective. Lastly, from the point of view of policy suggestion, this paper offers an optimal trade policy that the economic and environmental effects of enforcing import tax on resource goods are likely to be Pareto-improving consequences compared to the implications of using an export tax.     

Specific Factors,Learning, and the Dynamics of Trade*

In the postwar period, the volume of trade among developed countries has increased at a much higher rate than GDP. This article presents a dynamic general equilibrium model of trade between developed countries that accounts for this pattern of trade dynamics. Countries trade in goods that use good‐specific skilled labor and unskilled labor as factors of production. Specific skills are learned on the job and there exist positive effects in learning. Small initial differences in the distribution of experts in each country generate an increasing pattern of specialization over time. Knowledge spillovers across sectors are crucial determinants of the trade pattern.     

Wage inequality and skill supplies in a globalised world

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results combine the insights of simple labour market and trade models. In countries that trade, relative wages respond inversely to variation in skill supplies, but the response decreases with the degree of openness to trade and is small in very open countries. To reconcile our results with standard estimates of the elasticity of substitution between skilled and unskilled workers, we allow also for the influence of directed technical change and income elasticity of demand for skill-intensive goods.     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.     

A tale of two countries: Directed technical change,trade and migratory movements

We propose a North-South model that reconciles trade and production strategies, flows of innovators and the path of economic divergence, or convergence, between countries. We explain the mechanisms behind these forces and show how the technological and economic gaps can be reversed if southern countries stop imitating northern goods and, instead, produce complementary goods. Such a strategy of complementarity on production yields the necessary incentives to innovators to engage in research in southern countries, which enhances the catching-up process between countries. It is also shown that migratory movements of unskilled labor between countries are also relevant to understand the dangers and benefits of different trade strategies for economic growth. This paper suggests a positive (negative) correlation between technological innovation in the North (South) and the level of substitutability in production, while under complementarity, technological innovation catches up in the South, therefore fostering the economic catching up process. A positive correlation between inflows of skilled and unskilled labor and substitutability of production between countries is also verified.     

Dynamic scoring of tax reforms in a small open economy model

We examine dynamic revenue effects of a permanent tax cut on labor and capital income using a small open two-sector dynamic general equilibrium model. We use a dynamic scoring technique to calculate long-run as well as transitional effects on fiscal revenue when a tax cut is financed by either a lump-sum tax or consumption tax. We show that the revenue loss from an income tax cut becomes substantially smaller when agents can use international financial markets compared to the case of the closed economy. Responses of tradable and nontradable sectors to the capital income tax cut display a stark contrast in both long-run equilibrium and transitional dynamics due to different factor intensities. Capital income tax cut in the tradable sector is the most efficient policy instrument in terms of minimizing fiscal revenue loss. These simulation results suggest that fiscal sustainability issue when implementing a tax cut could be overstated.     

Intra‐industry Trade Liberalization: Why Skilled Workers are More Likely to Support Free Trade

This paper presents a theoretical model and empirical analysis that connects the prevalence of intra‐industry trade with increased wage inequality from trade liberalization in both skilled and unskilled labor abundant countries. The Stolper–Samuelson effect is incorporated into an intra‐industry trade liberalization (intra‐ITL) hypothesis where skilled labor opposes protectionism in all countries engaged in intra‐industry trade because skilled workers gain at the expense of unskilled workers from multilateral trade liberalization within the skill‐intensive sector. We examine empirical evidence on whether skilled individuals are more supportive of trade liberalization than unskilled individuals across 31 countries with different levels of intra‐industry trade and skill endowments. We find that the extent to which countries engage in intra‐industry trade in high‐tech commodities is strongly linked with the intensity of opposition to protection by skilled labor. Regression results strongly support our hypothesis that skilled workers, almost everywhere, are more likely to support free trade.     

Uniform domestic tax rates,trade distortions and economic integration

This paper examines the argument that uniform indirect tax rates are necessary to remove trade distortions for participating countries in economic integration. In a simple goods mobile, factor immobile international trade model it is shown that uniformity of tax rates is not necessary with either a general origin or destination based tax. Under a restricted origin basis, absence of distortion is only possible if trade is bilaterally balanced, in which case uniform or nonuniform rates across countries serve equally well.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

The political economy of trade and migration: Evidence from the U.S. Congress

We compare the drivers of U.S. congressmen's votes on trade and migration reforms since the 1970s. Standard trade theory suggests that trade reforms that lower barriers to goods from less skilled‐labor abundant countries and migration reforms that lower barriers to low‐skilled migrants should have similar distributional effects, hurting low‐skilled U.S. workers while benefiting high‐skilled workers. In line with this prediction, we find that House members representing more skilled‐labor abundant districts are more likely to support trade and migration reforms that benefit high‐skilled workers. Still, important differences exist: Democrats are less supportive of trade reforms than Republicans, while the opposite is true for migration reforms; welfare state considerations and network effects shape votes on migration, but not on trade.     

