The GATT/WTO has promoted trade,but only in capital-intensive commodities!

This article uses gravity models to explore the impact of the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WHO) on bilateral trade in a sample of 46 countries over the period 1965 to 1997. Our data enable us to disaggregate trade by broad commodity aggregates. The results for total trade are similar to those reported by Rose (2004). However, the disaggregated estimates reveal that the GATT/WTO has had a positive and statistically significant impact on trade in capital-intensive commodities, but no statistically significant impact on trade in other commodities. The article demonstrates that simple modifications of Rose's approach lead to results that are much more ‘common sense’ than his (JEL F10, F15).     

Structural Estimation of Variety Gains from Trade Integration in Asia

This article studies the variety gains of trade integration in Asia. Adopting a heterogeneous firm model of trade of monopolistic competition allowed us to estimate not only the welfare gains because of country specialisation, but also the variety gains arising from trade integration. The underlying structural parameters were estimated econometrically, based on a large panel of firm‐level data for the Asian economies (ORIANA). Our empirical findings suggest that, when relaxing the assumption of firm homogeneity and accounting for export market entry costs, the gains from trade integration are higher than in conventional models with representative firms.     

TWENTY‐FIRST‐CENTURY TRADE GOVERNANCE: FINDINGS FROM THE COMMONWEALTH COUNTRIES

This paper focuses on twenty‐first‐century‐trade governance patterns within the Commonwealth (CW) countries. It uses an augmented gravity model to examine the role of governance in influencing trade and investment flows, and whether enhanced trade governance within the CW countries could potentially foster trade gains, on a both intra‐ and extra‐CW basis. Results show a 10% reduction in the costs incurred for a good to exit a country can increase intra‐CW exports by 5%. Second, contract enforcement is more efficient among CW members, and requires 20% less time compared to the world average. Third, every 1 percentage point improvement in government effectiveness triggers an increase in exports from CW, at 3.4%, compared to the rest of the world, at 2.4%. Finally, trade between CW members is three times higher when they belong to an existing regional trade agreement. (JEL F10, 011, F13)     

HOW DOES GLOBALIZATION AFFECT INDUSTRIAL COMPETITIVENESS?

Industrial competitiveness (IC), reflecting a country's ability to produce and export manufactures competitively, is closely associated with economic growth. How does globalization affect IC? While the topic is of great importance, empirical studies on the issue in the literature have been limited. This article attempts to close the gap by estimating the role of foreign direct investment (FDI) and international trade with cross‐country data in 1985 and 1998. Taking advantage of a recently constructed IC index, we estimate several regression models of effects of FDI and trade on industrial performance. Results suggest that FDI and trade have a positive impact on IC, and increasing integration with the world economy through FDI and trade contributes to better industrial performance. (JEL F02, F10, F21, L60)     

NONLINEAR AUTOREGRESSIVE DISTRIBUTED LAG APPROACH AND BILATERAL J‐CURVE: INDIA VERSUS HER TRADING PARTNERS

The J‐curve studies related to India have mostly either used aggregate trade flows of India with the rest of the world or between India and its trading partners. They have all assumed exchange rate changes have symmetric effects on Indian trade balance. In this article, we use partial sum concept combined with the nonlinear autoregressive distributed lag approach of Shin et al. to show that indeed in some instances, there are evidences of asymmetry effects of currency depreciation. This new nonlinear approach provides more support for the J‐curve than the previous linear approaches. (JEL F31)     

A two-methodology comparison study of a spatial gravity model in the context of interregional trade flows

This article argues that the introduction of spatial interactions to model the determinants of origin-destination (OD) flows can potentially result in excessive contiguity. To explain flows between OD regions, it is not only what happens in the origin and destination that is relevant, but also what happens in their neighbouring regions. However, what happens if there is a high degree of overlap between origin neighbouring areas and destination neighbouring areas? The article presents an empirical illustration to re-examine the evidence presented in previous research (Alamá-Sabater et al., 2013) and more closely analyses the territorial level, focusing on the case of interregional trade of goods at the NUTS3 level (Spanish provinces). We then use two different methodologies within the framework of a spatial gravity equation for interregional trade modelling. The findings confirm the importance of spatial dependence on trade flows and in particular that logistics decisions within a province affect shipments from contiguous provinces.     

The Impact of Foreign Direct Investment on Poland's Trade with the European Union

Over 75% of FDI in Poland originates from the EU. The EU also predominates in the exports and imports of FDI companies. The objective of this article is to examine whether FDI is likely to replace trade or to create new trade flows. In particular, the article shows the influence of FDI on Poland's trade with the EU. The FDI impact on Polish trade can be seen as its contribution to export creation. Moreover, externalities caused by trade and FDI inflow are influencing Polish specialisation patterns, which is important in the process of integrating the economy into the world market.     

