Country asymmetry,trade agreements,and transfers

Using a standard 2 × 2 trade agreement model, I show that the welfare effects of a free trade agreement (FTA) depend on the asymmetry on supply and demand functions. When countries are sufficiently asymmetric with respect to the size or the demand functions, the small country tends to be better off, while the large country is worse off. Thus, the small country must compensate the large country for the FTA to be incentive‐compatible. However, in the presence of sufficient asymmetry in the supply functions, the small country is worse off, while the bigger is better off. In this case, the transfer must flow from the large to the small country. This last finding helps explain why some FTAs between rich and poor countries provide for adjustment transfers to the latter.     

Beyond trade creation: Preferential trade agreements and trade disputes

This study investigates the effects of preferential trade agreements (PTA) on bilateral trade disputes. We construct a unique and comprehensive dataset on inter-country trade disputes from 1995 to 2007. The dataset covers 110 countries and 1,162 bilateral country-pair trade disputes. Using this dataset in a gravity-type model of trade dispute analysis, we find that countries belonging to the same PTA tend to experience fewer trade conflicts among themselves than with non-member countries. By studying various types of PTA with different dispute settlement mechanisms, we further find that the dispute-reducing effect only comes from PTA with specific provisions on dispute settlement mechanisms. Moreover, the effect is stronger if those PTA explicitly stipulate that members can also resolve their disputes via the WTO Dispute Settlement Body. However, having PTA that do not address how members should resolve their disputes may lead to more dispute initiations than in cases without PTA.     

International supply chains and trade agreements

There is a growing literature that examines the role of trade agreements on the formation of international supply chains. The evidence indicates that in general countries that share trade agreements are more likely to develope cross-border supply chains. In this analysis, we argue that in order to examine the effects of trade agreements on the formation of supply chains between two countries, it is not enough to analyse the impact of the trade agreements that the two countries share but it is also important to assess the impact of the trade agreements that they share with third countries. Using data on trade in value added for 129 countries, we show empirically that about 40% of the potential increase in trade in value added induced by a trade agreement between an importing country and a sourcing partner is wiped out by each additional trade agreement signed by the importing country with third nations in which the sourcing partner is not a member. The result has important implications for regions seeking to develop international supply chains but in which the process of integration is highly fragmented.     

Size inequality,coordination externalities and international trade agreements

Developing countries now account for a significant fraction of world trade and two-thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation – such as the WTO – but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.     

International trade agreements, environmental policy, and relocation of production

This paper studies the influence of free trade agreements on national environmental policies and location strategies of polluting firms. It is shown that banning export subsidies makes relocation of production more attractive for firms. When export subsidies are banned relocation is profitable because: (1) the rival firm reduces output due to more stringent emission regulation in the host country of the investment and (2) relocation leads to lower emission tax rate in the original home country of the investing firm. When export subsidies are used, the first effect is absent because the host government is able to use the export subsidy to compensate the negative effect of more stringent emission taxation on domestic shareholders.     

Paths of efficient self-enforcing trade agreements

This paper characterizes the efficient payoff frontier in a three country model where countries face one time adjustment costs of forming trade agreements, and compares it with the constrained efficient frontier when agreements must be self-enforcing. The presence of self-enforcement constraints puts a limit on the magnitude of transfers that can be made between countries, and makes it more likely that bilateral agreements are observed on the constrained efficient frontier. The existence of adjustment costs leads to the possibility that payoffs under a two step agreement, in which an initial bilateral agreement is expanded to include the third country, may Pareto dominate the payoffs from immediate formation of an agreement among all three countries. However, the condition that a two step agreement be efficient in the absence of self-enforcing constraints is neither necessary nor sufficient for the gradual approach to have a lower minimum discount factor. This paper was prepared for the conference “New Directions in International Trade Theory” held at the University of Nottingham. I thank Andres Rodriguez-Clare, Rod Falvey, conference participants, and anonymous referees for helpful comments on an earlier draft.     

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.     

