General equilibrium trade modelling with Canada–US transportation costs

Transportation costs are an important topic in international trade, but seldom have researchers paid attention to general equilibrium trade modelling with transportation costs and explored their relevant effects. This paper uses numerical general equilibrium trade model structures to simulate the impacts of transportation costs on welfare and trade for a Canada–US country pair case. We compare two groups of model structures: Armington assumption models and homogeneous goods models. Within these two groups of models, we also compare balanced trade structures to trade imbalance structures and production function transportation costs to iceberg transportation costs. Armington goods models generate more absolute welfare gains from transportation cost elimination than homogeneous goods models. Welfare gains under balanced trade structures are larger in production function transportation cost scenarios than in iceberg transportation cost scenarios, but under trade imbalance structures, welfare gains are greater under iceberg transportation cost scenarios. Canada's welfare gains in the iceberg transportation cost scenario are significantly larger than gains in the production function transportation cost scenario. On trade effects, homogeneous goods models generate more export and import gains, balanced trade structures have more trade variations, and iceberg transportation costs generate more trade effects.     

The impact of search costs on consumer behavior: A dynamic approach

Prices for grocery items differ across stores and time because of promotion periods. Consumers therefore have an incentive to search for the lowest prices. However, when a product is purchased infrequently, the effort to check the price every shopping trip might outweigh the benefit of spending less. I propose a structural model for storable goods that takes into account inventory holdings and search. The model is estimated using data on laundry detergent purchases. I find search costs play a large role in explaining purchase behavior, with consumers unaware of the price of detergent on 70 % of their shopping trips. Therefore, from the retailer’s point of view raising awareness of a promotion through advertising and displays is important. I also find a promotion for a particular product increases the consumer’s incentive to search. This change in incentives leads to an increase in category traffic, which from the store manager’s perspective is a desirable side effect of the promotion.     

Interacting factor endowments and trade costs: A multi-country,multi-good approach to trade theory

We provide a synthetic analysis of the different ways in which countries participate in the world economy. Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multiple goods or multi-stage production, and country-specific trade costs. Each country's production specialization, trade and welfare is determined by the interaction between its relative endowment and its trade costs. We consider the effects of allowing one good to ‘fragment’ into component and assembly production. The volume of trade and welfare levels are higher with fragmentation for most countries, although for many countries these variables fall with fragmentation.     

Interacting factor endowments and trade costs: A multi-country, multi-good approach to trade theory

We provide a synthetic analysis of the different ways in which countries participate in the world economy. Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multiple goods or multi-stage production, and country-specific trade costs. Each country's production specialization, trade and welfare is determined by the interaction between its relative endowment and its trade costs. We consider the effects of allowing one good to ‘fragment’ into component and assembly production. The volume of trade and welfare levels are higher with fragmentation for most countries, although for many countries these variables fall with fragmentation.     

Product perishability and multistore grocery shopping

Perishability, a largely unconsidered characteristic of consumer goods, is shown to play an important role in planned multistore shopping behavior. We present a model of consumers as cost minimizing inventory managers, who choose between two stores differentiated on location and price, and who purchase perishable and nonperishable goods. We show that the interaction between perishability of goods and price differences of stores can be an important driving force for planned multistore shopping. This rationale leads to a set of propositions. One unexpected result is that as the known price difference on a basket of identical goods increases between two stores, shoppers making store choice decisions on the basis of the basket price are more likely to shop regularly at both stores. We present survey results supporting our model’s predictions.     

Productivity, terms of trade and the ‘home market effect’

This paper analyzes the international transmission and welfare implications of productivity gains and changes in market size when macroeconomic adjustment occurs both along the intensive margin of trade (changes in the relative price of existing varieties of tradable goods) and the extensive margin (creation and destruction of varieties). We draw a distinction between productivity gains that enhance manufacturing efficiency and gains that lower the cost of firms' entry and of product differentiation. Countries with lower manufacturing costs have higher GDP but supply their products at lower international prices. Instead, countries with lower entry costs supply a larger array of goods at improved terms of trade. Output growth driven by demographic expansions, as well as government spending, is associated with an improvement in international relative prices and firms' entry. While trade liberalization may result in a smaller array of goods available to consumers, efficiency gains from deeper economic integration benefit consumers via lower goods prices. The international transmission mechanism and the welfare spillovers vary under different asset market structures, depending on trade costs, the elasticity of labor supply, and consumers' taste for varieties.     

