Trade liberalization in environmental goods

Trade negotiations have started to pay attention to liberalization in environmental goods (EGs), whose production may require dirty intermediate goods. We construct a two-country trade model to explore the effects of trade liberalization in EGs on the local pollution, the global environment and welfare in the presence of such an environmental conundrum. We find that countries do not necessarily benefit from trade liberalization in EGs in the absence of an environmental policy. With the assistance of an upstream pollution tax, trade liberalization in EGs improves each country's welfare. This result holds independent of whether the upstream market is competitive or not, or whether we have upstream trade across countries. For asymmetric countries, trade liberalization in EGs improves the world welfare and the welfare for the country if it has a smaller demand for EGs; or experiences less damage from the production of dirty inputs; or values environment improvement more.     

Revenue‐enhancing Trade Liberalization in a Differentiated Duopoly

Existing studies suggest that in developing countries, tax reforms that increase consumption taxes can compensate for shortfalls in revenue from a tariff reduction. However, these revenue‐enhancing tariff–tax reforms have a critical shortcoming—they generally reduce welfare under imperfect competition. This paper shows that tax reforms such as consumption tax reforms do not necessarily have to be implemented to make up for revenue shortfalls from tariff reductions under imperfect competition, because trade liberalization through tariff cuts leads to an increase in government revenue when domestic and imported goods have a high substitutability. This revenue‐enhancing effect of a tariff reduction occurs for a wider degree of product substitutability when initial tariff and consumption tax rates are high. More importantly, we show that even if initial tariff and consumption tax rates are sufficiently low, a tariff reduction still increases government revenue for a low degree of product differentiation under Bertrand competition.     

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.     

The Division and Size of Gains from Liberalization in Service Networks*

If two disjoint country service networks involving a small and large country are connected as part of international liberalization in the presence of network externalities, the per capita gain for the small country from access to a large network will be large, and the per capita gain for the large country will be small. In contrast to goods, the benefits of liberalization in network‐related services are more likely to be approximately equally divided between large and small countries than is true of trade in goods, where benefits accrue disproportionately to the small country. We also argue that non‐cooperation in network‐related services trade may involve more extreme retaliation than suggested for trade in goods by the optimal tariff literature, so that relative to a non‐cooperative outcome, gains from liberalization in network‐related services become larger than from liberalization in goods. We develop simple models which we use for numerical examples showing these points, along with an empirical implementation for global telecoms liberalization for the US, Europe, Canada, and the rest of the world using the framework developed in the paper. This shows similar proportional gains to regions, consistent with the theme of the paper that goods and services liberalization differ.     

Explaining Export Performance through Inputs: Evidence from Aggregated Cross‐country Firm‐level Data

Which trade barrier related to intermediate inputs forms a greater burden on the export performance of firms in developing countries? Using aggregated cross‐country firm‐level data covering 43 mostly developing economies, this paper estimates the marginal importance of the impact of various intermediate input trade cost barriers, namely tariffs, non‐tariff barriers (NTBs) and services barriers, on firms' export behavior. In a cross‐sectoral setting, this paper takes the firm's export performance in goods as a central focus to study the effects of these different trade barriers through the exporting firm's choice of use of intermediate inputs. The results show that the most significant trade barriers on inputs that impede export performance in developing countries are mainly NTBs and restrictions of services.     

The “Emulator Effect” of the Uruguay Round on US Regionalism

Using a detailed data set at the tariff line level, we find an emulator effect of multilateralism on subsequent regional trade agreements (RTAs) involving the USA. We exploit the variation in the frequency with which the US grants immediate duty free access (IDA) to its RTA partners across tariff lines. A key finding is that the US grants IDA status especially on goods for which it has cut the multilateral most favored nation (MFN) tariff during the Uruguay Round the most. Our results suggest that the Uruguay Round multilateral “concessions” have elicited subsequent preferential trade liberalization.     

Does international openness affect the productivity of local firms?

