New measures of trade creation and trade diversion

This paper estimates the effects of regional agreements on trade flows controlling for country pair, importer-year, and exporter-year fixed effects. These fixed effects capture the determinants of trade flows normally included in gravity model specifications and control for yearly shocks to countries' trade. Controlling for the fixed effects generally reduces the estimated trade impacts of regional agreements. The estimates reveal that regional agreements have significant anticipatory effects on trade flows and continue to affect trade for up to 11 years after they begin. The paper also presents estimated effects on individual countries' trade flows in year five of the agreements.     

The effect of trade liberalization on child labor

The question of how trade liberalization affects the employment of children in developing economies is at the core of the debate on globalization. Trade theory predicts that an increase in the price of an exported good could either increase or decrease child labor depending on the magnitudes of the substitution and income effects. In this paper, we study the relationship between changes in the relative price of an exported commodity and child labor using household-level data from within a poor country. In particular, we relate child labor to regional and intertemporal variation in the real price of rice surrounding national and international rice market integration in Vietnam. We find that higher rice prices are associated with declines in child labor. Income effects play an important role in this relationship. Rice price increases are associated with the largest declines in child labor in households that are large net producers of rice. These findings show that greater market integration can be associated with less child labor. Moreover, our results suggest that the use of punitive trade sanctions on exports from developing countries to eradicate child labor is unlikely to yield the desired outcome.     

In search of WTO trade effects: Preferential trade agreements promote trade strongly, but unevenly

The literature measuring the effects of WTO membership on trade flows has produced remarkably diverse results. Rose (2004) reports a wide range of empirical specifications that produce no WTO effects. Tomz et al. (2007) use Rose's data but include de facto WTO membership, to find positive WTO trade effects. Rose (2005) also produced positive WTO trade effects after accounting for the diverse trade effects produced by individual preferential trade agreements (PTAs). When Subramanian and Wei (2007) emphasize general equilibrium trade effects by controlling for multilateral resistance, they find strong WTO trade effects only for industrialized countries. Subramanian and Wei (2007), however, account neither for unobserved heterogeneity among trading partners, nor for differences in trade effects across PTAs (which could inflate WTO estimates). We unify the Rose, Tomz et al., and Subramanian and Wei specifications in one comprehensive approach that minimizes omitted variable bias to show that all specifications produce one consistent result: WTO effects on trade flows are not statistically significant, while PTAs produce strong but uneven trade effects. Extending the gravity model to address specific avenues in which WTO may have affected trade flows, we find that WTO membership boosts trade prior to PTA formation and increases trade among proximate developing countries (at the expense of distant trade). An augmented gravity model that accounts for WTO terms-of-trade theory shows that countries with greater incentives to bargain for tariff reductions before WTO accession experience positive and significant subsequent WTO trade effects.     

The dynamics of trade and competition

We estimate a version of the Melitz and Ottaviano [Melitz, Marc J. and Ottaviano, Gianmarco I.P., 2008, Market size, trade, and productivity, Review of Economic Studies 75(1), pp. 295-316.] model of international trade with firm heterogeneity. The model is constructed to yield testable implications for the dynamics of prices, productivity and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find short run evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. The response of profit margins to openness has implications on the conduct of monetary policy. Consistent with the predictions of some recent theoretical models we find some, albeit weaker, support that the long run effects are more ambiguous and may even be anti-competitive. Domestic trade liberalization also appears to induce pro-competitive effects on overseas markets.     

Estimating the effects of free trade agreements on international trade flows using matching econometrics

This paper provides the first cross-section estimates of long-run treatment effects of free trade agreements on members' bilateral international trade flows using (nonparametric) matching econometrics. Our nonparametric cross-section estimates of ex post long-run treatment effects are much more stable across years and have more economically plausible values than corresponding OLS cross-section estimates from typical gravity equations. We provide plausible estimates of the long-run effects of membership in the original European Economic Community (EEC) and the Central American Common Market (CACM) between 1960 and 2000 and the estimates confirm anecdotal reports of these agreements' effectiveness.     

