Welfare Implications of RTAs Within the WTO System in the Presence of FDI

We examine the welfare implications of the two major types of regional trade agreements (RTAs)—free trade agreements (FTAs) and customs unions (CUs)—within the WTO system in the presence of FDI. To do so, we analyze multilateral tariff cooperation in the context of two types of WTO regimes: a pure WTO regime without any RTAs and a modified WTO regime in which RTAs coexist with the multilateral framework. Our main finding is that in the presence of significant foreign ownership, RTAs within a multilateral system do not raise the national welfare of its members, thereby weakening the incentives of countries to form RTAs.     

FDI Deregulation Versus Labor Market Reform: a Political Economy Approach

This paper studies the political economy of foreign direct investment (FDI) in interaction with labor market policies. It analyzes the setting of reform focused on deregulating labor markets as a political compromise pressured by the lobbying of an industry lobby and a trade union. Using a common agency model of lobbying, we show that the interest group’s influence is socially distortive towards less deregulation. Also, our political economy framework shows that, for large countries, exogenous FDI liberalization policies lead to deregulation in the labor market. For small countries, such policies enhance more labor market rigidities.     

Immigrant Specificity and the Relationship between Trade and Immigration: Theory and Evidence

Studies routinely document that immigrant employment concentrates in non‐traded goods sectors and that many immigrants have low inter‐sectoral mobility. We consider these observed characteristics of immigrant employment with regard to the question of how immigration affects a nation's pattern of production and trade. We model an economy producing three goods; one is non‐traded. Domestic labor and capital are domestically mobile but internationally immobile. Allowing that some new immigrants will become specific to the non‐traded goods sector, the model indicates that the effects of immigration on output and trade depend importantly on the sectoral pattern of employment of both new and existing immigrants. Empirical investigation in a panel data set of OECD countries supports the model's prediction that immigration raises the output of non‐traded goods. Consistent with the model, we also find that immigration and trade are complements. Given its empirical support, the model's implications for immigration policy are then discussed.     

Exporter responses to FTA tariff preferences: evidence from Thailand

This paper focuses on how exporters respond to free trade agreement (FTA) preferential schemes by analysing the administrative records of FTA implementation at the product level in Thailand. The key finding is that while there is growth in the number of FTAs with a potentially larger membership than existing FTAs, firms tend to prioritise existing FTAs. Moreover, only a narrow range of products are involved in applications for FTA preferential schemes. As a result, only one‐third of exports are covered by such arrangements. The key determinants of firms applying for preferential schemes include tariff margins, the ability to comply with rules of origins (ROOs) and the economic fundamentals influencing trade. Hence, it is less likely for FTAs to open up export opportunities for products that are either yet to be traded or of low prospective trade volume. Estimates of the costs of complying with ROOs average 8.6 per cent of tariff equivalence. The cost approaches zero for developed countries but is substantially higher for developing nations. The key policy inference is that the export‐enhancing effects of FTAs are passive at best, working only after economic fundamentals are established. For us to harness the trade‐inducing effects of FTAs, reducing costs incurred from the presence of ROOs from both exporting and importing countries should be the prime focus.     

The Role of Trade Policies in Building Regional Value Chains – Some Preliminary Evidence From Africa

Regional value chains (RVCs) are considered as an important step towards greater integration into global value chains (GVCs), but African countries trade very little value added with each other. Based on the UNCTAD‐Eora GVC database, this paper estimates a panel model from 2006 to 2012 for 37 African countries and sheds light on the role of trade costs in building RVCs in Africa. First evidence is provided for a significantly negative effect on foreign value added of charged tariffs on capital goods and higher time to trade. In addition, higher regulatory quality and a stronger telecommunication infrastructure seem to be positively correlated with a country's ability to participate in RVCs.     

