Comparative advantage and strategic specialization

This paper shows that a strong comparative advantage is necessary for free trade and specialization in a 2 × 2 symmetric Ricardian model to be achieved in a Nash equilibrium. Governments strategically control labor distribution across industries, and representative agents maximize Cobb–Douglas utilities. A Nash equilibrium with complete specialization is achieved if and only if relative productivity exceeds a key value of 3, which is considered a very large number based on previous empirical studies. This paper also introduces a two‐stage game where each government chooses labor distribution first and then tariffs. In this two‐stage game, complete specialization is never achieved for any relative productivity level. Finally, by generalizing the Cobb–Douglas model into constant elasticity of substitution (CES) preferences, I show that if immiserizing growth effects exist, complete specialization could not be achieved for any level of relative productivity.     

DOES THE GRAVITY MODEL EXPLAIN SOUTH KOREA'S TRADE FLOWS?*

This paper applies the gravity model to explain South Korea's bilateral trade flows and to extract practical trade policy applications. A trade structure and an Asian‐Pacific trade network are included in the gravity equation to characterize the peculiarity of South Korea's trade patterns. The empirical result shows that South Korea's trade follows a Heckscher–Ohlin model more than an increasing returns or a product differentiation model. South Korea has large unrealized trade potentials with Japan and China, suggesting that they are desirable partners for an FTA. North–South Korean trade will expand markedly if bilateral relation normalizes and North Korea participates in APEC.     

Specialization in a dynamic trade model: An overlapping generations case

Abstract

We explore a small open economy with overlapping generations to show that demographic structure is an important factor for the determination of a production pattern in the dynamic trade theory. In the representative agent model, Baxter (1992) shows that even if there are two commodities and two production factors, there is a Ricardian implication that opening up to trade leads to perfect specialization in a small open economy. In contrast, using the overlapping generations model, we find that the heterogeneity of the economic agents generally makes imperfect specialization occur. We also find that whether the stability condition holds or not is crucial for the determination of the long-run production pattern.     

The Transmission of Sustained Growth through the Terms of Trade in an Endogenous Growth Model

This paper develops a two‐country model of endogenous growth and international trade in intermediate goods. In autarky just one of the economies enjoys sustained growth. The trade situation may be characterized by complete specialization of both countries, or by incomplete specialization of the growing economy. In either case, trade transmits perpetual growth to the stagnant economy because of the permanent improvements in its terms of trade. The existence of a non‐reproducible factor in the growing economy is crucial to ensure propagation of growth. Moreover, under incomplete specialization countries converge in per capita income. This result relies on two assumptions. First, there must be a large enough share of world income to pay for the input in which the stagnant economy has comparative advantage. Second, all technologies producing intermediate goods should be equally intensive in the non‐reproducible factor.     

Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization

Abstract.  We examine why the gravity equation works and the implications for its use. First, we demonstrate that the gravity equation as a statistical relationship can be generated from a model with incomplete specialization and trade costs. Second, we analyse the predominance of zero bilateral trade values as a 'puzzle' broadly inconsistent with the complete specialization models typically used to derive the gravity equation, but consistent with the alternative hypothesis of incomplete specialization. Third, we demonstrate that the explanation for why the gravity equation works has considerable relevance for how the gravity equation is interpreted and used and how we view bilateral trade.     

The pattern of specialization and economic growth: The resource curse hypothesis revisited

This paper explores the relation between countries’ pattern of trade specialization and long-term economic growth. It shows that countries specializing in the export of natural resource based products only fail to grow if they do not succeed in diversifying their economies and export structure. This conclusion follows from an empirical investigation that has three innovative features. First, it uses a dynamic panel data analysis. Secondly, it employs disaggregated trade data sets to elaborate different measures of trade specialization that distinguish between unprocessed and manufactured natural resource products and are informative about the countries’ trade diversification experience, their link to world demand trends and involvement in intra-industry trade. The final innovative aspect of the paper relates to our empirical findings: it is only specialization in unprocessed natural resource products that slows down economic growth, as it impedes the emergence of more dynamic patterns of trade specialization.     

