Reassessing the productivity gains from trade liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country‐industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non‐tariff barriers. Finally, we find suggestive evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.     

International trade and unionization: Evidence from India

We exploit exogenous variation in tariffs to examine the impact of import competition on unionization and union wages in a developing country. Using a combination of nationally representative household data (National Sample Survey Organization) and nationally representative industry‐level data (Annual Survey of Industries) from India, we find that net‐import industries that experienced larger cuts in tariffs also experienced larger declines in unionization. In addition, we find that these industries also experienced larger increases in union wages. These results are consistent with the predictions of an efficient bargaining framework that we extend to endogenize the union formation decision by allowing for a fixed cost of union formation. We also conduct a back‐of‐the‐envelope calculation to show that the total wage gains to unionized workers marginally exceed the total wage losses to deunionized workers.     

Cross‐border Lobbying in Preferential Trading Agreements: Implications for External Tariffs and Welfare

This paper examines the effect of cross‐border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two‐stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent‐seeking activities type. We find that cross‐border lobbying un‐ambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.     

A PROTECTIONIST BIAS IN MAJORITARIAN POLITICS: AN EMPIRICAL INVESTIGATION

Do politics affect trade policy? Despite an extensive literature examining the relationship between trade policy and some political factors, relatively few studies have explored the role of a country's electoral system, arguably one of the most fundamental characteristics of a nation's political landscape. This paper examines the empirical relationship between tariffs and electoral systems across countries and over time. The broad theoretical framework is provided by Grossman and Helpman, which predicts a bias towards a non‐zero average tariff, i.e. a “protectionist bias”, in countries with majoritarian systems, since politicians in a majoritarian system aim to maximize the welfare of their home districts, as opposed to the welfare of the nation as a whole. I compare average tariffs of countries with majoritarian systems to those with proportional systems, using methods that address the omitted variables/sample selection problem inherent to this analysis. I find that countries with majoritarian systems do indeed appear to have higher average tariffs than do countries with proportional systems. This result holds after controlling for other country‐specific characteristics, such as a country's legal origins, colonial history, and geographic location.     

Endowments,Culture and Economic Development

This paper investigates whether the geographic characteristics of a country can explain cross‐country variations in income levels through their ability to explain cross‐country variations in cultural traits that enhance economic development. In other words, this paper attempts to determine whether the geographic endowment can serve as an instrument in examining the effect of culture on economic development. The paper conducts two‐stage least‐squares regressions. The second stage is a regression of the logarithm of real gross domestic product per capita on each of the cultural attributes that are considered in this study. In the first stage, the geographic factors that statistically explain a cultural aspect are used as instrumental variables. The results of the empirical estimation show that the cultural variables, instrumented by the geographic variables, explain cross‐country variations in economic development.     

Trade Liberalization and the Profitability of Mergers: a Global Analysis*

We analyze the effects of bilateral tariff reductions on the profitability of cost‐reducing horizontal mergers. Given Cournot competition in a two‐country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.     

The United States is a Small Country in World Trade*

Despite being the largest country in world trade and thus presumably having high optimal tariffs, the United States has long had low and declining levels of protection. This paradox suggests that the United States is failing to exploit its monopsony power by levying optimal tariffs. Using data on world output and trade flows, we find that the United States is a small country in world trade in that its trade policies have negligible impacts on world prices. In the median manufacturing industry, US tariffs reduce world prices by only 0.12%. United States optimal tariffs are also typically small (3.6% in the median industry) and are lower than existing US tariffs in most industries. It is no puzzle that the United States has been a champion of free trade since the 1930s—the United States, like other small countries, benefits economically from tariff reductions.     

Welfare Effects of Tariff Reduction Formulas

World Trade Organization (WTO) negotiations rely on tariff reduction formulas. Formula approaches are of increasing importance in trade talks, because of the large number of countries involved, the wider dispersion in initial tariffs (e.g. tariff peaks), and gaps between bound and applied tariff rates. This paper presents a two country intra‐industry trade model with heterogeneous firms subject to high and low tariffs. We examine the welfare effects of applying three different tariff reduction formulas discussed in the literature that were used and proposed in previous and current General Agreement on Tariffs and Trade (GATT)/WTO negotiations (1) a proportional cut, (2) the Swiss formula and (3) a tiered formula. No single formula dominates for all conditions. The ranking of the three tools depends on the degree of product differentiation in the industry and the achieved reduction in the average tariff.     

