LEGISLATED PROTECTION AND THE WORLD TRADE ORGANIZATION

Tariff bindings and administered protection are two characteristics of the World Trade Organization (WTO) that are little understood. Tariff bindings place a ceiling on tariffs that is not always reached, whereas administered protection provides all industries with some minimum import protection, effectively creating a floor for protection. How do these policies affect applied most favored nation (MFN) tariff rates that are enacted through the legislature? I model tariffs determined by a dynamic legislative process and show that low applied MFN tariffs are less likely with tariff bindings and more likely with administered protection than under purely legislated protection.     

PROTECTION BY TARIFF BARRIERS AND INTERNATIONAL TRANSACTION COSTS

Using estimates of protection in the EU market against US exports, this paper illustrates the relative importance of natural and policy sources of protection and the measurement errors induced in the measurement of effective protection by omitting transactions costs. It also considers protection in the EU ‘domestic’ and export market, and the implications of the elimination of tariff barriers only on relative rates of protection in ‘domestic’ and export markets.     

Employment protection, international specialization, and innovation

We develop a model to analyze the implications of firing costs on incentives for R&D and international specialization. The key idea is that countries with a rigid labor market will tend to produce relatively secure goods, at a late stage of their product life cycle. Consequently, their researchers tend to specialize in ‘secondary innovation’ which improves existing products, rather than ‘primary innovation’ which introduces new products. This is roughly consistent with the observed pattern of R&D in Europe versus the U.S. Employment protection does not necessarily harm the country where it prevails, but typically reduces world welfare and the world number of goods.     

The Impact of a Disorderly Resolution of Global Imbalances on Global Wealth

Partly reflecting structural advantages such as liquidity and strong investor protection, foreigners have built up extremely large positions in US (as well as other dollar‐denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to US financial markets. For every 10 per cent decline in the dollar, US equity markets, and US bond markets, total wealth losses to foreigners could amount to about 5 percentage points of foreign GDP. Four stylized facts emerge: (i) foreign countries, particularly emerging markets, are more exposed to US bonds than to US equities; (ii) over time US exposure has increased for most countries; (iii) on average, US asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserves position alone, wealth losses of emerging market governments could on average amount to about 2¾ percentage points of their GDP.     

Tariffs, market conduct and government commitment

We analyse a simple 'tariffs cum foreign competition' policy targeted at enhancing the competitive position of a domestic, developing country firm that competes with its developed country counterpart on the domestic market and that carries out an innovative (or imitative) effort. We evaluate this policy with respect to social welfare, type of oligopoly conduct, information requirement, time consistency and possibility of manipulative behaviour and conclude that the most robust policy setup is one in which the domestic government is unable to pre-commit to the level of its policy. We also study how the unit cost heterogeneity of the domestic firm affects trade protection.     

Market Size and the Survival of Foreign‐owned Firms*

We develop a general equilibrium model with heterogeneous firms and foreign direct investment cost uncertainty and investigate the survival of foreign‐owned firms. The survival probabilities of foreign‐owned firms depend on firm‐level characteristics, such as productivity, and host country characteristics, such as market size. We show that a foreign‐owned firm will be less likely to be shut down when its parent firm's productivity is higher and its indigenous competitors are less productive. Although a larger market size will always reduce the survival probability of indigenous firms, it can lead to a higher survival probability for foreign‐owned firms if their parent firms are sufficiently productive.     

Product Lifetime: A Determinant of Entry Decision by Multinational Firms

Existing literature on the role of intellectual property rights (IPR) protection has painted an ambiguous picture about the size of the effects of stronger IPR on the choice of the multinational firm’s mode of entry into foreign market. Some empirical studies suggest that improving IPR in recipient countries will have higher effect on licensing, while others found larger effect on foreign direct investment (FDI). The available indices of protection only measure country-wide characteristics and do not pick inter-industry variation, while the data show significant differences in losses of US multinationals by industry. In this paper, we introduce and empirically estimate a new dimension to multinational firm’s decision to enter a foreign market—a parameter that reflects the length of positive profits that the firm can earn in various industries. We dub the estimated parameter a perceived time of rent extraction. The introduction of the time parameter allows us to differentiate the effects of stronger IPR on the entry modes in different industries and reconcile the ambiguity results in the literature. Particularly, strengthening IPR has higher impact on FDI in industries with shorter rent extraction time, while licensing is affected more than FDI in industries with longer rent extraction time.     

Foreign market conditions and export performance: does ‘crowdedness’ reduce exports?

Abstract This paper analyzes the link between firm exports and the competitive environment in foreign markets. We derive a theory‐based econometric specification linking market‐specific exports to foreign demand and the degree of a market’s ‘crowdedness,’ which depends on the number and efficiency of firms competing there and the barriers impeding their access. Estimates on a large sample of Italian firms indicate that increased crowdedness has reduced Italian exports, but only by 0.2%–0.3% per year. This is substantially less than the contribution of other factors such as higher unit labour costs or weak demand growth in the EU15.     