A calm investigation into Mr Ricardo's principles of international trade

Abstract

This paper deals with some difficulties presented by Ricardo's texts on international trade, taking seriously Ricardo's account of the systematic interaction of real and monetary phenomena. After a brief reassessment of the main features of Ricardo's views on foreign trade, some basic questions are examined, concerning the method of analysis and the alleged invalidity of the labour theory of value at the international level. The enquiry goes on to state that, for Ricardo, there are no significant differences between domestic and international exchanges, and on this basis, proposes a simple and general rule explaining the flows of trade. The “principle of comparative advantage” and the “gains from trade” thus appear as simple unintended consequences of the decisions of agents in free markets. Finally, the characteristics of an international equilibrium and the nature and impact of destabilising shocks are analysed.     

Pecking order and core‐periphery in international trade

This paper analyzes the impact of market size and trade costs on bilateral trade flows. A multi‐country trade model with firm‐level heterogeneity in productivities and countries’ market potential provides a simple micro foundation for the link between these variables. In the model, market size and trade costs jointly determine a country‐specific pecking order of exporters serving their destination countries. In a counterfactual setting where bilateral trade costs are homogeneous across country pairs, market size predicts a common ranking of exporters among destination countries. This leads to a unique core‐periphery structure of the world trade network. With heterogeneous trade costs, we illustrate the impact of market size and trade costs on bilateral trade flows and its margins in a simple gravity‐like setting. Using an instrumental variables approach, we find that both market size and trade costs (measured through the network position of countries) have a significant impact on bilateral exports: countries in the core bilaterally trade more with other countries in the core than with peripheral countries, conditional on typical observables.     

The effect of democracy on different categories of economic freedom

Many empirical studies conclude that democracy increases economic freedom. However, these studies use highly aggregated indices of economic freedom, which eliminates interesting information. The purpose of this paper is to study empirically how in developing countries different categories of economic freedom are affected by democracy, measured either as political rights or civil liberties. Democracy appears to have a positive effect on the economic freedom categories Government Operations and Regulations and Restraints on International Exchange, but no effect on the categories Money and Inflation and Takings and Discriminatory Taxation. That a high level of democracy would have a negative effect on economic freedom reform receives no support in this study. The robustness of the results to the model specification and extreme points is tested.     

Measuring economic freedom: an alternative functional specification and subsequent ranking

ABSTRACT

The widely cited Economic Freedom of the World index is an aggregate measure of economic freedom calculated by using a simple arithmetic mean of scores over five sub-dimensions: (1) size of government, (2) legal structure and security of property rights, (3) access to sound money, (4) freedom to trade internationally and (5) regulation of credit, labour and business. The use of a simple arithmetic mean implicitly assumes that the different sub-dimensions are ‘perfect substitutes’. To explore the implications of this assumption, we compute an aggregate economic freedom score and ordinal ranking of countries, by taking a geometric mean of the five sub-dimensions. For this alternative specification, the marginal impact of each sub-dimension on the aggregate score is no longer independent of the other sub-dimension scores. Consequently, countries with inconsistent levels of economic freedom across sub-dimensions are ‘punished’ to a greater degree than are countries with less variability across sub-dimensions. Our alternative specification results in considerable movement in terms of country rankings. The geometric mean measure does not appear to explain economic growth as well as the arithmetic mean measure.     

Has economic freedom fostered bank performance? Panel evidence from China

The impact of economic freedom on the well-being of the economy has been widely documented. Noticeably absent from the literature is empirical evidence on the impact of economic freedom on the banking sector. This article employs data on the Chinese banking sector and provides for the first time empirical evidence on the impact of economic freedom. We find evidence supporting far greater freedom for entrepreneurs to start businesses. The empirical findings seem to suggest that greater freedom of trade positively influences the performance of banks operating in the Chinese banking sector. However, the impact of the different dimensions of economic freedom is not uniform across Chinese banks with different ownership structures.     

What factors inspire the high entry flow in Taiwan's manufacturing industries–A count entry model approach

Why is the entry flow of the manufacturing sector extremely high in Taiwan, and does it contribute to the prevailing entrepreneurship? This article aims to explore what factors inspire potential entrants to go into an industry. Based on a theoretical formulation of the Poisson probability entry model, a count data model is employed to investigate the determinants of entry flows. The empirical results reveal that traditional entry barriers indeed lower the entry flow. The entry incentives, including price cost margin and industry growth, play a lesser role at attracting new firms, while alternatively the market size acts as a better proxy of an entry incentive in explaining entry flows. Incumbents’ responses to entry, R&;D and advertising intensity are found to be associated with a significant negative impact on entry flows. This article also finds that there is a higher bound of covariate of entry, about 10%, that can be attributed to the immeasurable personality of entrepreneurs–entrepreneurship.

Rather be the chicken's beak than be the cow's behind. 1 ¹?This proverb explains in terms the concept of choosing jobs as how one would like to be a leader of a small firm rather than an employee in a large enterprise.