International trade and child labor: Cross-country evidence

We explore the relationship between exposure to trade (as measured by openness) and child labor in a cross-country setting. Our methodology accounts for the fact that trade flows are endogenous to child labor (and labor standards more generally) by examining the relationship between child labor and variation in trade based on geography. We find that countries that trade more have less child labor. At the cross-country means, the data suggest an openness elasticity of child labor of − 0.7. For low-income countries, the elasticity of child labor with respect to trade with high-income countries is − 0.9. However, these relationships appear to be largely attributable to the positive association between trade and income. We consistently find a small and statistically insignificant association between openness and child labor when we control for cross-country income differences in the full sample, when we split the sample into different country groups, consider only trade between high- and low-income countries, or focus on exports of unskilled-labor intensive products from low-income countries. Thus, the cross-country data do not substantiate assertions that trade per se plays a significant role in perpetuating the high levels of child labor that pervade low-income countries.     

Endogenous free trade agreements and the multilateral trading system

I evaluate in this paper the impact of free trade areas (FTAs) on the world trading system. I use an oligopolistic-political-economy model where the external tariffs of FTA members, as well as the decision to form FTAs, are endogenously determined. In this context, I show that FTAs are primarily beneficial to the multilateral trading system. This conclusion is based, first, upon the finding that FTAs induce their member governments to lower their external tariffs, and to do so deeply enough to enhance trade even between FTA members and non-members. While this ensures gains for the latter, in general FTA members may not gain. I show, however, that governments will endorse only welfare-improving arrangements, in spite of their political motivations; as a result, FTA members benefit from ratified arrangements as well. Finally, I find that FTAs, by reducing the role of special interests criteria in governments' trade regime decisions, also tend to enhance support for further liberalization at the multilateral level.     

World trade patterns and prices: The role of productivity and quality heterogeneity

This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Recent empirical literature identifies two groups of evidence — the product lines evidence on different export strategies and sources of competitiveness across product groups and countries, and the aggregate trade flows evidence on a positive relation between the income per capita and both export and import prices (also conditional on the exporter). We attempt to provide a theoretical background for these findings and focus on the North–South productivity differences in a four country North–South trade model with two dimensions of firm heterogeneity. Differences in the firms' product quality and cost efficiency impose different competitiveness sources when entering more difficult markets and result in the observed export and import prices and consumption bundles across the rich and poor countries.     

Unions, competition and international trade in general equilibrium

We develop a two-country, multi-sector model of oligopoly in which unionised and non-unionised sectors interact in general equilibrium. The model is used to study the impact of trade liberalisation, deunionisation and firm entry on wages in unionised and non-unionised sectors, and on welfare. We find that a shift from autarky to free trade increases non-union wages and welfare, whereas the effect on union wages is ambiguous. We also show that partial deunionisation leads to higher wages in both unionised and non-unionised sectors, but only increases welfare when the proportion of unionised sectors is sufficiently low. Finally, wages in non-unionised sectors necessarily increase with firm entry, while the response of union wages and welfare depends on the trade regime.     

How often are propositions on the effects of regional trade agreements theoretical curiosa?

This paper uses computational techniques to assess whether or not various propositions that have been advanced as plausible in the literature on regional trade agreements may actually hold. The idea is to make probabilistic statements as to whether propositions of interest might hold, rather than to restrict assumptions so they unambiguously hold. Our aim is to blend theory and numerical simulation and go beyond the ambiguous analytically derived propositions that dominate the theoretical literature so as to assess the likelihood of propositions holding for particular model specifications.     

The elasticity of trade: Estimates and evidence

Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions. We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum's (2002) Ricardian model. We apply our estimator to disaggregate price and trade-flow data for 123 countries in the year 2004. Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum's (2002) approach. This difference doubles the welfare gains from international trade.     

Gravity, trade integration, and heterogeneity across industries

We derive a micro-founded measure of bilateral trade integration that is consistent with a broad range of leading gravity models. This measure accounts for cross-industry heterogeneity by incorporating substitution elasticities estimated at the industry level. We then use it to provide a theory-based ranking of trade integration across manufacturing industries in European Union countries. In addition, we explore the determinants of trade integration, finding that substantial Technical Barriers to Trade in certain industries as well as high transportation costs associated with heavy-weight goods are the most notable trade barriers.     

