Fixed export cost heterogeneity, trade and welfare

Recent literature on the workhorse model of intra-industry trade has explored heterogeneous cost structures at the firm level. These approaches have proven to add realism and predictive power. This paper presents a new and simple heterogeneous-firms specification. We develop a symmetric two-country intra-industry trade model where firms are of two different marginal cost types and where fixed export costs are heterogeneous across firms. This model traces many of the stylized facts of international trade. However, we find that with heterogeneous fixed export costs there exists a positive bilateral tariff that maximizes national and world welfare.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.     

Household inequality, social welfare, and trade

Working with Sen social welfare functions (meaning explicit separability between mean income and income dispersion), we develop a generalized dual approach to tracking household inequality aspects of social welfare in general equilibrium. We highlight how household equity can be examined analytically alongside production efficiency in duality-based models, using our dual framework to explore potential trade-offs between efficiency and equity effects of trade policy. Our results complement the set of standard inequality results in trade theory focused on functional rather than household inequality. We also find that the relative distributional impact of tariffs on welfare is conditional on the initial level of inequality.     

Globalization, rent protection institutions, and going alone in freeing trade

We construct a two-country North-South Product-cycle model of trade with endogenous growth and trade barriers. We remove the scale effects on growth by incorporating rent protection activities by Northern incumbents. We examine the effects of two forms of globalization - an expansion of the relative size of the South and unilateral trade liberalization by either country. We find that the location of rent protection institutions and the sectoral trade structure determine whether or not globalization raises steady-state economic growth. We demonstrate that for accelerating worldwide economic growth, contrary to conventional wisdom, unilateral Northern trade liberalization is preferable to bilateral trade liberalization.     

Countries, regions and trade: On the welfare impacts of economic integration

We study the impact of falling international trade costs and falling national transport costs on the economic geography of countries involved in an integration process. Each country is formed by two regions between which labor is mobile, whereas there is no international mobility. Goods can be traded both nationally and internationally at positive, but different, costs. A decrease in trade costs and/or in transport costs has a direct impact on prices and wages, which allows us to account for the impact of changes in these parameters on the economic geography and welfare of each country. We show that, as trade barriers fall, the benefits of integration come after its costs. We also show that national transport policies are of the beggar-thy-neighbor type. On both counts, policy coordination is required in the process of economic integration.     

On the welfare effects of trade and investment liberalization

Using a three-factor knowledge- and physical capital model of trade and multinational activity, we consider a set of policy experiments to assess the welfare effects of trade and investment liberalization in general equilibrium. Specifically, we address the question of whether and under which circumstances a single versus a combined trade/investment liberalization strategy or a unilateral versus a bilateral policy change is preferable from a single country's and the world's point of view. The focus of this paper is to look at three relevant questions. First, when is investment liberalization beneficial and when is it harmful for a single economy or the whole world? Second, is pure investment liberalization a welfare maximizing strategy? Third, when is either kind of liberalization (trade, investment, or both) welfare improving and when neither of them?     

International trade, flexible manufacturing, and outsourcing

Abstract .  This study analyzes the impact of opening up markets on the diffusion of flexible manufacturing in a general equilibrium framework. With flexible manufacturing, suppliers can service a range of downstream industries and do not have to be concerned about being held up. Instead, the vertical structure is determined by the trade-off between economies of scale in flexible manufacturing and product specificity of in-house production. The analysis derives a number of testable predictions with regard to firm size and productivity measures and shows that globalization can lead to a consolidation in upstream markets, lower real wages, and reduce welfare.     

On tariff and quality innovation in a market with discrete preferences

In a market for a quality-differentiated good with heterogeneous set of consumers and a local firm facing competitive imports from abroad, we examine private and social incentives for quality innovation. For differential tariff regime, we show that both the private and social gains increase with the tariff protection for the low-quality segment of the domestic market for any given tariff on high-quality imports. But for some very high costs of innovation, the local firm may not undertake a socially desirable innovation. The pro-competitive effect, on the other hand, ensures that quality-distortion-at-the-bottom occurs only for very high levels of tariffs.     

Domestic trade protection in vertically-related markets

We consider trade policy in a setting where home country firms are fully dependent on vertically-integrated foreign firms for supplies of a key input. We find that vertically-integrated firms' strategic considerations play an important role and that, in particular, a tariff on final goods may either increase or decrease the domestic price of final goods. The import of final goods is always taxed to extract and shift rents from foreign firms, while the import of intermediate goods can be either taxed or subsidized. The market structure is shown to be an important consideration when making trade policy.     