The trade that might cause life hazard will be dealt, while the trade that might cause a loss will not be dealt.

Two traditional Chinese proverbs     

Redistribution,trade and corruption: an empirical assessment

ABSTRACT

This article explores the role of institutional quality in the trade and inequality nexus. Does corruption shape the relationship between trade and inequality through its impact on redistribution? Our answer to this question builds on the hypothesis that trade raises inequality and that governments may want to intervene through appropriate redistribution schemes that aim at taxing the gains from trade in a way that offsets the negative effects of trade on inequality. Moreover, we argue that this mechanism may be distorted by corruption and bad institutions in general. Quite to the contrary to common wisdom, we find that trade reduces inequality in countries with high institutional standards by means of a low level of corruption but increases inequality in countries with low levels of institutional quality.     

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.     

TRADE,STRUCTURAL REFORM,AND INSTITUTIONS IN SUB‐SAHARAN AFRICA

Sub‐Saharan African countries have traditionally lagged the rest of the developing world in terms of overall trade relative to gross domestic product. But, there is growing interest among these countries to initiate trade policies and improve quality of institutions as a way to promote trade and boost foreign direct investment. This article extends the gravity model of trade to include proxies for trade reform policy and institutional quality among the 15 countries of the Economic Community of West African States (ECOWAS) for data spanning 1984–2006. Alternative methods of estimation based on ordinary least squares, Heckman two‐step procedure, and Poisson pseudo‐maximum likelihood produce predictions that are consistent with the standard gravity model. They further highlight the evidence of restrictive trade policies and weak institutions that contribute to the failure of ECOWAS countries to boost bilateral trade. (JEL F13, F15, O19, O55)     

Impact of regional interactions on China’s trade performance: evidence from a spatial econometric approach

ABSTRACT

In this paper, we examine the impact of regional interactions on China’s trade performance as supported by infrastructure development, using exports and imports of Chinese-owned and foreign-owned firms disaggregated for 28 provinces. Taking into account the disparities in the regional economic activities, we use five spatial weight matrices in a spatial panel lag and spatial panel error frameworks in the period 1996–2016. The spherical distance and the gasoline usage weight matrices measure the impact of ground connections on China’s trade flows. The nautical miles and the river distance weight matrices measure the impact of maritime and river connections on trade flows for provinces along the sea coast, in the Yangtze valley, and along Zhu river, respectively. We find significant cross border effects on provincial trade flows. The effects vary between areas and firms. Overall, our findings show positive influence of regional interactions on China’s international trade performance.     

Making Sense of the Comparative Advantage Gains from Trade: Comment on Batra

This paper addresses Ravi Batra’s (2002 ) criticism of the basic comparative advantage gains‐from‐trade model. While Batra’s criticism is based on the selection view interpretation of real income, the gains from trade can only be properly understood from the options view interpretation of real income. I also show how a recent empirical implementation of the gains‐from‐trade model defies Batra’s claim that “the consumption gain . . . is not subject to measurement” (2002, p. 642).     

Does trade liberalization and its associated increased economic activity affect permanently the value and pattern of trade flows?

Despite a number of multi-country case studies based on a variety of analytical frameworks and numerous econometric studies using large cross-country data sets that analyse trade openness and its induced economic activities that alters both the volume and value of trade flows, there is still disagreement among economists concerning the nature of this relationship. In this article, we follow a rather unique approach by estimating the density functions of the observed trade flows and the density functions of trade flows generated by tariff removal using an intertemporal global Computable General Equilibrium (CGE) model. Our inquiry is whether or not the trade flows generated by global tariff elimination impact economies in the long-run and alter their historical underlying distributions. If the latter case prevails, it implies that the economies follow a different transitional path into a new steady-state equilibrium. The density functions, estimated parameters and higher moments of the observed trade flow distributions are distinctly different from the parameter estimates of the trade flows generated by the model. In this sense, trade-inducing economic activity as generated by tariff removal and captured by the neoclassical specification of the model is associated with trade flows along a different transitional path from the observed trade flows.     

Does Implied Volatility Pricing Follow the Tenets of Prospect Theory?

Abstract

Prospect theory and behavioral finance are gaining recognition as useful frameworks for the analysis of economic behaviors. Yet, behavioral finance is generally concerned with specific anomalies and individual behaviors and does not deal with market indices. To bridge this gap, the authors studied the changes in the value of implied volatility indices on several markets, relative to changes in the level of the corresponding equity indices with dividends reinvestment. We hypothesized that the relation should follow the psychological tenets of prospect theory. In accordance with this hypothesis, the authors found concavity in the gain area, convexity in the loss area, and evidence that market losses have more impact than gains on the pricing of implied volatility indices. These findings are observed in all the markets under consideration and are robust to the use of different functional forms. The parameters are in the range observed in previous laboratory studies but vary in different trading environments.