Erratum to Multilateral trade negotiations, bilateral opportunism and the rules of GATT/WTO

Trade negotiations occur through time and between the governments of many countries. An important issue is thus whether the value of concessions that a government wins in a current negotiation may be eroded in a future bilateral negotiation to which it is not party. We identify rules of negotiation that serve to protect the welfare of governments that are not participating in the bilateral negotiation. Our main finding is that the two central principles of GATT/WTO—nondiscrimination (MFN) and reciprocity—preserve the welfare of nonparticipating governments and therefore offer a “first-line of defense” against bilateral opportunism.     

The role of intermediaries in facilitating trade

This paper documents that intermediaries play an important role in facilitating international trade. We modify a heterogeneous firm model to allow for an intermediary sector. The model predicts that firms will endogenously select their mode of export - either directly or indirectly through an intermediary - based on productivity. The model also predicts that intermediaries will be relatively more important in markets that are more difficult to penetrate. We provide empirical confirmation for these predictions using the firm-level census of China's trade, and generate new facts regarding the activity of intermediaries. We also provide evidence that firms begin to export directly after exporting through intermediaries.     

The trade-creating effects of business and social networks: evidence from France

Using theory-grounded estimations of trade flow equations, this paper investigates the role that business and social networks play in shaping trade between French regions. The bilateral intensity of networks is quantified using the financial structure and location of French firms and bilateral stocks of migrants. Compared to a situation without networks, migrants are shown to double bilateral trade flows, while networks of firms multiply trade flows by as much as four in some specifications. Finally, taking network effects into account divides the estimation of the impact of transport costs and of the effect of administrative borders by around three.     

Power laws in firm size and openness to trade: Measurement and implications

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data, both for the economy as a whole and at the industry level. Furthermore, the differences between power law coefficients for exporters and non-exporters are larger in sectors that are more open to trade. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.     

The effect of WTO on the extensive and the intensive margins of trade

We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade. We construct gravity equations for the two product margins motivated by Chaney (2008). The empirical results show that standard gravity variables provide good explanatory power for bilateral trade on both margins. Importantly, we show that the impact of the WTO is concentrated almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 25%. At the same time, WTO membership has a negative impact on the intensive margin. Based on novel comparative statics results about how fixed and variable trade costs impact the product margins of trade, our results suggest that WTO membership works by reducing primarily the fixed rather than the variable costs of trade.     

The effects of loss aversion on trade policy: Theory and evidence

We study the implications of loss aversion for trade policy determination and show how it allows us to explain a number of important and puzzling features of trade policy. Some important questions concerning trade policy are why a disproportionate share of protection goes to declining industries and why trade policy has an anti-trade bias. We show that if individual preferences exhibit sufficient loss aversion, higher protection will be given to sectors in which profitability is declining. We also show that if the coefficient of loss aversion is large enough, there will be an anti-trade bias in trade policy. Using a nonlinear regression procedure, we find support for the model and the estimates of the loss aversion parameters are very close to those obtained by Kahneman and Tversky (Kahneman, D., Tversky, A., 1992. Advances in Prospect Theory: Cumulative Representation of Uncertainty. Journal of Risk and Uncertainty 5, 297-323.) with experimental data. Protection is found to be more responsive to losses than to gains, and the estimates of the coefficient of loss aversion are about 2. We also find evidence of loss aversion in lobby formation.     

The WTO trade effect

This paper re-examines the GATT/WTO membership effect on bilateral trade flows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Together, these methods provide an estimation framework that is robust to misspecification bias, allows general forms of heterogeneous membership effects, and addresses potential hidden selection bias. This is in contrast to most conventional parametric studies on this issue. Our results suggest large GATT/WTO trade-promoting effects that are robust to various restricted matching criteria, alternative GATT/WTO indicators, non-random incidence of positive trade flows, inclusion of multilateral resistance terms, and different matching methodologies.     

The effects of offshoring on the elasticity of labor demand

In this paper, I use detailed plant-level data to analyze the relationship between offshoring and labor demand elasticities in the U.S. manufacturing sector during the 1972-2001 period. The results suggest that conditional demand elasticities for production workers are positively associated with increased exposure to offshoring both in the short-run and in the long-run. This relationship holds both for the unbalanced panel of plants and, for plants which continue their operations throughout the sample period. Controlling for skill biased technical change does not alter the magnitude or the significance of the estimated positive relationship between offshoring and labor demand elasticities.