Virtual proximity and audiovisual services trade

Audiovisual services such as music and movies in digital formats have gained substantial importance over the last decade. This paper analyses audiovisual services in a gravity model framework. In particular, we explore the role of virtual proximity – a new proxy for cultural proximity based on bilateral hyperlinks and bilateral website visits between countries – and find that ‘virtually-proximate’ countries trade significantly larger amounts of audiovisual services. Our results show that virtual proximity also has a larger impact on trade in audiovisual services than on total services trade. Moreover, in line with Hanson and Xiang (2011), our analysis indicates that in the audiovisual services sector, global fixed export costs dominate bilateral fixed export costs for most countries in our sample.     

The chilling trade effects of antidumping proliferation

Advocates of antidumping (AD) laws downplay their negative effects by arguing that the trade flows that are subject to AD are small and their distortions negligible. But while the adverse effect of AD on product-level trade has long been established, the question remains whether there are trade effects at the aggregate level. The recent proliferation wave of AD laws and their use provides us with a unique policy change to estimate the true trade effects of adopting and enforcing AD laws. For this purpose, we estimate the effect of AD on bilateral trade flows between the “new adopters” of AD laws and their trade partners. Using a gravity model of annual observations (1980-2000) our estimates show that AD has trade chilling effects on aggregate import volumes but the impacts are heterogeneous across sectors. We find that new tough users experience a chilling of their aggregate imports of 14 billion US$ a year (or 5.9%) as a result of AD measures. For some countries like Mexico and India, the dampening effects of AD laws on trade flows are found to substantially offset the increase in trade volumes derived from trade liberalization.     

Distance and trade: Disentangling unfamiliarity effects and transport cost effects

This paper provides evidence supporting Grossman's (Comments on Alan V. Deardorff, Determinants of bilateral trade: Does gravity work in a neoclassical world?. In: Jeffrey A. Frankel (Ed.), The regionalization of the world economy. Chicago: University of Chicago for NBER; 1996) claim that not only transport costs but also unfamiliarity can explain the negative correlation between geographic distances and bilateral trade volumes. A gravity model that controls for as many natural causes of trade as possible reveals that countries high in uncertainty-aversion (based on Hofstede's survey) export disproportionately less to distant countries (with which they are presumably less familiar). More important, this result is mainly driven by differentiated products, not by products with international organized exchanges or with reference prices. For transport costs alone to explain such a trade pattern, one would have to assume that distance-related ad valorem transport costs are higher when a trade route originates from a high uncertainty-aversion country, which is unlikely. This trade pattern is easy to explain, however, if one accepts that geographic distance is a proxy for unfamiliarity and that exporters in high uncertainty-aversion countries are more sensitive to informational ambiguity. A further result is that high uncertainty-aversion countries trade less and thus grow poorer in the long run, which suggests that cultural factors are as important as geographic ones in determining trade openness and prosperity.     

Trade policy & lobbying effectiveness: Theory and evidence for India

How do we understand differences in effectiveness in lobbying for trade policy? To explain lobbying effectiveness, I introduce a new measure into Grossman and Helpman's (1994, American Economic Review 84: 833–850) model of protection-for-sale (PFS). Differences in effectiveness are explained on the basis that some groups make a better case for protection by sending a signal regarding information they possess and that is considered by policy makers before setting trade policies. I begin by estimating a standard PFS model for India using a measure of political organization, a common approach in the empirical literature on PFS. To overcome the need to define such a binary political organization variable, I then use panel data to estimate the new measure of relative lobbying effectiveness. For the most effective sectors, a high output to import ratio translates into higher trade protection; for the least effective sectors, higher output to import ratio translates into lower trade protection. Examining some of the political economy influences on lobbying effectiveness, I find that producing similar goods reduces the positive effect of geographical proximity on effectiveness. Hence, within a sector, firms in close proximity and producing similar goods compete to lobby rather than cooperating or free-riding.     

Language and foreign trade

While language plays an important role in gravity models, there has been little attention to the channels through which a common language promotes bilateral trade. This work proposes separate series for a common language depending upon whether ease of communication facilitates trade through translation or the ability to communicate directly. The series related to direct communication is far more important in explaining bilateral trade, but the other series, based on translation, makes a distinct contribution as well. Either measure of a common language outperforms the measure in popular use, which is implicitly related to translation, and a combination of the two does far better. In addition, the paper examines the effect of two country-specific linguistic influences on trade: Literacy and linguistic diversity at home. Both of these influences promote foreign relative to domestic trade. Finally, the article studies the separate roles of English and network externalities.     

Determinants of foreign direct investment

Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of included covariates. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities include traditional gravity variables, cultural distance factors, relative labour endowments and trade agreements. There is little support for multilateral trade openness, most host‐country business costs, host‐country infrastructure and host‐country institutions. Our results suggest that many covariates found significant by previous studies are not robust.     

Intra-industry trade with multinational firms

Recent developments, including the analysis of firm-level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade (IIT). Most empirical work still relies on the standard Grubel-Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits of multinational firms. Given the overwhelming importance of the latter, this is a major shortcoming. This paper provides a guide to measurement and estimation of the determinants of bilateral IIT shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate the impact of investment costs, multinational activities and income flows from repatriated profits. We also discuss and quantify the bias of the Grubel-Lloyd index associated with repatriated profit flows of multinationals. Using bias-corrected versions of the Grubel-Lloyd index as the dependent variable, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in IIT shares.     

The nonlinear impact of currency unions on bilateral trade

Most gravity model specifications assume that a currency union varies the level of bilateral trade between members by a constant proportion. We demonstrate that a common currency also alters the slope of the relationship between bilateral trade and member country GDPs.     

