On the trade-diversion effects of free trade agreements

Trade-diversion effects of free trade agreements (FTAs) have not been thoroughly examined empirically. Using a novel empirical approach, we confirm that FTAs divert trade away from non-member countries and even more so from internal trade (domestic sales) in member countries.     

Trade diversion from tomato suspension agreements

Abstract .  Trade barriers can cause output to be diverted to other countries and into other products. We study the effect of a voluntary price restraint (VPR) on Mexican tomatoes entering the United States. The diversion caused by the VPR is statistically and economically significant – representing over four-fifths of the direct effects of the trade barrier. When the VPR was binding, Mexico exported more tomatoes to Canada, the United States cut back on exports while Canada increased their exports to the United States. The VPR also diverted fresh tomatoes in Mexico into paste production, which was then exported to the United States.     

The effects of economic and political integration on fiscal decentralization: evidence from OECD countries

Abstract .  This paper examines the impact of economic and political integration on the vertical government structure. It argues that, by increasing the market size and the benefits of decentralized provision of public goods, integration triggered the recent process of decentralization in OECD countries. A panel analysis relates the degree of fiscal decentralization to economic and European integration, controlling for interregional heterogeneity, economies of scale, and institutions. The results mostly support a decentralizing effect of economic integration in general and of European integration in particular for heterogeneous EU countries, whereas participation of subnational governments in national decision-making is associated with more centralization.     

Current account deficits and sustainability: Evidence from the OECD countries

Whether or not a current account deficit sustainable has important implications for policy. If the current account deficits of a nation is sustainable, then it implies that the government should have no incentive to default on its international debt. In this article we examine whether or not the current account deficits for the OECD countries can be characterized by a unit root process with regime switching. The econometric methodology allows us to distinguish periods that are associated with unsustainable outcomes from those in which the intertemporal national long-run budget constraint (LRBC) holds. Among the main results, it is found that it is very likely that the LRBC will not hold for the Australia, the Czech Republic, Finland, Hungary, New Zealand, Portugal or Spain, thus signifying a red signal that the current account deficits observed during the period were probably not on a sustainable path.     

Trade diversion under selective preferential market access

Abstract .  The European Community (EC) operates a multi-layered GSP scheme in which different groups of developing countries are granted varying degrees of market access. This paper analyzes the question of trade diversion among different categories of beneficiary countries ensuing from the selectivity of preferential market access. Evidence from a disaggregated panel data analysis reveals sizable intra-developing country trade diversion. The losses for relatively disadvantaged countries in terms of forgone trade volume are estimated to range between about 2% to 20% of their total trade with the EC. The distortions are driven by highly substitutable, mostly labour-intensive commodities.     

Trade costs and productivity in services sectors

This paper provides the first evidence linking lower international trade costs with higher productivity in services sectors. On average, lowering trade costs by 10% is associated with a gain in total factor productivity of around 0.5%, which is an effect of similar magnitude to that for goods sectors.     

The monetary transmission mechanism: Evidence from the industries of five OECD countries

This paper studies the monetary transmission mechanism using disaggregated industry data from five industrialized countries. Our goal is to document the cross-industry heterogeneity of monetary policy effects and relate it to industry characteristics suggested by monetary transmission theories. Sizable and significant cross-industry differences in the effects of monetary policy are found. Such differences swamp the hardly detectable cross-country variability. Sectoral output responses to monetary policy shocks are systematically related to the industry output durability, financing requirements, borrowing capacity and firm size. These findings are consistent with a quantitatively non-negligible role of financial frictions in the monetary transmission.     

Trade openness reduces growth volatility when countries are well diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets.     

Trade creating free trade areas and the undermining of multilateralism

This paper indicates that the consequences of regional trade agreements for the world trade system may be deceiving—an arrangement's apparent virtue may constitute the source of its drawback. In a model where governments have political, as well as economic, motivations, I show that a free trade area induces its members to reduce protection against the non-members, and to do so sufficiently deeply to generate overall trade creation. Trade creation amplifies the excluded countries’ access to the integrating markets, but also reduces their extra gains from multilateral liberalization. Thus, trade creation can reverse the support of the excluded countries to liberalization on a multilateral basis. This is more likely to happen when governments outside the free trade area are more responsive to special interests.     

Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform

This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.     

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.     

Selection and network effects—Migration flows into OECD countries 1990-2000

This paper presents empirical evidence on immigration flows into the OECD countries during the period 1990-2000. Our results indicate that network effects are strong, but vary between different groups of welfare states and between countries according to the type of immigration policy being applied. Network effects seem to be less important in the Nordic countries which also seem to attract immigrants from the lowest income level source countries. We do not find clear evidence that selection effects measured by migration flows being sensitive to differences in public social expenditures have had a major influence on the observed migration patterns until now. This may partly be explained by restrictive migration policies which may have dampened the potential selection effects.     

Trade agreements and international comovements: The case of NAFTA (North American Free Trade Agreement)

Business cycles correlation between Mexico and the US changed from being on a downward sloping path before 1992 to an upward sloping path after that. This paper suggests that the North American Free Trade Agreement could be the explanation. NAFTA generated not only an increase in the volume of trade but also a change in the elasticity of substitution between imports and exports. The paper tests this hypothesis using the neoclassical business cycles model. Although there are still some discrepancies between the theory and data in the degree of correlation, the direction of change in the model corresponds to the one in the data.     

Beyond the average effects: The distributional impacts of export promotion programs in developing countries

Do all exporters benefit the same from export promotion programs? Surprisingly, no matter how obvious this question may a priori be when thinking of the effectiveness of these programs, there is virtually no empirical evidence on how they affect export performance in different parts of the distribution of export outcomes. This paper aims at filling this gap in the literature. We assess the distributional impacts of trade promotion activities performing efficient semiparametric quantile treatment effect estimation on assistance, total sales, and highly disaggregated export data for the whole population of Chilean exporters over the 2002-2006 period. We find that these activities have indeed heterogeneous effects over the distribution of export performance, along both the extensive and intensive margins. In particular, smaller firms as measured by their total exports seem to benefit more from export promotion actions.     

Gradualism and dynamic trade adjustment: Revisiting the pro-trade effect of free trade agreements

Do pro-trade effects of free trade agreements reflect timing of policy or dynamic trade adjustment? Only the latter involves dynamic welfare gains. I find that dynamic trade adjustment is as important as the immediate impact effect of free trade agreements.     

Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model

This paper uses a gravity model to assess ex-post regional trade agreements. The model includes 130 countries and is estimated with panel data over the period 1962-1996. The introduction of the correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account the unobservable characteristics of each pairs of trade partner countries, the endogeneity of some of the explanatory variables as well as a potential selection bias. In contrast to previous estimates, results show that regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world.     

Nonlinear effects of government debt on private consumption: Evidence from OECD countries

This paper investigates nonlinear effects of government debt on private consumption. The estimated consumption function shows smooth regime switching depending on the debt-to-GDP ratio, and a higher level of government debt crowds out private consumption to a greater extent.     

Exchanging market access at the outsiders' expense: the case of customs unions

Abstract.  Under a customs union, countries can exchange preferential market access by coordinating external tariffs to shift profits from excluded countries. I show that the exporting rents resulting from this coordination can offset trade diversion losses produced by the union, even if its members are relatively small in world markets. Such gains come, however, at the expense of excluded countries. I show that small countries can use customs unions also to foster multilateral cooperation, by increasing the incentives of excluded countries to support global free trade.     

On the emergence of an MFN club: equal treatment in an unequal world

Abstract .  Motivated by GATT, we endogenize the formation of a club whose members have to abide by the MFN principle of non-discrimination. The underlying model is that of oligopolistic intraindustry trade. While an MFN club does not alter average tariff levels across countries, it increases aggregate world welfare; makes non-members worse off; and can immiserize its high cost members. These results imply that (i) core WTO rules such as MFN are valuable even if multilateral negotiations deliver limited trade liberalization and (ii) the distributional effects of MFN maybe one reason why developing countries have been granted Special and Differential treatment at the WTO.