Should Small Countries Fear Deindustrialization?

Will small countries deindustrialize when opening up to trade with large countries? Donald Davis (1998 ) shows that for the home market effect to lead to deindustrialization of small countries, trade costs for homogeneous goods must be sufficiently smaller than trade costs in differentiated goods, a condition which is not supported by empirical evidence. We show that if differentiated goods production uses tradable inputs small countries can become deindustrialized when trading with a sufficiently large country and if trade costs are low.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

Democracies,Politics, and Arms Supply

Throughout the 20th century arms have not only been tradable goods, but also policy instruments. This paper focuses on countries supplying major conventional weapons (MCW), and investigates whether changes in political conditions impact the quantity of MCW supplied to third countries. In particular, it concentrates on democratic exporters and estimates a gravity‐type panel tobit for the years 1975–2004. Results suggest that the exporter's chief executive, being right‐wing, has a positive and significant impact on MCW exports. This may reflect a general right‐wing tendency to support national industry and deregulate heavy industry exports. It is also found that higher concentration of power is associated with lower MCW exports, and that executives which serve the last year of their term and can run for re‐election tend to decrease MCW exports.     

Price convergence in the European Union – What has changed?

This paper investigates price convergence in European Union countries using disaggregated price level indices in the period 1999–2016. Our results show that prices of both tradable and nontradable goods had a significantly lower dispersion in 2016 than in 1999. The convergence was faster in the case of countries with price level below the average, which can be interpreted as catching-up. However, further analysis shows that most prices converged only up to 2008. While prices of transport equipment continue to converge across the European Union, several durable consumption categories show price divergence after 2008. We attribute this to the drop in international trade of durable products due to increasing inflation and exchange rates volatility following the global financial crisis. From the monetary policy perspective, the existing price-level gaps, shown in our study, may pose a risk of higher inflation, especially in catching-up economies.     

Trade tariff,wage gap and public spending

This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.     

Tax Competition and Economic Integration

This article examines the role of tax competition and economic integration in a core–periphery setting, where agglomeration forces are present. I present a New Economic Geography model, which accounts for firm entry/exit and international mobility of skilled labor employed in the public R&D sectors. In contrast to other literature on tax competition, I focus on its impact on labor migration and net earnings of skilled and unskilled labor. Economic integration is modeled as trade liberalization, an easing of factor mobility restrictions and technology diffusion. I find that tax competition favors skilled labor when trade costs are reduced. In contrast, unskilled labor benefits when factor mobility restrictions are eased and technology diffusion is enhanced.     

Brain Drain,Fiscal Competition,and Public Education Expenditure

A two‐country model is developed in this paper to examine the implications of fiscal competition in public education expenditure under international mobility of high‐skilled labor. The authors allow for educational choice, asymmetry of countries with respect to total factor productivity, and tax base effects of migration in source and host country. As the latter may give rise to multiplicity of equilibrium, alternative belief structures of mobile high‐skilled workers are carefully taken into account. The paper also looks at the consequences of bilateral policy coordination. While in line with other studies on tax competition, bilateral coordination can reduce the under‐investment problem in public education spending, it also tends to hinder migration or may even reverse the direction of the migration flow that materializes under non‐cooperative policy setting. As a result of its potentially adverse effects on migration patterns, bilateral coordination may therefore reduce global welfare and bring the world economy further away from the social planner's solution.     

Indra-Industry Trade,Endogenous Technical Change,Wage Inequality and Welfare

By using alternative intra-industry trade models (1. New goods cannot be introduced into the economy; 2. The possibility for a set of capital goods available in the economy to vary; the models consider the existence of intersectoral linkages), I show by means of Applied General Equilibrium (AGE) analysis that trade rises wage inequality between skilled and unskilled workers; but the impact on wage inequality is far larger, when countries are assumed to exchange differentiated capital goods. The latter result has been obtained by using an imperfect competitive model, which embodies a sector bias technological change that arises from trade. In addition, the gains from trade, insignificant under the standard trade hypotheses, are extraordinarily large when endogenous technological change is taken into account. The main policy conclusion is that if policy makers of flexible wage economies introduce trade barriers to reduce wage inequality, these protective measures, by affecting the diffusion of technology, would cause a large welfare loss. [D58, f12, F43, J3, O3]