Does a currency union affect trade? The time-series evidence

Does leaving a currency union reduce international trade? We answer this question using a large annual panel data set covering 217 countries from 1948 through 1997. During this sample a large number of countries left currency unions; they experienced economically and statistically significant declines in bilateral trade, after accounting for other factors. Assuming symmetry, we estimate that a pair of countries that starts to use a common currency experiences a near doubling in bilateral trade.     

Effects of Islamic religiosity on bilateral trust in trade: The case of Turkish exports

Using a rich firm level data set for Turkish manufacturing, we test whether sharing similar religious beliefs with potential contracting parties drives a firm’s first time entry into export markets. We exploit variation in the practice of Islam across Turkish NUTS3 regions and we find that firms located in regions characterised by stronger religiousness are more likely to enter export destinations with a higher share of Muslims among their population. This result is robust to the control for past trade, common language, cultural and migration ties as well as for selective trade policy in favour of politically connected religious business groups. In particular, religious proximity eases export entry for producers of “trust intensive” goods, it favours subsequent foreign market entries and reduces the export exit probability. All in all, our evidence supports an export enhancing effect of religious proximity working through export sunk costs reduction rather than through similarity in preferences.     

A NOTE ON FOREIGN DIRECT INVESTMENT AND EXPORTS IN VERTICALLY DIFFERENTIATED INDUSTRIES

We examine the FDI versus exports decision of a multiproduct multinational firm which supplies vertically differentiated products, and show that the proximity‐concentration trade‐off can generate FDI‐export coexistence, i.e., the firm supplies the low‐quality products through FDI and the high‐quality products through exports. We also show that the opposite can never happen. Moreover, when the multiproduct multinational firm faces price competition in the target markets, it has an incentive to use trade costs to soften price competition, which can reduce its FDI incentive.     

Explaining destinations and volumes of international arms transfers: A novel network Heckman selection model

What determines the volumes of international weapon transfers? And why do countries establish such arms trading relationships in the first place? We propose an innovative statistical strategy that builds on the gravity approach and combines a Heckman model with a network analysis. This allows us, for the first time, to analyze the impact of network structures on both the extensive and the intensive margins of the international arms trade simultaneously. We argue that the structure of the arms transfer network conveys important information for exporting and importing countries. Therefore, past topological properties of the trade network play a central role in its future evolution. Using data on the trade of major conventional weapons between 1955 and 2018, our estimation results and out-of-sample predictions show that network structures have considerable explanatory power with respect to the creation of trade links. They are far less relevant for the explanation of trade volumes, which are mainly determined by demand factors.     

The U.S. trade imbalance and real exchange rate: An application of the heterogeneous panel cointegration method

The United States economy suffers from persistent trade deficits, arising from the so-called ‘global external imbalance’. Can the depreciation of the US dollar improve this phenomenon? This study for the first time applies the heterogeneous panel cointegration method to examine the long-run relationship between the real exchange rate and bilateral trade balance of the U.S. and her 97 trading partners for the period 1973–2006. Using new annual data, the empirical results indicate that the devaluation of the US dollar deteriorates her bilateral trade balance with 13 trading partners, but improves it with 37 trading partners, especially for China. In the panel cointegrated framework, a long-run negative relationship between the real exchange rate and the bilateral trade balance exists for the U.S.     

Je t'aime, moi non plus: Bilateral opinions and international trade

This paper studies the relationship between bilateral trade patterns and opinions. It uses the Eurobarometer public opinion surveys published by the European Commission, which provide data on the share of the population in each EU15 member country in favour of each CEEC joining the EU. Our results first suggest that bilateral opinions have a statistically robust and relatively large effect on imports, even when standard and new covariates capturing proximity between countries are controlled for. We interpret this effect as reflecting a positive impact of “bilateral affinity” on trade patterns. We also show that it is possible to go some way towards explaining the variance in bilateral opinions among our sample. Last we provide some preliminary attempt to determine causality between bilateral opinions and imports.     

Foreign Direct Investment and Environmental Taxes

Abstract. This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country toward the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.     

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.     

Fixed export cost heterogeneity, trade and welfare

Recent literature on the workhorse model of intra-industry trade has explored heterogeneous cost structures at the firm level. These approaches have proven to add realism and predictive power. This paper presents a new and simple heterogeneous-firms specification. We develop a symmetric two-country intra-industry trade model where firms are of two different marginal cost types and where fixed export costs are heterogeneous across firms. This model traces many of the stylized facts of international trade. However, we find that with heterogeneous fixed export costs there exists a positive bilateral tariff that maximizes national and world welfare.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.     

Determinants of successful regional trade agreements

This paper investigates the determinants of the effectiveness of regional trade agreements (RTAs) in enhancing bilateral trade. Characteristics of both the country pair and other RTA members are found to significantly influence the trade creation effect of RTAs. However, North/North, North/South and South/South RTAs are found to have similar effects on trade.     

North, South and distance in the gravity model

It is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade. However, distances North-South could also reflect differences in factor endowment that provide opportunities for profitable trade. This paper investigates the hypothesis that if we control for distance in the ordinary sense, differences North-South promote international trade. The hypothesis receives ample support. Moreover, the significance of differences North-South survives a battery of robustness tests, concerning period, distinctions between differences in latitude North-North, North-South and South-South, and controls for other measures of differences in factor endowment, such as differences in per capita output and differences in average temperature, rainfall, and seasonal range in temperature. The impact of differences North-South on bilateral trade has also been falling. This decline, in turn, might be partly responsible for the weakening of the influence of distance that has been occurring since World War II. This last hypothesis receives confirmation as well. Finally, the paper examines the impact of internal distance and remoteness on trade. Since both variables are country-specific, this is done by studying their impact on the country fixed effects themselves in the earlier estimates. Internal distance turns out to have a far greater impact than remoteness—by an order of 10.