Intra‐industry Trade Liberalization: Why Skilled Workers are More Likely to Support Free Trade

This paper presents a theoretical model and empirical analysis that connects the prevalence of intra‐industry trade with increased wage inequality from trade liberalization in both skilled and unskilled labor abundant countries. The Stolper–Samuelson effect is incorporated into an intra‐industry trade liberalization (intra‐ITL) hypothesis where skilled labor opposes protectionism in all countries engaged in intra‐industry trade because skilled workers gain at the expense of unskilled workers from multilateral trade liberalization within the skill‐intensive sector. We examine empirical evidence on whether skilled individuals are more supportive of trade liberalization than unskilled individuals across 31 countries with different levels of intra‐industry trade and skill endowments. We find that the extent to which countries engage in intra‐industry trade in high‐tech commodities is strongly linked with the intensity of opposition to protection by skilled labor. Regression results strongly support our hypothesis that skilled workers, almost everywhere, are more likely to support free trade.     

Converging in divergent ways

This paper focuses on intra‐industry trade (IIT) between Central, Eastern and South‐Eastern European (CESEE) countries and the EU‐15. It assesses the determinants of intra‐industry trade by combining a detailed product‐level (HS‐6) trade‐flow database with country‐level structural, monetary and institutional variables. Estimates are obtained with System‐GMM and dynamic fractional response models. Our results suggest that structural factors driving IIT differ in the region, notably perceptions of corruption and the distance in the stock of physical capital from the EU‐15. On the other hand, nominal variables such as the competitiveness of corporate taxation and the flexibility of exchange rate regimes contribute to the increase in intra‐industry trade in the whole region.     

The Role of Trade in Intra‐Industry Productivity Growth—the Case of Old and New European Union Countries

The purpose of this paper is to evaluate the role of trade in productivity growth in a sample of 30 sectors in 25 EU countries in the period of rapid East–West integration (1995–2007). Shift‐share analysis is used to show that changes in value added per hour worked in these countries appear to be mainly due to positive developments (rising productivity) within single industries and only to a lower extent result from a shift towards higher productivity activities. Trade is found to be an important positive determinant of intra‐industry productivity growth in European countries. Exports and imports alike can be associated with efficiency gains, but intermediate good exchange and trade with New Member States exert a particularly strong influence on intra‐industry productivity growth in the EU.     

Same Same But Different: Dialects and Trade

Language is a strong and robust determinant of international trade patterns: Countries sharing a common language trade significantly more with each other than countries using different languages, holding other factors constant. In this article we present the first analysis of the effect of language on trade in an intra‐national context. Analyzing unique data for a single‐language country, Germany, we find that similarities in the local dialect have a significantly positive impact on regional trade. We interpret this finding as evidence for the trade‐promoting effect of culture, because linguistic similarities likely reflect cultural ties across regions, rather than lower costs of communication or similar institutions.     

The Roles of Innovators and Labor in a Schumpeterian Factor Endowments Based Model of Intra‐industry Trade

This paper builds a model of Schumpeterian innovation and trade that emphasizes endowments of innovators and labor as a key factor in determining the pattern of trade. The model suggests a strong complementarity between intra‐industry and inter‐industry trade. The pattern of inter‐industry vs intra‐industry trade is analyzed using the Grubel–Lloyd index. The theoretical model predicts that the prominence of intra‐industry trade is a nonlinear function of the ratio of the proportion of world knowledge domestically generated to the domestic share of the world labor supply. Strong empirical evidence for this key result is presented and implications are discussed.     

Endowment Differences and the Composition of Intra‐Industry Trade

The empirical relationship between differences in endowments and different types of trade is investigated in this paper. Although net trade (NT) and vertical intra‐industry trade (IIT) are both broadly viewed as reflecting endowment differences, we suggest that there will be systematic differences in the way their shares of trade adjust as endowment differences become larger. Empirical evidence for European Union trade with its 52 major trading partners confirms this. The share of horizontal IIT (net trade) decreases (increases) for all increases in absolute endowment differences, but the share of vertical IIT can both increase and decrease with increases in endowment differences.     