Forest sustainability and trade policies

Many analyses of trade and environment have concluded that trade liberalization is Pareto improvement with Pigovian tax systems even when production and consumption processes bring non-market externalities. But in case of global forest issue there are many accusations that the trade liberalization of forest products has caused the degradation of forest sustainability. In this paper we try to explain the gap between the theory and the real situation from theoretical point of view. We will analyze comprehensively about free trade and forest sustainability by partial and general equilibrium analyses. Pigovian systems work well under the assumption of complete substitutivity of consumption between external effects and marketable commodities. If it were not satisfied, it is inevitable to levy import tariff or to take some domestic price support systems to guide the production point into sustainable forests.     

Heterogeneous trade agreements,WTO membership and international trade: an analysis using matching econometrics

This article explores the heterogeneous effects of trade agreements (TAs) and World Trade Organization (WTO) membership on the volume of international trade. We extend Baier and Bergstrand’s (2009a) application of matching econometrics by distinguishing between different types of TAs and WTO participation and account for the endogenous nature of trade policy. For a panel data set covering 1960–2005 and 187 countries, we find that the treatment effect on international trade systematically varies with the type of TA and WTO membership.     

Managed trade: The US–Mexico sugar suspension agreements

Under the 1994 North American Free Trade Agreement, Mexican sugar producers were ultimately granted free access to the US sugar market, while all other suppliers, including US refiners, were subject to supply quotas. Following a surge in imports of Mexican sugar, the American Sugar Coalition initiated anti‐dumping and countervailing duty (ADCVD) proceedings against Mexico in early 2014. In December 2014, the ADCVD cases were halted as a result of two suspension agreements negotiated between the US and Mexico. This paper contributes to a small number of empirical studies that have estimated the impact of suspension agreements. We measure the impacts of the ADCVD filings and the suspension agreements on US domestic raw and refined prices, the raw‐to‐refined margin and the quantity and composition of sugar imports from Mexico. Results suggest US raw sugar prices increased by 3¢ per lb. (14%) under ADCVD proceedings, equivalent to an ad valorem tariff between 40% and 50%, while the suspension agreements increased US raw sugar prices by 5¢ (70% tariff equivalent). US refined sugar prices increased by similar amounts under the ADCVD proceedings and the suspension agreements (4.5¢ per lb.). Ultimately, both the ADCVD proceedings and the suspension agreements significantly reduced sugar imports from Mexico. US sugar refiner economic welfare hinges critically on the quantity and composition of raw sugar imports. As such, refiner revenue, following the ADCVD filings and suspension agreements, is estimated to have declined by 16%, relative to a free trade environment.     

Exports,jobs, growth! Congressional hearings on US trade agreements

Who testifies on US trade agreements before Congress and what do they say? We examine the content of Congressional testimony on US trade agreements, and the selection process which determines who testifies in the first place. We find that testimony is systematically tilted toward a sunny view of trade's positive economic effects, while import competition and offshoring are generally downplayed. We argue that trade's supporters strategically frame their motives for supporting trade agreements, and that pro‐trade committee chairs’ decisions on who testifies further skew testimony away from the distributive consequences of globalization within the United States. Congressional hearings on trade agreements therefore represent a key site where the influence of dominant pro‐trade interests is both revealed and reinforced.     

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.     

Skill distribution and income disparity in a North‐South trade model

Abstract. What are the impacts of free trade agreement on the welfare of different types of workers in a developed country? What is the impact of free trade on a developed country's income disparity? What is the effect of free trade on the skill distribution of a developed country? The objective of this paper is to address the above questions in a two‐sector general‐equilibrium North‐South trade model in which both countries produce one final good and one high‐tech intermediate input. The final good is produced with the use of a high‐tech intermediate input and unskilled workers. Horizontally differentiated skilled workers produce the high‐tech intermediate input. Each country is populated by a continuum of unskilled workers with differential potential ability. Workers in the North and South can acquire skills by investment in training or education. Thus, skill distribution in the North and South is determined endogenously in the model through a self‐selection process. I characterize two different types of equilibria: a closed‐economy equilibrium without trade and a free trade equilibrium. Then, I investigate the impact of free trade, in the presence of training costs, on the skill distribution within each country, income disparity, and social welfare. JEL classification: D63, F10, J31     

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.     