Varying Political Economy Weights of Protection: The Case of Colombia

In this paper, we examine trade policy determinants and trade reform in a developing country setting using a political economy model. The government determines tariffs by balancing the political support from producers vs. consumers, while placing a higher political weight on producers’ welfare relative to average citizens. We then expand the model in several directions to guide our subsequent estimations at the three‐digit industry level for Colombia between 1983 and 1998. We account for import substitution motives for protection but describe how the government's move away from these policies leads to unilateral trade liberalization. We innovatively allow the political weights to vary based on key industry variables beyond a common denominator. The sectors with higher employment, labor cost, and preferential trade agreement (PTA) import shares receive a larger political weight compared to otherwise similar sectors. The novelty of our approach is estimating the effect of sectoral characteristics on protection filtered through the political weights. We obtain more realistic estimates for these weights and provide some evidence for a slowing down effect of PTAs on trade liberalization.     

Market Structure and Foreign Direct Investment

During the last decade the extent of inward foreign direct investment (FDI) in the US has increased dramatically. An important aspect of industries where most FDI takes place is their high level of concentration. This paper investigates how strategic interactions among domestic and foreign producers influence the structure of the industry. Especially, it focuses on the foreign firms' choice between exporting versus servicing these markets by investing in a plant located in the host country when facing competition from a domestic oligopoly. The empirical investigation reveals that the relationship between FDI and tariffs is not as simple as previously thought. In highly concentrated industries, where strategic behavior may play an important role, high tariffs rather than low tariffs may lead to less FDI and more imports.     

Endowments,Specialization, and Policy

The paper explores the relationship between industry shares in production and their determinants including factor endowments, technology, and government policies, in a GDP–function framework. We use a new international panel dataset on production and trade compiled by the World Bank. As an intermediate step we calculate Hicks‐neutral productivity indices that vary across industries, time, and countries. We find that own‐TFP is robustly associated with industry shares across time and countries and that, after correcting for these productivity differences, output shares are related to factor endowments (Rybczynski effects) in a plausible way. Once Rybczynski effects are controlled for, we find little evidence of demand‐side policies (import tariffs) affecting the allocation of resources; we find, however, more role for supply‐side policies as the relative size of capital‐intensive industries is positively associated with infrastructure–capital endowments.     

Tariffs,Offshoring and Unemployment in A Two‐Country Model

This paper develops a two‐country model that incorporates offshoring opportunities, and analyses the effects of tariffs under economic stagnation in a liquidity trap that causes unemployment. We find that a rise in tariffs on imports of outsourced goods contributes to an increase in employment by inducing a shift in production, but also leads to an appreciation of the real exchange rate that tends to reduce employment. The effect of real exchange rate appreciation dominates the effect of the production shift, and accordingly employment and consumption fall. The effects of tariff adjustments are reversed, however, when there is no liquidity trap and hence no unemployment.     

Two Dimensions of Convergence: National and International Wage Adjustment Effects of Cross-border Outsourcing in Europe

The paper proposes a distinction between the two dimensions of convergence—within and between countries—when analyzing the impact of cross‐border outsourcing on real wage rates in the EU‐15 and the CEEC. In the CEEC, international outsourcing has not affected the adjustment of average real wage rates at the manufacturing industry level, but it has led to a closure of the gap within a typical EU economy. Between‐country convergence is likewise fostered by cross‐border outsourcing, supporting the hypothesis that outsourcing facilitates international factor price equalization.     

The effects of cross‐border M&As on the acquirers’ domestic performance: firm‐level evidence

Abstract This paper provides empirical evidence on the effects of cross‐border mergers and acquisitions (M&As) on the acquiring firms’ domestic performance in the U.K. and France. We build a new firm‐level data set that combines a global M&A database with balance sheet data for the years 2000 to 2007. Combining matching techniques with a difference‐in‐differences estimator, we find that cross‐border M&As boost on average acquirers’ domestic sales and investment, and they are not accompanied by a downsizing of the domestic labour force in either country. Further, cross‐border M&As in knowledge‐intensive industries lead to improvements in domestic productivity. Our results display some heterogeneity across industries and types of acquisitions, suggesting a connection between the motives for international M&As and their resulting effects.     

