International Trade as Determined by Income and Income Distribution

Abstract

In standard trade theory, consumption is normally assumed to be homothetic. Consequently, income and its distribution have no role in determining international trade patterns. This paper examines the assumption and its implications. The assumption of homothetic preferences is rejected at the 1% level. It further demonstrates that the Heckscher–Ohlin–Vanek (HOV) model modified by allowing for non-homothetic taste improves the performance of HOV prediction and explains some of the trade puzzles and paradoxes.     

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.     

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.     

Shedding light on the convergence debate: Using luminosity data to investigate economic convergence in Ecuador

The objective of this research is to analyze convergence in incomes per capita in Ecuador over the period 1992–2013. Using the National Oceanic and Atmospheric Administration’s satellite data capturing nighttime luminosity by region to proxy income, we undertake an analysis of economic convergence between provinces and cantons in Ecuador over the period 1992–2013. Traditional regression analysis alongside dynamic distribution analysis is used to verify the existence and determine the nature of convergence among Ecuadorian territories. What is found is that economic convergence across Ecuador’s provinces can be confirmed with a speed of convergence approximating Barro’s iron‐law of 2% per annum. In contrast to the expectations of finding convergence over recent years, the major progress in economic convergence was made over the 1992–2002 period. This was the period with the highest political and economic uncertainty. Investigating convergence in human development indicators such as infant mortality rates suggests that the boom‐financed period of economic prosperity did however coincide with a significant catchup of provinces lagging in human development achievements to leaders in this dimension.     

Revisiting the sectoral Linder hypothesis: Aggregation bias or fixed costs?

This paper reassesses and revisits the Sectoral Linder Hypothesis due to Hallak, which posits that similar tastes for quality lead to more intensive trade between similar countries at the sectoral level. First, the measure of demand similarity used in this paper is based on the distribution of income estimated from household surveys. The paper finds that a similarity measure based on the income distribution produces stronger results than the traditionally used measure based on GDP per capita. Moreover, the country/product level extensive margin is taken into account. This is important because similarity is likely to affect the fixed costs of trade and the fixed costs of alternative means of servicing a market (i.e., licensing and FDI). Fixed costs, in turn, affect the number and average productivity of firms that engage in bilateral trade and hence the overall volume of trade. This paper employs the method by Helpman et al. to control for the extensive margin. Heteroskedasticity is addressed using a feasible generalized least squares (FGLS) approach. The findings show that once controlling for the effect of similarity on the extensive margin, the Linder hypothesis holds at more aggregate levels. Other robustness checks suggest that results are not confined to products that are vertically differentiated.     

Macroeconomic Linkages and Regional Monetary Cooperation: Steps Ahead*

There is a growing appetite for economic cooperation in East Asia. Although the region has forums to facilitate this, economic cooperation has focussed largely on discussion of issues and policies ? cooperative action is confined to functional cooperation in finance. There is scope for further cooperation in strengthening markets and institutions, with a view to accelerating convergence and stability in the region and deepening shared preferences about policy objectives, including on monetary and exchange rate issues. Although monetary policy in East Asia is generally focussed on controlling inflation, differences remain in economic structure and preferences about policy trade‐offs, markets, and institutions.     

Individual Preferences for Trade Partners in Taiwan

This article investigates economic factors and non‐economic factors of individual attitudes toward free‐trade agreements with different countries. Based on the Stolper–Samuelson theorem, highly skilled workers in Taiwan should be more supportive of free trade with China and less supportive of free trade with the United States than should unskilled workers in Taiwan. Using survey data from Taiwan, we find that highly educated people in Taiwan are more supportive of free trade with both the United States and China, and the effects of education are much stronger with respect to free trade with China. We also find that individual risk attitudes, national identity, and ethnicity play important roles in explaining trade preferences.     

Does the Linder effect hold for differentiated agri-food and beverage product trade?