International trade and the negotiability of global climate change agreements

This paper examines the incentives for individual countries to engage in global negotiations to reduce carbon emissions in order to prevent global warming. To reduce carbon emissions a country reduces consumption of its own good. The direct effect of reducing its own consumption is that consumption declines and with it utility. However, reducing carbon emissions also lowers global temperatures and that increases utility. The trade-off between these two effects determines the incentive for countries to reduce carbon emissions. We find that larger countries are more likely to participate because a given percentage reduction in output will result in a larger reduction in global temperatures. Longer time horizons also lead to greater willingness to participate. The presence of international trade makes carbon reduction agreements more likely because reducing the output of your own (export) good has a positive terms of trade effect which reduces the cost of output reduction.     

Trade,conflict, and political integration: Explaining the heterogeneity of regional trade agreements

Many historians argue that the main goal of European trade integration was the preservation of peace. This paper investigates whether this reasoning is relevant for the EU and other regional trade agreements (RTAs). I provide empirical evidence that customs unions and common markets (deep RTAs) do reduce the probability of war between members. Partial scope and free trade agreements (shallow RTAs) however have no effect on war probabilities. Accordingly, international insecurity has a differential impact on incentives to create RTAs. Deep RTAs are signed between countries that are involved in many interstate disputes and that have low trade costs with the rest of the world, whereas the opposite is true for shallow RTAs.     

The strategy of trade sanctions in international environmental agreements

This paper analyzes the links between policies aimed at supplying a global public good and international trade in segmented markets. I find that the credible threat to impose trade sanctions may be capable of sustaining full cooperation in the supply of the public good, provided the sanctions are accompanied by a minimum participation clause which serves to coordinate government behavior. In equilibrium, trade is not restricted. But if the threat to impose sanctions were not allowed by the rules of the game, supply of the public good would be Pareto-inefficient.     

The impact of trade agreements on world export prices

This paper uncovers new stylized facts on the relation between economic integration and world trade prices. Using free on board export price data for the universe of manufacturing products, we show that a country's membership in the WTO (World Trade Organization) or in a PTA (Preferential Trade Agreement) is associated with an increase in export prices of differentiated goods. For the WTO, this effect is captured by the countries that were subject to rigorous WTO accession procedures. We also exploit the importance of the depth of a PTA and of its different provisions. Whereas the effect of the depth per se is not significant, individual provisions evoke distinct effects on prices. In particular, we find that PTAs with provisions on investments are associated with higher export prices. The results are consistent with theoretical models that relate competition to the innovation behavior of firms.     

Sign here,please! On developing countries’ market access conditions in regional trade agreements

Have regional trade agreements (RTAs) improved market access conditions for developing countries? Employing a measure expressing effective tariff margins and using disaggregated panel data for a sample of 45 developing country exporters, 60 export destinations, and the period between 1991 and 2015, it is shown that this question can generally be answered in the affirmative. Although the effect is estimated to be moderate, RTAs might thus be an important long‐run building block in the United Nations 2030 Agenda for Sustainable Development in order to increase developing countries’ participation in world trade. On closer inspection, however, for the countries included in the sample, there is considerable variation depending on the choice of integration partners and economic sectors. More specifically, market access improvements cannot be found for African economies in South–South agreements and developing countries engaging formally with the European Free Trade Association (EFTA) or the Republic of Korea, while leading industrialized nations are reluctant to grant improved market access to developing countries in RTAs especially in capital‐intensive (high‐productivity) manufacturing sectors.     

Moving to autarky,trade creation and home market effect: an exhaustive analysis of regional trade agreements in Africa

This article analyses the effects of Regional Trade Agreements (RTAs) on bilateral trade in Africa. A structural gravity equation is estimated over the period 1955–2014. The overall effect of RTAs on African trade is strong, but depending on the nature of the RTAs, there is a decreasing impact over time. While Economic Integration Agreements (EIAs) still favour trade in Africa, there was no trade creation coming from Free Trade Agreements between 1990 and 2014. However, the provisions of RTAs do not have a negative impact on trade: agreements that include behind-the-border policies do not significantly deter bilateral trade. To explain the declining impact of RTAs, we look at their redistributive impact between members states. There is no evidence that large countries disproportionally export diversified goods due to RTAs (no ‘home effect’). Countries with a good international network (‘hub effect’) benefited more than other countries of RTAs between 1955 and 1990 but this is however less true on the most recent period (1990–2014).