Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences

We develop a Ricardian model of trade with nonhomothetic preferences to analyze preferential trade agreements (PTAs) among countries of different stages of economic development. The richer a country is, the more likely will PTAs improve its terms of trade, also when it is a non‐member. Rich non‐member countries are also less likely to incur welfare losses from PTAs. PTA membership only guarantees welfare gains for countries that are too poor to import the goods rich countries produce. For all other countries, the welfare effects of joining PTAs depend on the world income distribution and on the strength of comparative advantages.     

Footloose Capital and Comparative Advantage

We investigate the effect of country size differentials and Ricardian technology differences on firms’ location decisions using a two‐country, two‐good (homogeneous agricultural good and differentiated manufacturing products), two‐factor (labour and footloose capital) simple new economic geography model. We found that manufacturing firms may agglomerate in a country where the manufacturing sector has a comparative disadvantage. In addition, when country size differentials and Ricardian technology differences exist between two countries, the key factor influencing firms’ location decisions changes according to the level of trade liberalization, from being market size‐dependent to becoming technology‐dependent.     

An Inframarginal Analysis of the Ricardian Model

This paper shows that a 2 × 2 Ricardian model has a unique general equilibrium, and the comparative statics of the equilibrium involve discontinuous jumps. If partial division of labor occurs in equilibrium, the country producing both goods would impose a tariff, whereas the country producing a single good would prefer unilateral free trade. If complete division of labor occurs in equilibrium, both countries would negotiate to achieve free trade. In a model with three countries, the country which does not have a comparative advantage relative to the other two countries, and/or which has low transaction efficiency, may be excluded from trade.     

Trade integration and risk sharing

What are the effects of increased trade in goods and services on the trade balance? We study the effects of reducing transport costs in a Ricardian model with complete asset markets and find that this increases the volatility of the trade balance. This result applies regardless of whether supply or demand shocks are the main source of economic fluctuations. Both type of shocks generate fluctuations in the trade balance that are in part moderated by stabilizing movements in the terms of trade. Trade integration dampens these terms of trade movements and, for a given distribution of shocks, amplifies fluctuations in the trade balance. To overturn this result, one must assume that either trade integration is sufficiently biased towards goods with strong comparative advantage and/or risk aversion is sufficiently extreme. We calibrate the model to U.S. data and find that, for reasonable parameter values, increased trade in services could double the volatility of the trade balance.     

Growth,expectations and tariffs

We present a growth model of international trade in which expectations about profitability and growth influence innovation and investment. Adaptive learning dynamics determine transition paths for countries with differing structural parameters. Countries limiting trade by tariffs on imports of capital goods can experience gains in growth and perceived utility for a finite time, whereas the rest of the world is adversely affected. Asymmetric gains persist longer when structural advantages of the country applying tariffs are larger. Substantial differences in levels of innovation, output and utility can appear within our asymmetric country setting.     

Trade policy in a Ricardian model with a continuum of goods under nonhomothetic preferences

We study the effects of trade liberalization in a Ricardian trade model with a continuum of goods and nonhomothetic preferences. Goods are ordered according to priority, and higher-ranked goods are consumed only by richer households. South (North) has a comparative advantage in the lower- (higher-) ranked goods. South's terms-of-trade unambiguously deteriorate as a result of unilaterally reducing its tariffs. North, by contrast, may experience a terms-of-trade gain when liberalizing its trade. It appears that the redistribution of tariff revenue from rich to poor households within each country increases the burden of trade liberalization for poor households.     

International Trade with a Public Intermediate Good and the Gains from Trade*

This paper presents a one‐primary factor, two‐consumer good, and two‐country model of international trade where each country’s government supplies a country‐specific public intermediate good so as to attain efficient production. By introducing the Marshallian adjustment process, it is demonstrated that the country with larger factor endowment exports the good whose productivity is more sensitive to the public intermediate good. Our normative analysis of free trade shows the following results. First, at least one country gains from trade. Secondly, if a country incompletely specializes in the trading equilibrium, the country necessarily loses from trade.     

Per capita income and the extensive margin of bilateral trade

This paper quantitatively explores the role of demand in explaining the positive correlation between an importer's per capita income and the extensive margin of bilateral trade. The theoretical mechanism is based on agents that increase the set of goods they consume with income. This affects the structure of a country's import demand and therewith the extensive margin of trade. We formalize this intuition by incorporating preferences that allow for binding non‐negativity constraints into an otherwise standard Ricardian multi‐country model. We quantify the model and find that the behaviour of the model's extensive margin of trade is consistent with the data.     

Growing through trade in intermediate goods: the role of foreign growth and domestic tariffs

We show that pure Ricardian trade can account for the empirical evidence that domestic growth is more affected by foreign growth than by trade openness. To do this, we develop a two‐country model involving a backward economy that exchanges intermediate goods with a faster growing country. We obtain three main results regarding growth and welfare of the backward economy: (i) the growth‐enhancing comparative advantage is facilitated by faster foreign growth; (ii) the growth rate may be negatively affected or unaffected by a domestic tariff, while it is always positively impacted by foreign growth; and (iii) a domestic tariff could be welfare‐improving.     

Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance

Most macroeconomic models imply that faster income growth tends either to lower a country’s trade balance by raising its imports with little change to its exports or to reduce its terms of trade in order to maintain balanced trade. Krugman (1989 ) proposed a model in which countries grow by producing new varieties of goods. In his model, faster‐growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of US imports from different source countries and finds strong support for Krugman’s model.     

Vertical specialization in North–South trade: Industrial relocation,wage and welfare

This paper presents a North–South trade model with vertically linked industries and examines how declining costs of trade across stages of production encourage vertical specialization and affect wages and welfare. As trade costs fall below a threshold, the production of all final goods relocates to the South and vertical specialization emerges. In some industries, production of intermediate goods also relocates against comparative costs because of benefits of co‐location, and further declines in trade costs lead to reshoring. A country may temporarily lose from falling trade costs, but both countries can be better off after trade costs fall sufficiently.     