The World Trade Collapse and International Value Chains: A Cross-Country Perspective

This paper challenges the mainstream narrative that links the strength and speed of the world trade collapse in 2008–2009 to the international fragmentation of production, organized in international value chains. The paper points out often overlooked counteracting forces such as non-bank-intermediated credit, trust in long-term commercial affairs and intra-firm relationships. A cross-section of the strength and speed of the import decline in 42 countries shows that both the share of manufacturing trade and an indicator for the vertical specialization in trade are associated with less contraction and slower adjustment. Countries with large shares of manufactures in trade (a proxy for international value chain activity) and/or vertical specialization in trade did not reduce their trade more strongly. The empirical evidence points out that international value chains may very well have had a major dampening effect that reduced the extent to which world trade fell.     

International risk sharing and commodity prices

Abstract Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk‐sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity‐specific shocks, not country‐specific shocks. Using commodity‐level production data at the national level and world commodity prices, we document significant terms of trade variability and positive responses of nation‐specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non‐existent.     

汇率变动对中国出口贸易的影响

在理论上汇率上升会降低出口贸易,在实证上却出现相反的结论。在人民币对美元不断升值的情况下,中国的对外出口贸易却迅速增加。垂直专业分工到双边贸易的引力模型就中国与世界30个主要贸易对象的出口贸易数据研究表明,国际垂直专业化分工使得出口的汇率弹性降低。因此,传统汇率理论会导致弹性的高估,在国际垂直分工下希望通过人民币升值降低中国的贸易顺差也难以实现。     

Does trade weaken product standards?

We investigate the effects of trade on national minimum quality standards for a product whose quality is unobservable to consumers prior to purchase. Two standard‐setting regimes are considered: (1) where the regulatory authority takes the trade share as given; and (2) where the regulatory authority takes full account of its ability to influence the trade share. We find that standards are not a protectionist instrument in this model, the usual gains from trade apply if standards are maintained at their autarky values, trade can cause private standards to be adjusted in a welfare reducing way, and the welfare of a country is higher if its regulatory authority adopts regime (2) rather than (1).     

International Trade with a Public Intermediate Good and the Gains from Trade*

This paper presents a one‐primary factor, two‐consumer good, and two‐country model of international trade where each country’s government supplies a country‐specific public intermediate good so as to attain efficient production. By introducing the Marshallian adjustment process, it is demonstrated that the country with larger factor endowment exports the good whose productivity is more sensitive to the public intermediate good. Our normative analysis of free trade shows the following results. First, at least one country gains from trade. Secondly, if a country incompletely specializes in the trading equilibrium, the country necessarily loses from trade.     

Industrial subsidy policy and the optimal level of specialization

Despite compelling rationale based on the theory of comparative advantage for free trade, many countries adopt restrictive trade practices. In this paper we investigate this puzzle in a stylized two-country two-good Ricardian model of international trade. Governments can offer protection to domestic industries via industrial subsidy policy in this model. We prove the existence of a Nash equilibrium in the two-player game where industries choose the level of specialization. We determine the necessary conditions for complete specialization in (a) the free-trade regime; and (b) the protectionist regime implemented through industrial subsidy policy. Our results show that if the government intends to promote complete specialization, then a high degree of comparative advantage and a large elasticity of substitution between export and import goods are required. Empirical evidence on these two parameters indicate that complete specialization is unlikely to survive in the protectionist regime.     

Microeconomic analysis on the growth of trade volume in China: 1978–2007

The gravity equation is usually employed by researchers in the field of international trade to explain the growth of a country’s imports and exports volume, especially the manufactured goods. But in China, variables in the model, such as exchange rate, tariff, transportation cost, and spatial distance etc., are not sufficient to explain the riddle of China’s growth in trade volume. In fact, this growth in China’s trade volume is owing to the disintegration of production in the process of economic globalization, to the multinational corporations’ (MNC) vertical outsourcing of their manufacturing processes and procedures, and to the timely readjustment of Chinese enterprises on their strategies of participating in the international intra-product specialization. In this paper we establish an equilibrium model of intra-product specialization dominated by MNCs, and do some empirical tests on the growth in trade volume in China by using the variables including technological conditions of trade, similarity of economies, policy conditions of trade, disintegration of production and level of per capita capital equipment. The empirical results support our basic judgments.     

