Composition of trade flows and the effectiveness of fiscal devaluation

We empirically explore whether the magnitude of the effects of fiscal devaluation, which consists of reducing the employers’ social security contribution rate and increasing the value‐added tax rate, depends on the composition of trade flows. Our sample comprises data on bilateral balances of trade between 28 European Union (EU) Member States and their main EU trade partners over the 2000–14 period. We use robust ordinary least squares regressions, controlling for the country‐pair and time fixed effects, to test whether there are differences in the sizes of relationships between these taxation forms and bilateral trade balances for different types of goods, by distinguishing between: (i) consumer, intermediate and capital goods; and (ii) labour and capital‐intensive goods. Our results show that the overall effectiveness of fiscal devaluation depends on the composition of trade flows. Value‐added tax is more strongly (positively) associated with (bilateral) balances of trade in consumer goods, compared to balances of trade in capital and intermediate goods. The employers’ contribution rate, in contrast, is more tightly (negatively) related to balances of trade in capital goods. The latter finding also holds true for trade balances of labour‐intensive goods compared to balances of capital‐intensive goods.     

A Gravity Model Forecast of the Potential Trade Effects of EU Enlargement: Lessons from 2004 and Path‐dependency in Integration

This paper uses a gravity model to forecast the potential impact on trade balances and trade patterns of the 2004 EU enlargement. The results suggest that gross trade creation for the accession economies is about 25 per cent of their 2003 trade. Although membership of the EU creates trade it also results in trade diversion; that is, a declining share of accession country exports and imports with non‐EU15 countries. Overall, the trade balances of the accession countries suffer larger trade deficits after accession due to import growth surpassing export growth. The extent of increase in the trade deficit due to accession is inversely related to the level of integration and income of the new members. Hence integration is path‐dependent and the EU should take this into account when preparing for further enlargements to the Balkans and Southeast Europe.     

Productivity Versus Employment: Quantifying the Economic Effects of an EU–Japan Free Trade Agreement

The European Union and Japan recently entered into negotiations over a bilateral free trade agreement intended to stimulate growth and create wealth. Since customs duties are already low, the success of the liberalisation process hinges on the elimination of non‐tariff barriers. The purpose of this paper is to shed light on two possible liberalisation scenarios: a less ambitious liberalisation and a comprehensive liberalisation. In contrast to classic studies, our paper builds on the modern trade literature, accounting for the dominance of intra‐industry trade in both economies and the existence of heterogeneous firms. Furthermore, we model a search‐and‐matching labour market, allowing us to quantify employment effects of trade liberalisation. We find that a comprehensive liberalisation increases Japanese GDP by 0.86 per cent, whereas the EU experiences only an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, whereas unemployment is reduced by only a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.     

Trade Diversion as Firm Adjustment to Trade Policy: Evidence from EU Anti‐dumping Duties on Vietnamese Footwear

This paper evaluates the impact of the 2006 European Union anti‐dumping (AD) action on Vietnamese footwear in three markets: imports to the EU, footwear producers in Vietnam, and the trade diversionary adjustment of Vietnamese firms in the US market. We find that the AD action reduced Vietnamese imports to the EU by as much as 65 per cent. Given that the EU makes up almost two‐thirds of Vietnam's footwear exports and footwear is among the top four export industries for Vietnam, this reduction is economically significant. Consistent with predictions of our model, we find evidence of trade diversion by Vietnamese producers from the EU to the US market. Our difference‐in‐difference estimates of the AD actions on the value of Vietnamese footwear imports to the United States ranged from 69 to 71 per cent over the period 2004–07 and 69 to 72 per cent in terms of quantity. These results highlight the spillover effects of trade policy in third markets when firms adjust to trade barriers. Our results are robust to triple‐difference specifications where we adjust for trend differences and a series of placebo specifications.     

Business cycle synchronisation in East Asia: The role of value‐added trade

We empirically investigate the relationship between business cycle synchronisation and the role of value‐added trade focusing on a panel of 12 Asian countries from 1995 to 2011. In addition, we propose the inclusion of two novel determinants, for example external value‐added trade intensity and exchange rate volatility and also saturate our empirical model with other common determinants found in the literature. Our findings first confirm that value‐added trade intensity, rather than gross trade intensity, has a sizable, positive and statistically significant impact on synchronisation among East Asian countries. Second, the exchange rate volatility has a significant negative effect on the business cycle synchronisation, which verifies that the exchange rate volatility is another important determinant of business cycle synchronisation. Our findings have important implications for the monetary cooperation in the region: strengthening trade linkage could reduce the costs of monetary cooperation by increasing the incidence of symmetric shocks.     

