Do free trade agreements actually increase members' international trade?

For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10 years.     

Intertemporal gains from trade

The gains-from-trade theorems of atemporal trade theory have direct analogues in intertemporal models. The apparent paradoxes which arise in the comparison of steady states disappear when the complete time paths of perfectly competitive trade and autarky equilibria in a general intertemporal linear production model are considered. The analysis can be extended to cover international investment.     

Non-competitive imports and gains from trade

The paper argues for the explicit inclusion in international trade models of goods which cannot be produced in the importing country. Non-competitive goods require a product-requisite factor which is not universally available. International trade in these goods generates much greater per-unit gains from trade than trade in ordinary goods which can be produced in both (all) countries. Omission of these goods from models of international trade leads to the possibility of a gross underestimation of the difference between autarkic and with-trade income levels. The omission of these goods also neglects some dimensions of policy which are important in the real world, such as sanctions.     

Economic determinants of free trade agreements

The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements (FTAs) and of the likelihood of FTAs between pairs of countries using a qualitative choice model. We develop this econometric model based upon a general equilibrium model of world trade with two factors of production, two monopolistically-competitive product markets, and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents. The empirical model correctly predicts, based solely upon economic characteristics, 85% of the 286 FTAs existing in 1996 among 1431 pairs of countries and 97% of the remaining 1145 pairs with no FTAs.     

The geography of trade in goods and asset holdings

Gravity models have been widely used to describe bilateral trade in goods. Portes and Rey [Portes, R., Rey, H., 2005. The Determinants of Cross-Border Equity Flows. Journal of International Economics, 65(2), 269-296.] applied this framework to cross-border equity flows and found that distance, which proxies information asymmetries, is a surprisingly very large barrier to cross-border asset trade. We adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework. Providing different instruments for both endogenous variables, we show that a 10% increase in bilateral trade raises bilateral asset holdings by 6% to 7%. The reverse causality is also significant, albeit smaller. Controlling for trade, the impact of distance on asset holdings is drastically reduced.     

Preference heterogeneity, wage inequality, and trade

We consider individuals who value product variety, and who can be skilled or unskilled as workers. Skilled people prefer to consume skill-intensive goods. We show that under plausible conditions an increase in the relative size of the skilled population increases the relative wage of skilled workers, thereby increasing wage inequality. In our two-country model of trade, an increase in the relative supply of skilled labor in either country increases the relative wage of skilled workers, and hence increases inequality in both countries.     

On the conservation of distance in international trade

Using disaggregated bilateral trade data, we find that the elasticity of trade to distance increased (in absolute value) by about 10% since 1985. To explore the reasons for this shift, we decompose the change in the distance elasticity of trade into the part due to a shift in the composition of trade among industries and the part due to a change in the distance sensitivity within industries. We find that adjustment in the composition of trade had little effect, but for 40% of industries distance became more important, with nearly all of the remaining industries showing no significant change. We explore alternative hypotheses as to why the elasticity of trade to distance increased in some industries. We find that homogeneous goods, bulky goods, and high tariff goods became significantly more distance sensitive. In contrast, the evidence implies that changes in tariffs and freight costs have reduced the importance of distance on trade. We conclude that the increase in the importance of distance over time is related to the substitutability of goods and the level of trade costs, but not to changes in tariffs or freight costs.     

Economic integration agreements and the margins of international trade

One of the main policy sources of trade–cost changes is the formation of an economic integration agreement (EIA), which potentially affects an importing country's welfare. This paper: (i) provides the first evidence using gravity equations of both intensive and extensive (goods) margins being affected by EIAs employing a panel data set with a large number of country pairs, product categories, and EIAs from 1962 to 2000; (ii) provides the first evidence of the differential (partial) effects of various “types” of EIAs on these intensive and extensive margins of trade; and (iii) finds a novel differential “timing” of the two margins' (partial) effects with intensive-margin effects occurring sooner than extensive-margin effects, consistent with recent theoretical predictions. The results are robust to correcting for potential sample-selection, firm-heterogeneity, and reverse causality biases.     

Domestic productivity and variety gains from trade

We show theoretically and confirm empirically that domestic productivity has a significant impact on the demand for foreign varieties under the assumption that domestic and foreign varieties are imperfect substitutes. In particular, the demand for imported varieties is more elastic for countries with comparative advantage. For an average good facing a median trade barrier, doubling the importer–exporter relative export performance decreases the number of imported varieties by 17%. Our findings suggest that the variety gains estimates could be significantly biased if we ignore the substitutability between imported and domestic varieties.     

国际贸易发展的新趋势及我国对策

中国加入WTO后,国际贸易量的飞速发展与中国当前的环境产生了不相适应的现象。如何结合中国实际,研究好国际贸易这一大课题,对于加强国家经济安全,保证国家经济不受损失是至关重要的。认真地分析当前的中国国情,对比国际经济实际状况,找出中国经济走向国际大舞台的通途是我们的客观使命。知识的积累、经验的沉淀、方式的改变等等都要求我们付出一定的努力,才能适应国际舞台,立足于不败之地。     

Anonymous market and group ties in international trade

History provides many examples of cohesive groups dispersed over several countries who exploit the ties between their members to gain entry into foreign markets. The phenomenon is well-established empirically and noteworthy because it suggests the importance of informational barriers in international transactions. We present a simple model where output is produced through a joint venture, and agents have complete information domestically but are unable to judge the quality of their match abroad. A minority of individuals, otherwise identical to all others, can exploit complete information in international matches between group members, if they so choose. Group ties increase aggregate trade and income, but hurt the anonymous market because they deprive it disproportionately of the group’s more productive members.     