This paper examines how international openness can change firm productivity in south‐eastern Europe (SEE), a crucial question for middle‐income countries. Using firm‐level data for six transition economies over the 1995–2002 period, we identify whether foreign ownership and propensity to trade with more advanced countries can bring about higher learning effects. We find that: (i) foreign ownership has helped restructure and enhance the productivity of local firms in four out of six countries; (ii) exporting to advanced markets has a larger impact on productivity growth in four countries, especially when the firm's absorptive capacity is taken into account; (iii) in contrast, exporting to the less competitive markets of the former Yugoslavia seems to negatively affect productivity growth in three countries; and (iv) learning effects from importing are similar to those from exporting. Our results suggest that trade liberalization is not uniformly beneficial. Regional composition of trade flows and absorptive capacity of local firms matter. Thus, trade liberalization within the SEE region may not provide a substitute for a general trade liberalization which includes access to the more competitive markets of countries belonging to the Organization for Economic Co‐operation and Development.     

Trade Liberalization and the Profitability of Mergers: a Global Analysis*

We analyze the effects of bilateral tariff reductions on the profitability of cost‐reducing horizontal mergers. Given Cournot competition in a two‐country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.     

Intra‐industry Trade Liberalization and the Environment

This paper examines how trade liberalization affects national and global pollution in a multi‐country model incorporating monopolistic competition and intra‐industry trade as well as inter‐industry trade. Each country produces skill‐intensive differentiated goods and labor‐intensive goods. Pollution is a by‐product of production but pollution abatement can be undertaken. Regardless of country characteristics, if the differentiated‐good sector is sufficiently cleaner (dirtier) then, without any change in environmental taxes, a multilateral reduction in import protection accorded to the differentiated good or to both goods typically leads to a decline (rise) in pollution in all countries. Pollution havens tend not to arise.     

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.     

贸易自由化是如何影响我国出口产品质量的？*--基于贸易政策不确定性下降的视角

传统理论认为贸易自由化会促进出口产品的质量升级,但我国加入W TO后的情况却并非如此。文章基于贸易政策不确定性的视角,利用我国加入W TO前后美国对我国产品进行关税调整这一自然实验,通过倍差法分析了贸易自由化对我国出口产品质量的影响。研究表明：（1）在贸易自由化的过程中,贸易政策不确定性的下降会拉低我国的出口产品质量,且这一结论在改变质量测度方法、控制成本效应以及使用不同的产品属性、贸易对象和样本的情况下依然稳健;（2）贸易政策不确定性主要是通过广延边际上的质量调整降低了我国出口产品的总体质量,即在贸易政策不确定性下降幅度越大的产品中,有越多的生产低质量产品的企业进入出口市场;（3）在集约边际上,存续企业并未针对贸易政策不确定性的下降做出及时的产品质量调整,从而无法改变我国的产品质量在短期内下降的趋势。文章为我国如何在推行贸易自由化的同时实现出口产品质量升级提供了启示。     

The welfare implications of trade liberalization between the Southern Mediterranean and the EU

The impact on the Southern Mediterranean Countries (SMC) of the current process of trade liberalization with the European Union is explored. The methodology is that of computable general equilibrium modelling under imperfect competition and the model includes ten countries and 11 sectors. This allows for both a cross-country and cross-sectoral analysis of the results. The experiments considered are the full liberalization of tariffs, as well as changes in market access and trade-induced changes in productivity. A key feature of the paper is that the phased introduction of tariff reductions is allowed for as explicitly envisaged in the Agreements. The results show that the process of liberalization may have a substantial, though non-monotonic, impact on the SMC economies in terms of both changes in production and through this on welfare. The welfare impact is potentially very high in particular for the high tariff economies. The sources of the welfare gain tend to derive from perfectly competitive explanations of trade for the high tariff economies, and from imperfectly competitive explanations of trade for the low tariff economies.     

Tariff evasion and rules of origin violations under the Canada‐U.S. Free Trade Agreement

Abstract Using product‐level data on trade between Canada and the U.S., this paper presents evidence of tariff evasion and violation of the rules of origin occurring under the Canada‐U.S. Free Trade Agreement (CUSFTA). It shows that more imports go unreported at the destination country when tariffs are higher. Consistent with the tariff evasion hypothesis, this result implies that the trade creation effect of a free trade agreement may in fact be due to less underreporting. Further, this paper shows that the larger Canadian tariff preference margin for the U.S. is associated with more goods originating in third countries being transshipped through the U.S. territory for re‐export. The preference margin is also positively correlated with the value of excess imports from the U.S., which qualify for preferential treatment. Both results suggest the presence of persistent violations of CUSFTA’s rules of origin.     