Productivity growth from an international trade perspective

This paper presents a framework to assess the relative importance of three key sources of productivity growth that international trade research focuses on: (1) inter‐industry specialization; (2) intra‐industry reallocation of resources across heterogeneous firms; and (3) technological progress. We illustrate how to apply the framework by deciphering the productivity dynamics of the Swiss manufacturing industry. We find that intra‐industry reallocations are the most important source of growth in aggregate total factor productivity, spurred by the productivity growth of large, incumbent firms and the entry of new firms. Inter‐industry specialization and general technological progress, nevertheless, remain important supplementary sources of productivity growth.     

A Model of Trade Liberalization in Services*

This paper develops an intra‐industry service trade model taking into account important features of services. We find that service trade liberalization between identical economies is welfare enhancing when the pre‐trade domestic market liberalization is limited. This holds regardless of the degree of trade liberalization and of the mode of supply. However, if the pre‐trade environment is characterized by a free‐entry equilibrium, then service trade liberalization is not necessarily welfare improving. It is welfare enhancing if the trade liberalization is full and the mode of supply is cross‐border. The gain from trade in our model comes from the improvement in service quality—better matching between consumers’ ideal varieties and firms’ product specificity. The implications for the mode of supply in service trade are also explored.     

Trade, Skills and Adjustment Costs: A Study of Intra-Sectoral Labor Mobility

The relationship between the ability of workers to change job, sector or industry and the short‐run adjustment costs associated with a reallocation of labor is the subject of lively debate among academics. This paper examines recent sector and industry level labor market adjustment in the UK using data from the Quarterly Labour Force Survey. We explore the link between the nature of UK trade patterns and labor adjustment within the manufacturing sector and employ a multinomial logit approach to examine the determinants of “within” and “between” industry mobility. By controlling for individual skill specificity we find some evidence of a link between intra‐industry trade and intra‐industry labor adjustment.     

Trade Liberalization and the Degree of Competition in International Duopoly

This paper analyzes how a reduction in trade costs influences the possibility for firms to engage in international cartels, and hence how trade liberalization affects the degree of competition. We consider a particular intra‐industry trade model amended to allow for firms producing differentiated products. Our main finding is that trade liberalization may have an anti‐competitive effect. We find that there is no unique relation between a reduction in trade costs and the degree of competition. When products are differentiated, a lowering of trade costs is pro‐competitive if trade costs are initially high, but anti‐competitive if trade costs initially are low. Hence, trade policy is not necessarily a substitute for competition policy.     

Environmental regulation and love for variety

Using a model of monopolistic competition, we examine the relationship between intra‐industry trade and environmental regulation. The decisions on emission standards set by each country show strong strategic interactions. In closed economies regulations act as strategic substitutes, and in equilibrium there is under‐regulation relative to the cooperative outcome. Trade liberalization may lead to stricter or laxer environmental standards, depending on the consumers’ preference for product variety. In addition, we show that with open trade environmental regulations may act as strategic complements and countries may set environmental standards that are as strict (or stricter) than those in the cooperative outcome.     

No risk and some fun? Trade and wages in the enlarged European Union

This paper analyses the relationship between openness to trade and wages at the industry level (15 manufacturing and 6 service industries) in 25 EU countries over the period from 1995 to 2005. By applying a cross-country and industry-specific approach, it is possible to control for unobserved heterogeneity at both country and industry levels. We also differentiate between intra and inter-industry trade and we try to assess the relative importance of foreign wages versus domestic productivity developments in an open environment. We find that trade is not an important driver of wages, since the wage response to trade is small. Moreover, in line with the Stolper-Samuelson reasoning, the overall wage impact is always positive if significant in central and eastern Europe, while in western Europe we often observe a negative response, particularly in resource-based industries. Nevertheless, increased trade reinforces the productivity-wage link and weakens the co-movement of wages in eastern Europe, while there is less evidence of a similar wage-disciplining effect of trade in the west.     