中欧贸易对双方经济和就业的影响分析

本文考虑到中欧贸易的特点,分别利用中国反映加工贸易的非竞争型投入产出模型和欧盟一般非竞争型投入产出模型,分析了2002年和2007年中欧贸易对中国和欧盟增加值和就业的影响;利用结构分解技术(SDA)分析了其随时间的变化的原因。分析发现中欧贸易对中国增加值和就业的总体拉动作用要远大于对欧盟增加值和就业的拉动,其对增加值的拉动效率却小于欧盟,另外双边贸易对中国增加值的拉动效率随时间而提高,但对中国就业和欧盟增加值和就业的拉动效率则在不断降低。文章同时对中欧贸易顺差进行了重新审视,发现利用出口增加值方法,中欧贸易顺差减少了9%-10%。     

Networks of Value‐added Trade

Global value chains (GVCs) require new methods for evaluating interconnections among countries, which can no longer be accurately appraised by standard bilateral gross trade flows. This paper uses tools of network analysis to examine the evolution of value‐added trade from 1995 to 2011. GVCs are very centralised and asymmetric networks, with a few large economies acting as hubs, which exposes them to the propagation of idiosyncratic shocks. As GVCs expanded, the networks of foreign value added in exports became denser, more complex and intensively connected. The regional dimension of GVCs is still dominant but is progressively giving place to a more global network. Networks of foreign value added in goods exports outpace those of services exports. However, foreign inputs of services are important for exports of both goods and services. There is a striking rise of China as a supplier of value added, while Germany and the United States maintain a central role in GVCs over the whole period.     

Trade Effects of the European Union's Service Directive: Contrasting ex ante Estimates with Empirical Evidence

One of the top priorities to improve the European Union's growth performance is the creation of a single market for services. The directive on services adopted by the Parliament and the Council by the end of 2006 aims at removing barriers to the free movement of service providers on the internal market. Previous studies quantified ex ante sizable effects of implementing the directive in its original form. This paper is a first attempt to evaluate ex post the trade effects induced by a directive – which excludes the country‐of‐origin principle – by performing a difference‐in‐difference‐(in‐differences) estimator on a sample of EU‐ and non‐EU countries in the period 2004 to 10. We account for non‐tariff trade barriers and the endogeneity of regional trade agreements and find that the service directive adds to a reallocation of business services trade within the EU. Accounting for the trade effect of past deregulations, the EU directive fosters a deeper integration of the new member states into the European service value‐added‐chain and promotes business service exports from third countries towards the EU significantly more than trade of country pairs in the control group. The reorientation of the EU‐15 towards the new members is in turn associated with less intense intra‐EU‐10 businesses, while business trade between EU‐15 members is not significantly affected.     

Trade Barriers as Bargaining Outcomes

Whether bilateral trade barrier data conform with the Grossman‐Helpman (1995) model's predictions about ‘trade talks’ is examined in this article. A simple form of the prediction from the model is tested. Bilateral US‐Japan and US‐EU data from the 1990s are employed. The results are the first in the literature.     

Modelling the Extensive Margin of World Trade: New Evidence on GATT and WTO Membership

Recent literature has argued that, contrary to the results of a seminal paper by Rose (2004), General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) membership does promote bilateral trade, at least for developed economies and if membership includes non‐formal compliance. We review the literature to identify open issues. We then develop a simple extension of the gravity model that gives rise to an extensive country margin of trade separating positive trade from zero trade country pairs. The model is used to identify WTO membership effects at both the intensive and the extensive margins. Empirical estimation of this model, based on Poisson pseudo‐maximum likelihood methods with exporter and importer fixed effects, allows us to readdress the empirical issue of whether GATT/WTO membership does or does not promote trade. We find that GATT membership was successful on the extensive margin of world trade but not on the intensive margin. For the recent WTO episode (1995–2008), we find consistent and robust evidence for a substantial trade‐creating role of membership which is driven primarily by the intensive margin. WTO membership results in higher bilateral trade of about 40 per cent.     