The Effects of Trade Liberalization in a Vertical Structure

Despite the importance of international trade on intermediate goods, the literature did not pay much attention to this aspect in determining the effects of trade liberalization in the presence of a labor union. We take up this issue here and show the effects of trade liberalization on the final goods and/or the intermediate goods, where the domestic firm pays unionized wage and imports intermediate goods. We show that trade liberalization on the intermediate goods (final goods) increases (decreases) the unionized wage, labor union's utility and domestic profit. Trade liberalization on both the final goods and intermediate goods may either increase or decrease the domestic unionized wage, labor union's utility and domestic profit depending on the input coefficients and the initial tariff levels. Our qualitative results are robust with respect to the intermediate goods market structure, the pricing strategy of the intermediate goods producers and the union's objective function.     

The price effect of tariff liberalization: Measuring the impact on household welfare

Trade policy literature has for many years emphasized open policies positive impact on economic growth and development. While these results generally hold when measured on averages, empirical evidence suggests that trade liberalization is unlikely to produce beneficial results across all households. This study adds to the literature by providing an analysis of the distributive effects of tariff liberalization in Mexico. The paper examines the effect of tariff liberalization from the perspective of households both as consumers and factor owners allowing for imperfect domestic price transmission. The results indicate the overall positive effect of tariff liberalization masks significant differences in the distribution of gains both across income levels and across geographic regions. Richer households are found to have gained relatively more. Urban areas, as well as Mexican states closest to the United States border, are also found to be larger beneficiaries while southernmost states have been largely bypassed by the effects of tariff liberalization. Those results can be explained not only in relation to the different endowments of the households, but also by the diverse effects on local prices that has resulted from Mexican trade liberalization.     

International Provision of Trade Services, Trade, and Fragmentation

This paper examines the special role that trade liberalization in service industries can play in stimulating not only trade in services but also in goods. International trade in goods requires inputs from several services industries (trade services, such as transportation, insurance, and finance) in order to complete and facilitate international transactions. Restriction on the ability of national service providers to provide these services across borders and within foreign countries creates additional costs and barriers to international trade above those that would arise in otherwise comparable intranational exchange. As a result, trade liberalization in services can yield benefits, by facilitating trade in goods, that are larger than one might expect from analysis of the services trade alone. This paper explores this idea using simple theoretical models to specify the relationships between services trade and goods trade. The paper also notes the role of services trade in a model of international industrial fragmentation, where production processes can be separated across locations but at some cost in terms of additional service inputs. The incentives for such fragmentation can be larger across countries than within countries, owing to the greater differences in factor prices and technologies available. However, the service costs of international fragmentation can also be larger, especially if regulations and restrictions impede the international provision of services. As a result, trade liberalization in services can also stimulate fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further.     

MARKET ACCESS,INVESTMENT, AND HETEROGENEOUS FIRMS*

This article presents a model of international trade in which heterogeneous firms can expand through capital acquisitions. I show that demand elasticities are a crucial element in predicting which firms invest, in what location, and for what reason. High‐productivity firms, who tend to sell goods at a low elasticity, invest for market access (tariff jumping). Middle productivity firms, who tend to sell at a higher elasticity, invest for productivity improvement. The relative value of trade costs dictates which incentive is larger. In equilibrium, trade liberalization can reduce aggregate productivity by reducing an important source of investment demand: foreign firms.     

Distance to Frontier and New Import Growth

In a panel‐data study involving product‐level import data for 48 developing countries that underwent substantial trade liberalization between 1989 and 2001, this study finds that the growth of trade in new goods imported following major trade liberalization is related to the state of technology that existed just before liberalization. The study develops two new measures of the extensive margin. Findings indicate that greater is the distance of a country from the world technology frontier, the faster is its growth of new goods imports. This indicates a higher cost of trade protection for countries further away from the world technology frontier.     

Reassessing the productivity gains from trade liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country‐industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non‐tariff barriers. Finally, we find suggestive evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.