Explaining Export Performance through Inputs: Evidence from Aggregated Cross‐country Firm‐level Data

Which trade barrier related to intermediate inputs forms a greater burden on the export performance of firms in developing countries? Using aggregated cross‐country firm‐level data covering 43 mostly developing economies, this paper estimates the marginal importance of the impact of various intermediate input trade cost barriers, namely tariffs, non‐tariff barriers (NTBs) and services barriers, on firms' export behavior. In a cross‐sectoral setting, this paper takes the firm's export performance in goods as a central focus to study the effects of these different trade barriers through the exporting firm's choice of use of intermediate inputs. The results show that the most significant trade barriers on inputs that impede export performance in developing countries are mainly NTBs and restrictions of services.     

TRAFFIC MANAGEMENT IN WHOLESALE INTERNATIONAL ROAMING: TOWARDS A MORE EFFICIENT MARKET?*

Despite a general trend of lower charges for mobile calls, in Europe, prices for international roaming calls have remained at levels that are surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariff is generating many antitrust concerns. This paper presents in a two‐country two‐firm framework the functioning of the current system governing wholesale international roaming agreements based on interoperator tariffs. The focus is on the role of traffic management; thanks to the emergence of traffic direction techniques, mobile network operators are allowed to select the roaming partner. We show that, unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve the market's efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross‐border cooperation at the wholesale level is Pareto efficient, it will not emerge as an equilibrium of a two‐sided matching game.     

THE MICRO‐DYNAMICS OF CATCH‐UP IN INDONESIAN PAPER MANUFACTURING

In this study we analyze the micro‐dynamics of catch‐up in Indonesian paper manufacturing, using a two‐country plant‐level dataset for the period 1975–97. We apply data envelopment analysis (DEA) to measure to what extent Indonesian paper mills are catching up with Finnish mills in terms of technical efficiency. Three questions are addressed: What is the distribution of Indonesian plant technical efficiency vis‐à‐vis the technological frontier? What is the role of entry, exit, and survival in Indonesia for catch‐up in the paper industry as a whole? In what ways do catching‐up plants in Indonesia differ from non‐catching‐up plants? We find that on average the Indonesian paper industry moved closer to the technological frontier during the 1990s. However, catch‐up has been a highly localized process in which only a few large establishments have achieved near best‐practice performance, while most other plants have stayed behind.     

The Mercantilist Index of Trade Policy*

We introduce an index of trade policy restrictiveness defined as the uniform tariff that maintains the same trade volume as a given tariff/quota structure. Our index overcomes the problems of the trade‐weighted average tariff: It avoids substitution bias, correctly accounts for general equilibrium transfers, and takes import volume instead of welfare as benchmark. Empirical applications to international cross section and time‐series comparisons of trade policy confirm our theoretical results: Trade‐weighted average tariffs generally underestimate the true height of tariffs as measured by the trade‐volume‐equivalent index; this in turn always underestimates the welfare‐equivalent index.     

Persistence of Regional Wage Differences in China

Regional wage differences in China appear to be persistent and even to have grown over the past two decades. We study potential explanations for this phenomenon. After adjusting for the difference in the cost of living across provinces, we find that some of the cross‐province differences in real wages could be related to the quality of labour, industry composition and geographic location of provinces. These factors, taken together, explain approximately half of the cross‐province real wage variation. Interestingly, we find that interprovincial government transfers have not offset regional wage differences during the time period we consider. We also demonstrate that interprovincial migration, while driven in part by levels and changes in wage differences across provinces, did not help offset these differences. These results are consistent with findings in the literature that cross‐province labour mobility in China is still limited.     

Should Smaller Countries Be More Protectionist? The Diversification Motive for Tariffs

This paper examines the diversification motive for tariffs under trade‐related uncertainty when there is incomplete international and domestic risk sharing. In the context of a two‐country Ricardian continuum‐of‐sectors model with shocks to foreign technologies or preferences, tariffs allow a country to mitigate external risk by diversifying across sectors. Given sufficiently high risk and risk aversion, the optimality of tariffs depends primarily on a country's ability to diversify, rather than its market power, such that small countries gain most.