ASEAN FTA,distribution of income,and globalization

This paper examines the impact of Free Trade Agreements on income distribution within the Association of Southeast Asian Nations (ASEAN) and between the members and their trading partners outside ASEAN. The study uses a Computable General Equilibrium model, a modified version of the 57 sector, 87 country, Global Trade Analysis Project (GTAP) integrated model of national input–output tables, version-6.2 (2001 database) with its reserve matrix facility, to simulate income distribution results as an outcome of certain parameter changes that appear in intra and inter regional trade.Within ASEAN, trade liberalization will stimulate the output of each country within the region according to their comparative advantage. Since trade liberalization tends to increase output of capital-intensive goods more than labor-intensive goods, the less-developed countries within the region tend to get smaller benefits compared to other member countries. In addition, the physical means of production tend to gain more relative to the gains of labor from the FTAs. This tends to widen the income gap between high-income and low-income households within ASEAN.Comparing ASEAN and the developed non-ASEAN countries, an FTA within ASEAN tends to reduce the returns to labor of the developed non-member countries and narrow the income gap between ASEAN, as a whole, and those rich countries since capital-intensive products of developing countries are often labor-intensive goods of developed countries.     

The Declining Value‐relevance of Accounting Information and Non‐Information‐based Trading: An Empirical Analysis*

Recently, a growing body of literature has suggested that financial statements have lost their value‐relevance because of a shift from a traditional capital‐intensive economy to a high‐technology, service‐oriented economy. These conclusions are based on studies that find a temporal decline in the association between stock prices and accounting information (earnings and book values). This paper empirically tests a theoretical prediction arising from the noisy rational expectations equilibrium model that suggests that the decline could be driven by non‐information‐based (NIB) trading activity, because such trading reduces the ability of stock prices to reflect accounting information. Specifically, Dontoh, Radhakrishnan, and Ronen (2004) show that when NIB trading increases, the R²s of a regression of stock price on accounting information declines. Our empirical tests confirm this prediction; that is, the decline in the association between stock prices and accounting information as measured by R²s is driven by an increase in NIB trading.     

Free trade and income redistribution in some developing and newly industrialized countries

A competitive general equilibrium model of production is specified and the long-run comparative static elasticities of changing prices on factor prices are examined in eight developing and newly industrialized countries. Unskilled labor in these developing countries stands to gain from a program of global free trade characterized by increased manufacturing exports and falling prices of imported business services, while capital owners and skilled labor lose. Results are contrasted with developed countries, the United States in particular, where unskilled labor will lose while capital and skilled labor enjoy gains with global free trade.     

Measuring Multi‐Membership in Economic Integration and Its Trade Impact: A Comparative Study of ECOWAS and SADC

One of the intriguing aspects of African regional trade agreements (RTAs) is the extent of multi‐membership, where many African countries are members of more than one RTA. Using a gravity model for 25 countries and the years 1980‐2006, we measure the extent of multi‐membership and compare its impact in two major African regional blocs, Economic Community of West Africa States (ECOWAS) and Southern Africa Development Community (SADC). We find that the impact of multi‐membership critically depends on the characteristics of the multi‐membership of regional integration initiatives. We find a positive impact if an additional membership complements the integration process of the original regional integration initiative: overlapping memberships had a much stronger and significant positive effect on bilateral trade within ECOWAS compare with an insignificant impact within the SADC.     

CAFTA对中国和东盟贸易扩大效应的实证研究

自2002年11月中国与东盟10国共同签署《中国-东盟全面经济合作框架协议》以来,中国-东盟自由贸易区(简称CAFTA)成立已近六年。CAFTA的成立对中国和东盟国家具有重要的经济意义和政治意义。现有文献中对CAFTA的事前研究较多,对CAFTA成立后贸易效应的实证研究较少。本文基于1999～2007年中国和东盟五国的贸易流量聚合数据,分别使用统计和计量方法,递进分析中国和东盟双边贸易流量的变化,以评估CAFTA对中国和东盟区内贸易的扩大效应。     