Heterogeneity of southern countries and southern intellectual property rights policy

Abstract.  We develop a model with one innovating northern firm and heterogeneous southern firms that compete in a final product market. We assume southern firms differ in their ability to adapt technology and study southern incentives to protect intellectual property rights. We find that, in a non-cooperative equilibrium, governments resist IPR protection, but collectively southern countries benefit from some protection. We show that, in general, countries with more efficient firms prefer higher collective IPR protection than those with less efficient firms. Given the aggregate level of IPR protection, it is more efficient if the more efficient countries have weaker IPR protection.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

Implications of reform and WTO accession for China’ agricultural policies

While China’s trade policies in most areas have been transformed in the reform era, trade in many agricultural goods remains under relatively non‐transparent state trading arrangements. Accession to the WTO will be a critical turning point, increasing transparency and introducing disciplines on protection even for the commodities remaining under state trading. While China’s tariff bindings for the most sensitive products seem unlikely to require substantial short‐term reductions in protection, they rule out substantial increases in the future, provide the opportunity to develop an efficient agricultural sector, and highlight the need for effective policies to reduce rural poverty. WTO membership provides an opportunity for China to improve market access opportunities for its agricultural exports, which face much higher barriers than its exports of industrial products. JEL classification: D58, F13, O13, O56, P33, Q17.     

Trade,poverty, and social protection in developing countries

How do shifts in trade affect social protections for the poor? Although the fraction of the world's population considered the “extreme” poor has fallen by over one-half over the past quarter century, many of those lifted above the global poverty line remain vulnerable to shocks that could place them back into poverty. These are the groups that require social protection to stabilize their incomes. Among the shocks to which the absolute poor have been exposed are those created by trade liberalization, particularly of the agricultural sector. The resulting risks, uncertainties, and threats to social stability from this type of trade require that the poor be provided with some forms of adjustment assistance. We examine the effects of trade components on several dimensions of social protection in developing countries, including spending, coverage, and adequacy over the past two decades. We find that, contrary to previous studies, disaggregating trade may be a key to determining which international market variables drive expansion of social protection. Disaggregating trade balances in agricultural vs. manufactured goods reveals that net food and agricultural exporters provide better social protection than countries that report agricultural trade deficits. Meanwhile, countries with manufacturing trade surpluses tend to experience reduced social protection coverage. We reason that governments of net agricultural exporters face incentives to invest in social programs that extend eligibility to the rural poor. Manufacturing export-driven economies, on the other hand, are likely participants in global production chains that limit the capacity of the public sector to extend social protection.     

Welfare, home market effects, and horizontal foreign direct investment

Abstract.  We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we first fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we secondly show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low, when transport costs are high, and when products are close substitutes, the market outcome may well have to too many multinationals operating from a social point of view ('over-investment'). As a by-product, under-agglomeration of exporters in the larger market may arise.     

Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform

This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.     

The composition of capital inflows when emerging market firms face financing constraints

The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are pro-cyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the dynamic composition of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and FDI search costs generate a state contingent cost of financing such that the cheapest source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time-varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions, then volatility of capital inflows is not necessarily bad for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both short- and long-run welfare implications.     

Protection for sale under monopolistic competition: Beyond the CES

We extend the protection for sale model of Grossman and Helpman (1994) by introducing a general model of monopolistic competition with variable markups and incomplete pass-through. We show that the structure of protection emerging in the political equilibrium not only depends on the weight attached by the government to consumer welfare when making its policy decision, but also on the degree of market power of firms and on the terms-of-trade variations due to the degree of pass-through. Our results highlight the importance of preferences in shaping the structure of protection and are consistent with the occurring of protectionism also in unorganized industries.     

How important is employment protection legislation for Foreign Direct Investment flows in Central and Eastern European countries?1

In this article we investigate empirically the importance of labour market conditions and in particular the role of employment protection legislation as determinants of bilateral Foreign Direct Investment (FDI). We find that FDI flows are significantly higher in countries with relatively low unit labour costs. We also find that employment protection legislation does not exert a statistically significant impact on FDI flows. Our results are consistent with the interpretation that transition economies attract FDI via low production costs whereas indirect costs related to the rigidity of the labour market are less relevant.     

Do Australian Qualifications Help? The Effect of Host Country Qualification on Migrant Participation and Unemployment*

The current Australian migration program rewards applicants for possessing Australian tertiary qualifications. This study examines whether such qualifications help mitigate the labour market disadvantages faced by immigrants in Australia. The effect of host country qualification on labour market assimilation is estimated by comparing the labour force participation and unemployment of natives with two groups of migrants: those holding foreign qualifications and those holding Australian qualifications. Controlling for factors such as level of education and experience, there is no evidence that Australian qualifications result in better labour market outcomes for migrants.     

GLOBALIZATION,GENDER, AND GROWTH

We consider the effect of globalization on fertility, human capital, and growth. We view globalization as creating market opportunities for employment in less developed countries. We construct a specific model of household decision making, drawing on empirical observations in the development economics literature, and show that if the market opportunities produced by globalization are for women, then globalization reduces fertility and increases human capital formation. If the opportunities are for men, then fertility increases and human capital formation falls. We then show that globalization that produces job opportunities for women increases growth and produces a long run steady state with higher per capita consumption than would prevail either without globalization, or with globalization that creates jobs only for men.     

The role of importers and exporters in the determination of the U.S. tariff preferences granted to Latin America

This paper investigates the role played by domestic importers and foreign exporters in improving preferential access to the domestic market. To this end, the framework used in this paper extends the protection for sale analysis to explicitly model the role of domestic importers and foreign exporters in the determination of preferential trade treatment. The predictions of the model are tested using data on preferential trade between the United States and Latin American countries. The results suggest that Latin American exporters and US importers' lobbying efforts have a significant and important role in determining the extent of preferential access granted by the United States. More interestingly, these findings also show that U.S. importers capture a very substantial share of the rents generated by tariff preferences. These results therefore shed a pessimistic view on preferential trade schemes as a reliable source of gains for developing countries.