The rise of vertical specialization trade

Manufacturing and vertical specialization (VS) trade, trade in goods that incorporate imported inputs, have grown rapidly since the 1960s. I argue that declining trade costs are an important explanation for these facts. I present a three stage vertical specialization trade model, with raw materials, manufactured parts and final goods sectors. In the simulated model, falling trade costs explain much of the observed growth in overall and VS trade. Manufacturing trade grows twice as fast as overall trade. Raw materials trade was more important in the 1960s when trade costs were high, since their production is more strongly linked to endowments than manufacturing. Therefore, materials will be traded even when trade costs are high. Trade costs have fallen more for manufactured goods over the last 40 years, leading to a rapid expansion of manufactured parts trade relative to materials.     

Tradability, productivity, and international economic integration

This paper develops a model of endogenously tradable goods to study the implications of international integration for price dispersion and pricing to market. A distinctive feature of the model is heterogeneity in both trade costs and productivity. The model highlights the role of heterogeneity in shaping how new entrants at the extensive margin differ from incumbent traders, thereby giving extensive margin movements distinctive implications relative to the intensive margin. In particular, the model predicts that international integration mainly along the extensive margin should be associated with a more limited degree of price convergence. This prediction finds support in cross-sectional regressions on European data and offers insight into recent integration episodes.     

Lobbying costs and trade policy

We study how endogenous lobbying costs influence trade policies. Although in practice lobbying expenditures far exceed campaign contributions, the literature on the political economy of trade policy has focused on the latter. In this paper we develop a model in which informational lobbying costs play a role in determining the structure of protection. In the model, special interest groups can choose to send a signal to the policymaker regarding some information they possess, and the policymaker observes the signal before setting the trade policies. We find that lobbying expenditures directly affect the equilibrium policies. In order to test the predictions of the model we collected data on lobbying expenditures from the Center for Responsible Politics as well as data on trade and industry characteristic variables for the United States from other sources. We perform a structural estimation of the equilibrium trade policies and find support for our model. The empirical evidence indicates that lobbying expenditures play an important role in explaining the variation of protection across sectors. Moreover, the model leads to considerably lower and more reasonable estimates of the weight that the government places on social welfare relative to political contributions.     

Per capita income,market access costs,and trade volumes

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. The key element of the model is an association between trade costs (both variable and fixed) and countries' development levels, which can account for the effect of per capita income on trade volumes and explain many zeros in bilateral trade flows. I find that market access costs play an important role in fitting the model to the data. In a counterfactual analysis, I find that removing the asymmetries in trade costs raises welfare in all countries with an average percentage change equal to 29% and larger gains for smaller and poorer countries. Real income inequality falls by 43%.     

Trade barriers and the relative price of tradables

In this paper I quantitatively address the role of trade barriers in explaining why prices of services relative to tradables are positively correlated with levels of development across countries. I argue that trade barriers play a crucial role in shaping the cross-country pattern of specialization across many tradable goods. I construct a multi-country, general equilibrium model of trade and derive tractable predictions that show how specialization affects relative prices. I calibrate the model to match the patterns of prices, levels of development, and bilateral trade across 103 countries. Through counterfactuals I find that removing trade barriers eliminates more than half of the gap in the relative price of services between rich and poor countries with only a minimal systematic effect on the absolute price of tradables.     

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.     

Measuring International Trade Costs

The costs of international trade have become an increasingly important item in trade negotiations (under the heading ‘trade facilitation’) and element of trade theory, but definition and measurement of trade costs remain in their infancy. This paper argues that the most conceptually appropriate measure is the gap between cost‐insurance‐freight (cif) and free‐on‐board (fob) values of traded goods, but that this must be measured on a consistent volume of trade. Such data are only available for a few countries. We calculate cif–fob gap values for the three largest trading nations that report such data (Australia, Brazil and the USA). These values provide plausible estimates of ad valorem trade costs for the three importing countries and for all countries’ exports. The estimates indicate that although trade costs have fallen over the last two decades, average trade costs now exceed the average tariff rate on imports into the USA and Australia. Country rankings by the cif–fob gap values differ significantly from those by commonly used proxies for trade costs, such as the indicators of time and cost in the World Bank’s Doing Business database, and analysis based on such proxies is likely to produce misleading results.     

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.     