Determinants of Trade Costs and Trade Growth Accounting between India and the European Union during 1995–2010

This study aimed to utilise the micro‐founded measure of trade cost derived by Novy to estimate the relative bilateral trade costs of India with its European Union partners. The advantage of using such a model is that the trade costs can be derived entirely using observable trade data. The results show that Indian tariff equivalent with its major EU trading partners has declined by 20 percentage points between 1995 and 2010, with Malta and Latvia experiencing the greatest decline. The study then decomposes the bilateral trade growth to ascertain whether it is an outcome of increased domestic production or reduction in bilateral and multilateral trade barriers. Novy's model indicates that the decline in relative bilateral trade costs explains the greatest percentage of this trade growth, which is partially offset by decline in multilateral resistance terms that has diverted trade away to other trading partners primarily in South and South‐East Asia and North America.     

Services Linkages and the Value Added Content of Trade

Working with a set of global social accounting matrices spanning intermittent years from 1992 to 2011, this paper examines the services embodied in trade on a value added basis. Data include not only the direct and indirect contribution of services to value added contained in a given country's exports, but also the extent to which third‐country value added in services, through intermediate linkages of imported goods and services, is also embodied in production and trade. Our data indicate, in line with previous findings, that the ratio of value added to gross trade has been decreasing both for goods and for services, which is consistent with growing vertical production fragmentation. On the other hand, while value added in goods sectors including indirect exports is less than the gross value of exports, in services, it is greater, highlighting the service intensity of trade.     

Accounting for intermediates: Production sharing and trade in value added

We combine input–output and bilateral trade data to compute the value added content of bilateral trade. The ratio of value added to gross exports (VAX ratio) is a measure of the intensity of production sharing. Across countries, export composition drives VAX ratios, with exporters of Manufactures having lower ratios. Across sectors, the VAX ratio for Manufactures is low relative to Services, primarily because Services are used as an intermediate to produce manufacturing exports. Across bilateral partners, VAX ratios vary widely and contain information on both bilateral and triangular production chains. We document specifically that bilateral production linkages, not variation in the composition of exports, drive variation in bilateral VAX ratios. Finally, bilateral imbalances measured in value added differ from gross trade imbalances. Most prominently, the U.S.–China imbalance in 2004 is 30–40% smaller when measured in value added.     

The Compatibility of EU Biofuel Policies with Global Sustainability and the WTO

The EU’s Renewable Energy Directive (2009/28) requires that by 2020, biofuels should account for at least 10 per cent of transport fuel consumption. EU legislation sets out sustainability criteria for biofuels to qualify for this target and procedures for verifying that they are met. Using the AGLINK‐COSIMO model, we investigate the impacts of the biofuel target on global trade flows and land use, both under the current biofuel tariff regime and assuming zero EU tariffs for biofuels. The EU’s 2020 transport fuel target increases the global area of agricultural crops by 0.9 per cent. With zero tariffs, the extra global land requirement is 21 per cent smaller, but a larger share of it falls outside the EU. This outcome sharpens the issue of how the EU’s unilateral sustainability criteria can be implemented given current international trade rules.     

RTAs' Proliferation and Trade‐diversion Effects: Evidence of the ‘Spaghetti Bowl’ Phenomenon

This paper investigates the trade‐diversion effects of regional trade agreements (RTAs), so‐called spaghetti bowl phenomenon (SBP), in multilateral trade. The SBP is due to the proliferation of RTAs. Thus, I investigate the relationship between the number of RTAs concluded by a country and the additional trade value attributed to a RTA. Using bilateral trade data in a sample of 119 countries, from 1995 to 2012, my main finding reveals a negative trade effect between them, confirming the existence of SBP in multilateral trade. However, results could not conclude the evidence of a negative effect of overlapping RTAs, involving the existence of SBP, within North–North, North–South or South–South trade. But, the additional trade value attributed to a RTA concluded with EU countries or US seems to confirm significantly a trade‐diversion effect because of the number of RTAs signed by these countries.     