Public Company Audits and City‐Specific Labor Characteristics

Prior research emphasizes the centrality of audit offices in understanding auditing practices, and documents significant interoffice variation in audit outcomes based on industry expertise and office size. Our study examines how two city‐specific labor characteristics also affect audit offices and local audit markets: the city's average educational attainment, and the number of accountants in a city, which proxy for a city's human capital. Our argument draws on the urban economics literature and predicts that the level of human capital in a city is positively associated with an audit office's ability to conduct high‐quality audits. As expected, there is a positive association between audit quality (quality of audited earnings and accuracy of going‐concern reports) and average education level in the city in which the lead engagement office is located. This association is generally significant for both Big 4 and non‐Big 4 offices, but is relatively stronger for non‐Big 4 firms that are more tied to local labor markets. A company is also more likely to choose a non‐Big 4 auditor in cities with higher educational levels and relatively more accountants, and there is evidence of higher non‐Big 4 audit fees as a city's education level increases. Collectively, these results suggest that local labor characteristics affect audit offices, audit quality, and the ability of non‐Big 4 auditors to compete with Big 4 auditors in the audits of public companies.     

On the bilateral trade effects of free trade agreements between the EU-15 and the CEEC-4 countries

The expansion of regionalism has spawned an extensive theoretical literature analysing the effects of free trade agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEEC-4, i.e. Bulgaria, Hungary, Poland and Romania) and model their effects on trade flows by treating the agreement variable as endogenous. Our theoretical framework is the gravity model, and the econometric method used to isolate and eliminate the potential endogeneity bias of the agreement variable is the fixed effect vector decomposition (FEVD) technique. Our estimation results indicate a positive and significant impact of FTAs on trade flows. This finding is robust to the inclusion in the sample of a group of control countries (specifically Belarus, the Russian Federation and the Ukraine) that did not sign an FTA. Besides, we show that trade growth after the FTA agreement with the EU was signed exceeded trade growth of the control group of countries, which did not become members.

The Hussain–Thirlwall Model: Extensions and Implications for Development Economics

Abstract: In the context of developing countries, Thirlwall and Hussain (1982) proposed to include capital flows and the terms of trade in a post‐Keynesian growth model based on foreign exchange constraint. Thereafter, the model has been improved to take into account the effect of debt servicing but its modification and adaptability are very broad and allow analysing multiple issues related to development economics. The model was also applied and tested in the majority of developing countries and the results generally supported the thesis according to which economic growth is led by exports because they are a source of foreign currencies and allow financing imports necessary to economic development. The objective of this article is to highlight the magnitude of the debates and the theoretical and empirical literature which followed the publication of the model and to underline its relevance in the analysis of development issues. In the case of sub‐Saharan Africa, Dr M. Nureldin Hussain worked out important development strategies (promotion of exports, effective utilization of foreign assistance, reduction of poverty) that are important to remember.     

Measurement of Capital Flight: Methodology and Results for Sub‐Saharan African Countries*

Abstract: This paper presents the methodology for the computation of capital flight and reports new estimates of the magnitude and timing of capital flight from 33 sub‐Saharan African countries from 1970 to 2004. Our methodology calculates capital flight as the residual difference between inflows and outflows of foreign exchange recorded in the balance of payments, with corrections for the magnitude of external borrowing, trade misinvoicing, and unrecorded remittances. We find that total capital flight from these countries in this period amounted to $443 billion (in 2004 dollars). With imputed interest earnings, the accumulated stock of flight capital amounted to $640 billion. These numbers exceed these countries’ external debts, which in 2004 amounted to $193 billion, indicating that sub‐Saharan Africa is a net creditor to the rest of the world.     

Do Free Trade Agreements Increase the New Goods Margin? Evidence from Korea

We analyze the changes in the composition of bilateral trade—and more specifically, in the new goods margin—following the free trade agreements (FTAs) signed by Korea between 2004 and 2008. We find that new goods trade increased disproportionately after the FTAs came into effect, and that least-traded goods (LTG)—those accounting for the lowest 10% of trade prior to the FTAs—ended up accounting for 37% of post-FTA trade with FTA partners. In contrast, the corresponding share for a comparable group of countries that did not sign FTAs with Korea was only half as large, averaging close to 20%. We also find that only less than 2% of all least-traded products accounted for most of the growth in LTG trade, and that those goods tended to be clustered in the same industries as the intensively-traded goods. Furthermore, a larger fraction of LTG became heavily traded for the case of FTA partners than for non-FTA countries. Finally, we find evidence that least-traded imports were subject to higher pre-FTA tariff protection than other products.     