Protection and jobs: explaining the structure of trade barriers across industries

This paper develops a model of protection and tests it using US data, including new protection measures. We find that protection in an industry increases with its employment but not with its level of output. We also find that lobbying entails significant transactions costs. We have limited evidence that industry characteristics, such as the number of firms and geographical concentration, affect protection. Nested tests imply that assuming lump-sum rebating of import revenues or rents is justified. The results also suggest that US policy makers weight a dollar of campaign contributions about 15% more heavily than a dollar of national income.     

Credit constraints, equity market liberalizations and international trade

This paper provides evidence that credit constraints are an important determinant of international trade flows. I exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980-1997 period. I show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets. This result is not driven by cross-country differences in factor endowments and is independent of simultaneous trade policy reforms. Moreover, it obtains with equal strength in the full panel of countries as well as in both panel and event-study analyses of countries which removed capital controls during the sample period. Finally, the effects of liberalizations are more pronounced in economies with initially less active stock markets, indicating that foreign equity flows may substitute for an underdeveloped domestic financial system. Similarly, opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies.     

Distortions and static negative marginal gains from trade

In this paper, the method of input-output analysis is used for the case of Korea to demonstrate that the promotion of certain exports can result in static inefficiency to the economy. It appears that Korea lost a significant amount of both capital and labor via trade in competitive goods during 1970/1972. Although the simple existence of static losses at any specific point in time does not necessarily imply welfare losses to the economy over the long term, the fact that we can observe such losses implies that we should at least try to justify their existence in terms of dynamic gains.     

The de minimis threshold in international trade: The costs of being too low

With tariffs largely negotiated away, trade facilitation issues such as custom delays and border costs are one of the next key barriers for trade policymakers to address. One important trade facilitation issue is the de minimis threshold (DMT )—a valuation ceiling for imports below which no duty or tax is charged and the clearance procedures are minimal. Customs assessments are costly and low thresholds can hinder trade flows. We offer a detailed analytical approach to assess the direct economic effects of raising the DMT . We focus on Canada, which has one of the lowest DMT s among developed countries. We utilise a unique data set and find that raising Canada's DMT would have positive effects for consumers and businesses, particularly small businesses because the cost saving for smaller entities is disproportionately large. For the government, foregone duty and tax revenues are outweighed by the cost saving, resulting in a fiscally neutral or even positive effect for government revenues.     

Investment liberalization and international trade

This paper estimates the cross-price elasticity of exports with respect to investment costs for bilateral relations between 36 countries. We show that the effect of reducing foreign direct investment costs on exports depends on country characteristics and trade costs as predicted by the [Markusen, 1997] and [Markusen, 2002] model. When countries differ in relative factor endowments and trade costs are low, investment liberalization stimulates exports, whereas when countries are similar in terms of relative factor endowments and size, and trade costs are moderate to high, investment liberalization reduces exports.     

Assessing the impact of communication costs on international trade

Communication costs are frequently cited as an important determinant of trade costs. We test this relationship by incorporating alternative measures of communication costs in a model of bilateral trade. We find that international variations in communication costs indeed have a significant influence on trade patterns. Furthermore, estimates using disaggregated data reveal that communication costs are more important for trade in differentiated products than for trade in homogenous products.     

International trade,risk taking and welfare

This paper shows that the gains from opening up to international trade are smaller when firms do not fully internalize downward risk. I develop a general equilibrium model with two key assumptions. First, when faced with adverse productivity shocks, employers can lay off workers without fully paying the social costs of their layoff decisions, a common feature of many institutions. Second, when opening to international trade, the elasticity of demand perceived by an industry increases. In this setup, I show that international trade induces firms to take more risk and (i) raises the equilibrium unemployment rate, (ii) increases the volatility of sectoral sales and (iii) increases welfare proportionately less than in the absence of the externality. Inducing firms to internalize the costs of layoff (Blanchard and Tirole, 2003) therefore appears even more important in a globalized world.     

Trade and the gains from trade with imperfect competition

A simple two-country model is constructed in order to show how imperfect competition can form a basis for trade. Under the assumption of Cournot-Nash behaviour, it is demonstrated that trade will lead to a bilateral welfare improvement when countries are identical in all respects. When countries differ in size, trade will always increase total world real income, but the large country may experience a welfare loss. Increasing returns to scale in the production of the monopolized good complicates the situation further, but it generally remains true that trade increases world real income.     

Technical regulations and specialization in international trade

It is widely acknowledged that while technical regulations can improve welfare and facilitate markets, they can also impede trade. The trade impeding effects of technical regulations are especially worrisome for developing countries: they frequently lack the human and capital resources necessary to satisfy technical measures, and thus are more likely to be excluded from markets by technical measures. This paper uses highly disaggregated US data on agricultural, mining and manufacturing imports to examine the impact of technical regulations on trade patterns. Using instrumental variables estimation to correct for the potential endogeneity of technical regulations, the analysis suggests that technical regulations substantially impinge on poor countries' exports: their weaker capacities to satisfy technical regulations lead them to specialize away from industries with heavier regulatory burdens.