Trade Costs in Bilateral Trade Flows: Heterogeneity and Zeroes in Structural Gravity Models

This paper contributes to the explanation of international trade flows with structural gravity models taking heterogeneity and excess zeroes into account. We introduce a more general hypothesis on the structure of trade costs in Helpman et al. (The Quarterly Journal of Economics, 2008; 123 , 2, 441) theoretical model that is capable of explaining over‐dispersion in trade data. Zero‐inflated negative binomial models are considered to analyse the impact of trade costs, measured in terms of geographical distance and contiguity effects. An analysis related to a sample of 37 countries' trade flows, with heterogeneous effects across sectors and trade‐integrated areas, such as APEC and EU, is presented. The size of exporting and destination economies and cultural and institutional factors are considered as influencing both the extensive and the intensive margin of trade.     

A trade theoretic analysis of outward capital flows: with special reference to Hong Kong

This paper sets up a trade theoretic model to explain the output, price and welfare consequences of the outward investment from Hong Kong to the Pearl River Delta. A four-good trade theoretic model is set up to incorporate some special features of the Hong Kong Economy. We assume that the economy produces four goods: an exportable good, an importable good and two non-traded goods. A special feature of the model is that one of the non-traded goods (locally produced) is also consumed by foreigners and produced under the assumption of non-competitive market framework. As tourist or business-centre trade is of great significance to Hong Kong, this model allows us to capture this phenomenon. First, precise conditions are derived regarding the decline in manufacturing output in Hong Kong. Second, it is shown that, in spite of the supply side determination of the relative price of non-traded goods, income effects in this market are of great significance in both income (welfare) and output movements. These income effects cannot be captured in industrial organization type applied work. Third, it is shown how outflow of capital affects labour productivity. A surprising result obtained for this part of the analysis is that a fall in productivity (outflow of capital and de-industrialization) creates a favourable terms-of-trade effect in the monopolized sector. The welfare effect consists of four terms: (1) a terms-of trade effect via the price of non-traded goods consumed by tourists/foreigners; (2) the loss (gain) in productivity due to an outflow of capital; (3) repatriation payments; and (4) the gains from exporting from the Special Economic Zones as well as other Pearl River Delta cities. Our decomposition has two very important features in contrast to traditional models: a terms-of-trade effect from the consumption of services and productivity gains or losses. The last point is exceedingly important for policy makers specifically if outward flow of capital affects productivity negatively.     

Economic geography and international inequality

This paper estimates a structural model of economic geography using cross-country data on per capita income, bilateral trade, and the relative price of manufacturing goods. We provide evidence that the geography of access to markets and sources of supply is statistically significant and quantitatively important in explaining cross-country variation in per capita income. This finding is robust to controlling for a wide range of considerations, including other economic, geographical, social, and institutional characteristics. Geography is found to matter through the mechanisms emphasized by the theory, and the estimated coefficients are consistent with plausible values for the model's structural parameters.     

Diversification cones, trade costs and factor market linkages

This paper finds non-uniform differences in the distribution functions of factor usage intensities among 10 rich OECD countries. The 10 countries form three distinct groups such that the between-group differences are more pronounced than within-group differences and capital-abundant countries are in capital-abundant groups. The estimation works even if the same industry codes represent different goods across countries in the data. The finding is consistent with the multiple-cone factor proportions theory with zero trade costs with each group being one cone. An alternative interpretation is non-zero trade costs. Both interpretations imply weak factor market linkages between the countries in different groups.     

Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures

We show how trading protocols impede the price discovery process in single stock futures as implicit trade costs outweigh explicit costs. Despite the trade volume dominance, trade costs advantage and leverage efficiency in futures markets, single stock futures account for only 35% of the price discovery vis-á-vis the spot market. Futures market's informational efficiency is adversely affected by market frictions in the form of marketwide position limits, minimum contract values, and margin requirements.     

INTERNATIONAL TRADE COMPOSITION AND MEDIUM-RUN GROWTH: Evidence of a Causal Relationship

The motivation for this article stems from Mazumdar's (1996) hypothesis that international trade composition impacts a country's ability to achieve transitional economic growth. In his article, Mazumdar suggested that developing economies, generally known for exporting consumption goods and importing capital goods, benefit more from international trade than do developed economies. In addition to static gains, developing economies experience a decline in the replacement costs of capital as the relative price of capital falls with trade. To empirically test this hypothesis, a trade composition variable is created using unpublished SITC export and import data of both consumption and capital goods. Incorporating this variable into a linear equation, a Granger Causality test and a more extensive VAR test are performed for a select group of developed and developing economies. The empirical results are suggestive, and indicate some support for the hypothesis that trade composition "causes" medium-run transition.