Transpacific Trade Imbalances: Causes and Cures

This paper explores the causes of the transpacific trade imbalances using an empirical global model. It also evaluates the impact of various policies to reduce these imbalances. We find the fundamental cause of trade imbalance since 1997 is changes in saving‐investment gaps, attributed to the surge of the US fiscal deficits and the decline of East Asia's private investment after the 1997 financial crisis. Our simulation results show that a revaluation of East Asia's exchange rates by 10 per cent (effectively a shift in monetary policy) cannot resolve the imbalances. We find East Asia's concerted efforts to stimulate aggregate demand can have significant impacts on trade balances globally, but the impact on the US trade balance is not large. US fiscal contraction is estimated to have large impacts on the US trade position overall and on the bilateral trade balances with East Asian economies. These results suggest that in order to improve the transpacific imbalance, macroeconomic adjustment will need to be made on both sides of the Pacific.     

The Pure Effects of European Integration on Intra‐EU Core and Periphery Trade

This paper analyses the effects of EU integration on intra‐EU trade volumes with a special focus on the evolution of trade within and between the core and the periphery countries. In the early phases of EU integration, there have been sizable trade creation and diversion effects with respect to EFTA countries. Both the creation and the diversion effects of EU membership have declined as the EU and EFTA have integrated. In all phases of EU integration, both core–periphery and intraperiphery growth of trade have experienced stronger positive effects than intracore trade. Hence, the EU enlargements did not cause any kind of intra‐EU ‘peripherality’.     

How to Balance the Outcomes of the Economic Partnership Agreements for Sub‐Saharan African Economies?

Since 2002, the Sub‐Saharan African countries ( except South Africa which already has a free‐trade agreement with the EU ) have embarked on free‐trade agreement negotiations with the European Union. These arrangements will replace the Cotonou scheme, which requires these countries to eliminate their tariffs on ‘substantially’ all their European imports. Based on a general equilibrium analysis, this study estimates the potential effects of these agreements by considering different levels of reciprocity in the commitments of the Sub‐Saharan African countries. It shows that the ‘standard’ EU proposal, whereby Sub‐Saharan African countries would cut tariffs on 80 per cent of their European imports, would not be enough to balance the outcome of the Economic Partnership Agreements. As a result of the asymmetries between European and African protections and supply‐side capacities, African countries could experience a balance of trade deficit of USD 1.8 billion associated with a 0.1 per cent decrease in GDP. This proposal, which also induces an industrial restructuring to the benefit of the agro‐processing industries, will create a significant fiscal burden. A lesser level of commitment could largely mitigate these unfavourable results; by reciprocating tariff eliminations on only 60 per cent of their European imports, African countries would reduce the trade imbalance and fiscal losses induced by these agreements by 21 and 51 per cent respectively.     

Assessing Export Competitiveness through the Lens of Value Added

Extensive changes in the organization of world trade over the last two decades have renewed concerns about countries’ ability to compete in export markets. The impact could be especially large in industries that participate in global value chains (GVCs). This study assesses the recent export performance of 56 countries in five industries associated with GVCs using an index of normalised revealed comparative advantage (RCA) that can be compared across industries and countries and new data on the domestic value added in exports from the OECD's Trade in Value‐added database. For a number of the GVC industries, countries identified as the most competitive based on gross exports are often found to be less competitive when evaluated in terms of domestic value added. Business services are an important exception; several countries appear more competitive on a value‐added basis than based on conventional measures of gross exports. Despite concerns about hollowing out, a number of major industrial countries remain highly competitive in one or more GVC industries, even from the perspective of domestic value added. A value‐added approach to RCA provides insights that are not apparent from an exclusive focus on gross exports.     

Rules of Origin and the EU‐Med Partnership: The Case of Textiles

This paper analyses the impact of rules of origin on patterns of trade in the context of the pan‐European system of diagonal cumulation. The paper first highlights the importance of rules of origin in all preferential trading arrangements while arguing that those rules can easily lead to trade suppression and/or trade diversion. We then focus on the introduction of the pan‐European system in 1997 and show evidence to suggest that the introduction of the system materially impacted on trade between the EU, and its CEFTA, EFTA and Baltic states partner countries. The main body of the paper then empirically explores the impact of the lack of cumulation in the textile industry on the countries of the Southern Mediterranean. The results suggest that rules of origin may indeed substantially constrain trade between non‐cumulating countries, possibly by as much as 70–80 per cent in aggregate. While preferential trading agreements thus serve to increase intra‐PTA trade through the liberalisation of trade barriers, they may also be doing so by effectively raising external barriers to trade through the use of constraining rules of origin. To the extent that they do so increases the likelihood of trade diversion and trade suppresion.