The common external tariff of a customs union: Alternative approaches

The most prominent exception to the cardinal ‘most favoured nation’ principle of the General Agreement on Tariffs and Trade (GATT) of 1947 is in its Article XXIV relating to Customs Unions (CUs) and Free Trade Areas (FTAs). This article required, first, the general incidence of the duties and regulations of commerce imposed by members of the CU with respect to trade with non-members shall not on the whole be higher or more restrictive than those that were applicable prior to the formation of CU or FTA, and, second, that substantially all the trade among members be free. Neither requirement was very operational, because the phrases ‘general incidence’ and ‘substantially all’ being difficult legal concepts to apply. The agreement of 1994 establishing the World Trade Organization (WTO) has made ‘general incidence’ precise by defining it import-weighted average of height of barriers but without offering any rationale for the definition. Now that preferential trading arrangements such as FTAs are proliferating, reform of Article XXIV is of importance. This paper describes alternative approaches to the central question of common external tariffs of a CU. Taking off from the work of Kemp and Wan who showed the existence of a common external tariff of CU that keeps the welfare of non-members unchanged while revising that of the CU as compared to the situation prior to the formation of CU, it characterizes such a tariff structure for two leading benchmark examples as consumption-weighted average of pre-union tariffs and subsidies in the member countries.     

Labor‐eliminating technical change in a developing economy

Developing countries face significant challenges arising from automation. While the trade theory literature has tended to focus on factor‐neutral and factor‐augmenting technical change, automation processes suggest another form of technical change is relevant: factor‐eliminating. We explore the impact of a labor‐eliminating technical change in the context of a small developing economy. Unlike labor‐augmenting technical changes, labor‐eliminating technical changes are not necessarily cost‐reducing, and thus will not necessarily be adopted. A manufacturing wage held artificially higher than at the market‐clearing level, as in the Harris–Todaro framework, increases the incentive to automate. We establish the conditions under which firms will adopt a labor‐eliminating technology, and describe the resulting changes in equilibrium outcomes. Under plausible circumstances, automation can actually lower output, and may raise both the rate and level of unemployment. Immiserizing growth becomes a possibility, and can be tied directly to the underlying wage distortion.     

Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption*

We investigate the effect of mandatory IFRS adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre‐IFRS‐adoption information environment, and stronger legal enforcement. These cross‐sectional results suggest that the conditions under which higher‐quality information is made publicly available affect suppliers' decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross‐country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.     

Explaining nineteenth‐century bilateralism: economic and political determinants of the Cobden–Chevalier network1

This study investigates the empirical determinants of the treaty network of the 1860s and 1870s. It makes use of three central theories about the determinants of Preferential Trade Agreement (PTA) formation, considering economic fundamentals from neoclassical and ‘new’ trade theory, political‐economy variables, and international interaction due to trade diversion fears (dependence of later PTAs on former). These possible determinants are operationalized using a newly constructed dataset for bilateral cooperation and non‐cooperation among 13 European countries and the US. The results of logistic regression analysis show that the treaty network can be explained by a combination of ‘pure’ welfare‐oriented economic theory with political economy and international interaction models.     

Economic Liberalization and Conditional Volatility of Exchange Rate in Sub‐Saharan Africa: Asymmetric GARCH Analysis

Abstract: For small open economies, an understanding of movements in the exchange rate is imperative in analyzing trade and capital flows. In addition, reliable forecasting of exchange rate volatility is important in risk‐taking assessment and investment decision‐making, both of which are critical to long‐term growth. Using an asymmetric GARCH‐type approach, this paper examines the implications of economic liberalization on the stochastic behavior of the exchange rate series in a sample of sub‐Sahara African (SSA) countries over the 1970–2004 period. The results indicate that exchange rate volatility is variable, and is less volatile under fixed exchange rate regime (pre‐economic liberalization) and higher under flexible regime (post‐economic liberalization), that is, it is asymmetric. For most of the countries, the EGARCH and TGARCH models are robust to parameter stability and gives better forecasting performance compared to the standard GARCH model.