Using a generalized gravity equation, this study tests for the Linder effect in differentiated agri-food product trade, i.e. as the demand structures of two countries become more similar, their trade intensity increases. Two proxies of demand structure, the Balassa index and the absolute value of the difference in per capita Gross Domestic Products (GDPs) of trading partners, are used to capture the Linder effect. In addition, two measures of bilateral trade, the Grubel and Lloyd (GL) index, and the value of bilateral trade are used as the dependent variable. This study investigates the role of the Linder effect in explaining the trade of 37 differentiated agri-food and beverage products categorized into eight product groups: cereals, fresh fish, frozen fish, vegetables, fresh fruit, processed fruit, tea and coffee and alcoholic beverages. The data covers trade across 52 developed and developing countries from 1990 to 2000. The type of proxy used for the Linder effect and the way in which bilateral trade is measured influence the outcome of the statistical tests for the Linder effect. The Linder effect for cereals, frozen fish, vegetables, processed fruits and tea and coffee, using the value of trade as the dependent variable, is often accepted, but it is generally rejected when the GL index is used as the measure of trade intensity. In brief, the results do not provide strong support for the Linder effect in the trade of differentiated agri-food products.     

中国与G-7的双边服务贸易成本的测度与决定因素——基于改进引力模型的应用

对中国双边服务贸易成本的测度和对其决定因素的探寻可以更好地为服务贸易流动提供解释,对中国服务贸易开放有重要的政策启示。笔者基于改进的引力模型,测度了1999年～2007年间中国与G-7的双边服务贸易成本,并利用面板数据对其进行分解,以此寻求影响中国对外服务贸易成本的因素。结果表明:中国与G-7的双边服务贸易成本总体呈下降趋势,并且在加入WTO后有加速的迹象;空间距离与服务贸易壁垒是双边服务贸易成本存在的主因,与贸易国的人均收入之差及共同的海陆边界有助于降低双边服务贸易成本,共同的贸易集团对于两国服务贸易成本的影响并不明显。     

Transfers in the gravity equation

This study integrates development aid into a theoretically founded structural gravity model that considers primary and secondary effects of aid as an income transfer and as a bilateral trade cost determinant. We identify the parameters of our model using a two‐stage approach that includes a state‐of‐the‐art Poisson pseudo‐maximum likelihood gravity estimation for a sample of 132 countries over the period 1995 to 2012. The main findings indicate that bilateral aid only increases bilateral trade for countries that do not have a common language, a past colonial relationship or an RTA. On average, 1 USD of additional foreign aid from all donors increases recipients’ net imports by around 0.36 USD. Our comparative statics indicate that donors experience a reduction in real consumption due to aid and recipients an increase. We also analyze the effect on third countries. The modelling framework also applies to the study of other transfers such as remittances.     

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.     

International Trade and Growth Miracles: the Implications of Nonhomothetic Preferences

If the rate of saving increases with income then a low per capita level of the capital stock may be self‐sustaining. In these circumstances international trade may allow an economy to quickly increase its per capita capital stock in a self‐reinforcing “growth miracle” process. A labor‐abundant economy trading with a capital‐abundant economy will see its wage rate rise relative to autarky. This rise in the wage rate also increases the savings rate and so raises the following period’s per capita capital stock. In this way a low‐income economy may exhibit large and permanent increases in its level of GDP per capita after opening its markets to international trade.     

Estimating the effects of non‐discriminatory trade policies within structural gravity models

We propose a simple method to identify the effects of unilateral and non‐discriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model. Specifically, we argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra‐national trade flows. The use of intra‐national sales allows identification of the effects of non‐discriminatory trade policies such as most favoured nation tariffs, even in the presence of exporter and importer fixed effects. A byproduct of our approach is that it can be used to recover estimates of the trade elasticity, a key parameter for quantitative trade models. We demonstrate the effectiveness of our techniques in the case of most favoured nation tariffs and “time to export” as representative non‐discriminatory determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country‐specific characteristics as well as any non‐trade policies.     