Tear down this wall: on the persistence of borders in trade

Abstract Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. Remarkable persistence in intra‐German trade patterns along the former East‐West border suggests that border effects are neither statistical artefacts nor driven by administrative barriers to trade, but arise from economic fundamentals.     

Rigid labour markets with trade and capital mobility: theory and evidence

Abstract We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model.     

The Border Effect and the Nonlinear Relationship between Trade and Distance

The border‐effect literature confirms that sub‐national units tend to trade more with the rest of their country than with foreign markets. However, it is likely that ongoing processes of trade integration will generate a trade‐off between internal and external integration for sub‐national units within countries. In this paper we estimate the internal and external border effect, using a novel dataset that captures intra‐ and international shipments between Spanish regions and regions in eight European countries with alternative treatments of the nonlinear relationship between distance and trade.     

Export promotion and intra‐industry reallocations

Publicly funded/subsidized export promotion agencies reducing informational barriers to export and thus firm‐level fixed/sunk costs of exporting are present in most countries. This paper develops a two‐country one‐sector heterogeneous firms model with origin‐specific publicly funded export promotion agencies and shows how the public good nature of export‐relevant information and the ability to engage in global public affairs may rationalize the existence of such agencies. A novel finding of the model is that gains from export promotion are shared with the trade partner via intra‐industry reallocations.     

North–South Trade Liberalization and Economic Welfare

We consider a general equilibrium model of a developing economy (the South) that opens to trade with a developed economy (the North). The southern economy is characterized by open urban unemployment and rural–urban migration, a competitive agricultural sector and a monopolistically competitive manufacturing sector. Hence, there is potential for both inter‐ and intra‐industry trade to arise on liberalization, in addition to distortionary effects of duality. Southern comparative advantage in agriculture may arise from the labor market distortion and the basis for intra‐industry trade is love for variety. We characterize various configurations of the trade pattern, and the resulting welfare consequences of opening to trade in this context. We illustrate a new mechanism under which in some circumstances it may be possible for trade liberalization to lower economic welfare in the South.     

Welfare Effects of Tariff Reduction Formulas

World Trade Organization (WTO) negotiations rely on tariff reduction formulas. Formula approaches are of increasing importance in trade talks, because of the large number of countries involved, the wider dispersion in initial tariffs (e.g. tariff peaks), and gaps between bound and applied tariff rates. This paper presents a two country intra‐industry trade model with heterogeneous firms subject to high and low tariffs. We examine the welfare effects of applying three different tariff reduction formulas discussed in the literature that were used and proposed in previous and current General Agreement on Tariffs and Trade (GATT)/WTO negotiations (1) a proportional cut, (2) the Swiss formula and (3) a tiered formula. No single formula dominates for all conditions. The ranking of the three tools depends on the degree of product differentiation in the industry and the achieved reduction in the average tariff.     

Payment choice in international trade: Theory and evidence from cross‐country firm‐level data

When trading across borders, firms choose between different payment contracts. Theoretically, this should allow firms to trade‐off differences in financing costs and enforcement across countries. This paper provides evidence for this hypothesis employing firm‐level data from a large number of developing countries. As predicted, international transactions are more likely paid after delivery when financing costs in the source country are high and when contract enforcement is low. We extend the theory and also show empirically that the more complex an industry is, the more important is contract enforcement and the less important are financing costs for the contract choice.     

Determinants of intra‐firm trade: Evidence from foreign affiliates in Sub‐Saharan Africa

By exploiting a unique sample of foreign affiliates in Sub‐Saharan Africa, we study previously examined and unexamined firm‐level determinants of intra‐firm trade. We document that foreign affiliates engaging in intra‐firm trade are relatively few and that the majority of these also engage in trade at arm's length, which accounts for an important fraction of their total trade. The identified firm‐level determinants of intra‐firm trade are consistent with property rights and intangible asset theories of the multinational firm, with international production hierarchy theories, as well as with theories of complex FDI and of multinational activity under credit constraints.