Estimating the effects of non‐discriminatory trade policies within structural gravity models

We propose a simple method to identify the effects of unilateral and non‐discriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model. Specifically, we argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra‐national trade flows. The use of intra‐national sales allows identification of the effects of non‐discriminatory trade policies such as most favoured nation tariffs, even in the presence of exporter and importer fixed effects. A byproduct of our approach is that it can be used to recover estimates of the trade elasticity, a key parameter for quantitative trade models. We demonstrate the effectiveness of our techniques in the case of most favoured nation tariffs and “time to export” as representative non‐discriminatory determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country‐specific characteristics as well as any non‐trade policies.     

Shifting Armington trade preferences: A re-examination of the Mercosur–EU negotiations

This paper examines the ‘small share’ problem inherent within the constant elasticity of substitution Armington specification. As a de facto research tool in the quantitative trade literature, this structural bias plagues the results of numerous multi-region CGE studies. Kuiper and van Tongeren (2006) proposed a fusion of gravity and CGE specifications to remedy said bias, which the current paper further develops. With a pervasiveness of ‘small-share’ examples on Mercosur–European Union trade owing to the latter's restrictive tariff regime, the results reveal that significant additional trade led gains to Mercosur under a potential preferential trade agreement when compared with the standard Armington treatment.     

Aggregate Fluctuations with National and International Returns to Scale*

Cyclical movements in aggregate output, factor inputs, and productivity are all positively correlated across countries. This article proposes a model in which positive cross‐country correlations of these variables result from increasing returns to the world‐wide variety of intermediate goods even if technology shocks are purely country‐specific. The model also accounts for the observed positive relationship between bilateral trade volume and international comovements. Positive comovements can also arise with constant returns to variety, but only if technology shocks are themselves strongly correlated. The combination of constant returns and common shocks, however, tends to generate procyclical fluctuations of the trade balance.     

平等与增长携手并进——收益递增、策略性行为和分工的效率损失

本文中的策略性劳动分工模型解释了为什么人们有时不选择分工，并造成社会产出损失。由于在高技能部门里存在“干中学”效应，低技能者如果背离比较优势而从事高技能部门的生产，就可以在未来分享劳动分工收益的过程中获得更高的谈判地位，甚至可能逆转自己的比较优势。然而，这种个人理性的选择却可能导致社会的产出损失。这个模型的一个意外而合理的含义是，在策略性的劳动分工决策中，如果未来一期由交易关系瓦解而造成的损失足够小，那么，交易成本的减少也可能导致当期分工的恶化。但我们的模型也包含了交易成本下降可能促进分工这一既有理论中的特殊情况。这个模型有助于理解在国际贸易、国内区域间分工和家庭内分工中广泛被观察到的低效率现象及相应的政策。     

Sustaining Collusion under Economic Integration*

In this paper, we aim at investigating from a game‐theory perspective whether trade liberalization can promote a collusive two‐way trade. We show that, under Cournot competition, economic integration is anti‐competitive if collusive trade is a possible outcome of the repeated game; under price competition, the likelihood of collusive trade is a necessary but not sufficient condition for trade liberalization to be pro‐competitive. Furthermore, we show that economic integration may increase the scope for collusion irrespective of the firms’ strategic variable.     

International Asset Trade,Capital Income Taxation,and Specialization Patterns

This paper constructs a small economy version of dynamic Heckscher‐Ohlin models with overlapping generations and analyzes effects of capital income taxation on the specialization pattern of the country. It is shown that once international asset trade is allowed, in the presence of international technological asymmetries, a small country eventually leads to perfect specialization in our overlapping generations model. It is also shown that the residence‐based tax has no effect on the specialization pattern while the source‐based tax has a negative effect on capital accumulation and thereby it can affect the specialization pattern of the small country.     

Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade

Free trade agreements (FTAs) lead to a rise in bilateral trade regardless of whether the signatories are developed or developing countries. Furthermore, the percentage increase in bilateral trade is higher for South–South agreements than for North–South agreements. The results are robust across a number of gravity model specifications in which we control for the endogeneity of FTAs (with bilateral fixed effects) and also take account of multilateral resistance in both estimation (with country‐time fixed effects) and comparative statics (analytically). Our analytical model shows that multilateral resistance dampens the impact of FTAs on trade by less in South–South agreements than in North–South agreements, which accentuates the difference implied by our gravity model coefficients, and that this difference becomes larger as the number of signatories rises. For example, allowing for lags and multilateral resistance, a four‐country North–South agreement raises bilateral trade by 53% while the analogous South–South impact is 107%.