Network effects,homogeneous goods and international currency choice: New evidence on oil markets from an older era

Conventional wisdom has it that network effects are strong in markets for homogenous goods, leading to the dominance of one settlement currency in such markets. The dominance of the US dollar in global oil markets is said to epitomize this phenomenon. We question this presumption with evidence for earlier periods showing that several national currencies have simultaneously played substantial roles in global oil markets. European oil import payments before and after World War II were split between the dollar and non‐dollar currencies, mainly sterling. Differences in use of the dollar across countries were associated with trade linkages with the United States and the size of the importing country. That several national currencies could simultaneously play a role in international oil settlements suggests that a shift from the current dollar‐based system toward a multipolar system in the period ahead is not impossible.     

Trade and Endogenous Formation of Regions in a Developing Country

The authors present a model of regional catching‐up and development without scale effects. Regional growth is driven by technological imitation which is determined by positive externalities from international trade, the regions’ geography, and regional institutions. For the two regions considered, factor endowments are immobile land and human capital which is perfectly mobile between the two regions. Endogenous formation of regions is analyzed by introducing a non‐symmetric decrease in international transaction costs, reflecting the different geography and institutions in the two regions. Using panel data from 354 South African magisterial districts over the period 1996 to 2000, we find that geography is important in explaining trade patterns. As predicted, regions that are larger in terms of economic size, with good foreign market access and know‐how of foreign markets, competitive transport costs and a good local institutional support framework will be more successful in exporting manufactured goods than other regions.     

Market Integration and Economic Development: A Long-run Comparison

How much of China’s recent economic performance can be attributed to market‐oriented reforms introduced in the last two decades? A long‐run perspective may be important for understanding the process of economic development occurring today. This paper compares the integration of rice markets in China today and 270 years ago. In the eighteenth century, transport technology was non‐mechanized, but markets were close to being free. We distinguish local harvest and weather from aggregate sources of price variation in a historical sample and in a similarly constructed contemporary sample. Findings indicate the degree of market integration in the 1720s is a very good predictor of per capita income in the 1990s. Moreover, the current pattern of interregional income in China is strongly linked to persistent geographic factors that were already apparent several centuries ago, well before the enactment of modern reform programs.     

Trade costs,quality and the skill premium

We develop a monopolistic competition model with non‐homothetic factor input bundles where increasing quality requires increasing use of skilled workers. As a result more skill abundant countries export higher quality, higher priced goods. Using a multi‐country dataset, we test and confirm the findings in Schott ( 2004 ) of a positive effect of skill abundance on unit values identified with US data. We extend the core model with per unit trade costs leading to the Washington apples effect that goods shipped over larger distance are of higher quality. The combination of high‐quality goods being relatively skill intensive with the Washington apples effect implies that countries at a larger distance from their trading partners display a higher skill premium. Simulating our model, we find that a doubling of distance of a country relative to all its trading partners raises the skill premium in a country by about 1.6%.     

Rule of law, democracy, openness, and income

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross‐national dataset into two sub‐samples: (i) colonies versus non‐colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub‐samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.     

ASIAN FINANCIAL CRISIS AND KOREAN TRADE DYNAMICS

Since the Asian financial crisis in 1997, Korean international trade has gone up substantially in both volume and trade balances. The improvement is largely due to an expansion of international markets through various bilateral trade agreements and the structural changes in Korean exchange rates. This article investigates the exchange rate–trade balance dynamics, popularly known as the J‐Curve phenomenon. Employing the bounds‐testing approach to cointegration and error‐correction modeling on Korean bilateral trade for the pre‐ and post‐Asian crisis periods, the study finds that support for the strict version of the J‐Curves has been fading after the crisis. While the weaker version of J‐Curve is generally supported in both pre‐ and post‐crisis sample periods, we also notice patterns such as M, N, or W‐Curves. There exists a long‐run relationship among the Korean exchange rates, domestic income, foreign income, and Korean trading balances. (JEL F14, F32)     

The Border Effect and the Nonlinear Relationship between Trade and Distance

The border‐effect literature confirms that sub‐national units tend to trade more with the rest of their country than with foreign markets. However, it is likely that ongoing processes of trade integration will generate a trade‐off between internal and external integration for sub‐national units within countries. In this paper we estimate the internal and external border effect, using a novel dataset that captures intra‐ and international shipments between Spanish regions and regions in eight European countries with alternative treatments of the nonlinear relationship between distance and trade.