Preferences,Country Bias,and International Trade

The paper analyzes international trade in a Ricardian world where consumer preferences exhibit country bias. In particular, consumers differentiate between identical physical goods by country of manufacture. In contrast to the classical Ricardian model, the pattern of international specialization in production depends on the preference structure. Possible equilibrium configurations include ones where both countries specialize incompletely and trade in both commodities, as well as situations where the pattern of specialization and trade is the reverse of that in the classical Ricardian world. Both interindustry and intraindustry trade can occur simultaneously, though there are no market imperfections or scale economies.     

Factor Endowments,Democracy, and Trade Policy Divergence

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector‐specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor, and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land)–abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource–abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.     

International Technology Transfer: Who Gains and Who Loses?*

When one country has a superior technology in all commodities, a Ricardian model with two goods and two countries is used to examine uncompensated transfers of superior technology in one or both goods. A transfer of the superior but second‐best technology always benefits the advanced country because it was improting that good initially and now gets it cheaper. But the free gift of the first‐best technology can also benefit the advanced country if a certain productivity condition is satisfied because that country may now export its former import good at an even better terms of trade.     

A Neo-Heckscher–Ohlin Model of Trade with Endogenous Production Patterns*

We propose a Neo-Heckscher–Ohlin (HO) model of trade that combines comparative endowment advantage, comparative technological advantage, international capital mobility and trade costs. Using an inframarginal approach, we produce a partition of the exogenous parameter space in a host of parameter value subsets that demarcate the various equilibrium patterns of production and trade. The results are startling! They suggest that production within the diversification cone – a key assumption of the Heckscher–Ohlin theory that is required for its core propositions (such as factor price equalisation) to hold – may only prevail on the razor's edge, or under exceptional circumstances. In addition, our findings nominate a mechanism by which improvements in transaction efficiency facilitate international trade thereby stimulating cross-country division of labour. Contrary to other generalisations of the Heckscher–Ohlin (such as the various derivatives of the Kemp–Jones model of trade), our model does not assume a purely Ricardian character: comparative endowment advantage may determine the pattern of trade even in the presence of opposing technological differences, as long as total factor productivity coefficients adjusted for transaction efficiency and factor intensity do not confer unambiguous comparative (technological) advantage. Still, ‘intensity-efficiency’-adjusted comparative technological advantage supersedes factor endowments in determining the flow of trade.     

The gains from trade revisited

This paper revisits the issue of whether countries gain more from trading with countries that are similar to themselves, or with countries that are different. A model based on relative endowment and technological differences across countries is developed. The main result is that a country may experience a region of increasing gains from trade as its trading partner becomes more similar to itself in terms of relative endowments. The model also predicts that for countries with sufficiently similar relative endowments, both factors of production may experience gains from trade.     

Breaks in the chain of comparative advantage

The chain proposition of comparative advantage states that when factor prices differ between two countries producing many products with two factors, every export of the capital abundant country would be more capital intensive than any of its imports. The present note points out that an economy has the option to break the chain to reach full employment if its factor endowment is not spanned by the production cone of the more intensive products.     

Ricardian productivity differences and the gains from trade

This paper evaluates the role of sectoral heterogeneity in determining the gains from trade. We first show analytically that in the presence of sectoral Ricardian comparative advantage, a one-sector sufficient statistic formula that uses total trade volumes as a share of total absorption systematically understates the true gains from trade. Greater relative sectoral productivity differences lead to larger disparities between the gains implied by the one-sector formula and the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries and 19 sectors we show that the multi-sector formula implies on average 30% higher gains from trade than the one-sector formula, and as much as 100% higher gains for some countries. We then set up and estimate a quantitative Ricardian–Heckscher–Ohlin model in which no version of the formula applies exactly, and compare a range of sufficient statistic formulas to the true gains in this model. Confirming the earlier results, formulas that do not take into account the sectoral heterogeneity understate the true gains from trade in the model by as much as two-thirds. The one-sector formulas understate the gains by more in countries with greater dispersion in sectoral productivities.     

Endogenous Imitation and Technology Absorption in a Model of North–South Trade

Abstract

This paper considers the transfer of technology from the North to the South that occurs through trade in high-technology goods and explicitly models the ‘reverse-engineering’ process that allows the South to assimilate new technologies. A key finding of this study is that the South's rate of growth is dictated by the size of the country's human capital, which determines its absorptive capacity and its ability to assimilate knowledge from the North. We find that while a Southern country that is poor in human capital can only imitate, Southern countries that possess sufficiently large human capital endowments, beyond a certain threshold, signal the onset of innovation. We also find that the North enjoys a higher rate of innovation and growth with trade than without. North's gains are the highest when it trades with a human-capital ‘poor’ South, because imitation increases South's demand for Northern intermediates. But trade with the Southern countries that are human capital rich (and therefore involved in innovation), dampens their demand for Northern imports, adversely affecting North's growth. The model predicts growth convergence between the North and a South that is well passed the threshold for innovation.     

TRIPs, trade and growth: When comparative advantages break down

In this paper we combine a model of Ricardian comparative advantages as in Dornbusch et al. (1977) with Grossman and Helpman's (1991) quality ladder model and derive the consequences of asymmetric IPRs protection for the pattern of trade and the world rate of growth through innovation. Our analysis differs from that already made by Taylor (1994) in that final goods and research technologies do not go exactly along together, so the impossibility of doing licensing under asymmetric protection will here bring forth an infringement of comparative advantages which we call “the invasion effect”.