Heterogeneity of southern countries and southern intellectual property rights policy

Abstract.  We develop a model with one innovating northern firm and heterogeneous southern firms that compete in a final product market. We assume southern firms differ in their ability to adapt technology and study southern incentives to protect intellectual property rights. We find that, in a non-cooperative equilibrium, governments resist IPR protection, but collectively southern countries benefit from some protection. We show that, in general, countries with more efficient firms prefer higher collective IPR protection than those with less efficient firms. Given the aggregate level of IPR protection, it is more efficient if the more efficient countries have weaker IPR protection.     

Do state trading exporters distort trade?

In this paper, we analyse the trade-distorting effects of state trading enterprises (STEs) which exist in some exporting countries. Because of these potential effects, several countries have raised the issue of state enterprises in the Doha Round negotiations in the WTO. The belief is that STEs in certain developed countries have trade effects which are equivalent to an export subsidy. STEs also exist in developing countries, though since the aim of government policy may differ from the developed country case, the trade distortion may be equivalent to an export tax. We present a theoretical model that is sufficiently general to allow us to consider the case of exporting STEs in developed and developing economies. The model is calibrated with data on two examples of STEs, one typical of an STE in a developed country, the other typical of an STE in a developing economy. In each case, we allow for differences in the nature of the STE's pay-off function. The overall conclusion is that STEs do distort trade and the trade distortion effect is potentially significant.     

International trade, exhaustible-resource abundance and economic growth

Countries with oil and other natural resources have grown less rapidly than those countries without. This phenomenon is known as the “natural resource curse”. We develop an infinite-horizon, two-country model of trade in which countries are identical, except that one country is endowed with deposits of an exhaustible resource and the other is not. Within the context of the model, we show that this phenomenon can be explained in part by an inelastic demand for the exhaustible resource that increases growth in trade revenues and induces the resource-abundant country to invest relatively less than the country lacking in exhaustible resources. These results are derived analytically and illustrated by an empirical analysis based on plausible parameters obtained from data.     

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.     

International status seeking, trade, and growth leadership

Abstract .  We study a two-country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies. International status seeking tends to revert growth differentials in favour of the developing country. Preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. The model predictions are shown to be consistent with the stylized facts that characterized the growth performance of East Asian economies.     

Intellectual property rights, multinational firms and economic growth

This paper develops a model of North-South trade with multinational firms and economic growth in order to analyze formally the effects of stronger intellectual property rights (IPR) protection in developing countries. In the model, Northern firms invent new higher-quality products, multinational firms transfer manufacturing operations to the South and the Southern firms imitate products produced by multinational firms. It is shown that stronger IPR protection in the South (i.e., the adoption and implementation of the TRIPs agreement) leads to a permanent increase in the rate of technology transfer to the South within multinational firms, a permanent increase in R&D employment by Southern affiliates of Northern multinationals, a permanent decrease in the North-South wage gap, and a temporary increase in the Northern innovation rate.     

Location choice under trade and environmental policies

In this paper, we use a game theoretic model to analyze the trade-off between the attractiveness of FDI and the environmental damage caused by production under asymmetric information. In the first stage, the domestic developing country reveals the level of import tariff and pollution tax under information uncertainty about the environmental damage that the foreign firm can cause. The foreign firm from a developed country decides where to locate afterwards with complete information about its own damage. Results show that the developing country can be better off encouraging FDI if and only if the marginal damage of pollution is sufficiently low. The optimal level of pollution taxes attracting FDI is higher than the marginal damage of pollution. However, the optimal pollution tax without FDI can be lower than the marginal damage of pollution with sufficiently high demand in the developing country.     

Policy competition for foreign direct investment between asymmetric countries

The present paper analyses policy competition for foreign direct investment between countries of different size and different market structure. We demonstrate how policy competition affects the location decision of the foreign investor and derive welfare implications. The key variables in our analysis are intra-regional trade costs, differences in market size, and minimum wages.     

Standardization of intermediate goods and international trade

Abstract.  This paper analyzes the relationship between standardization of intermediate inputs and international trade. We employ a two-country, general equilibrium model with differentiated manufacturing goods. Production of manufacturing goods requires specific intermediate inputs, which can be either specialized or standardized. Standardization and the pattern of trade are determined endogenously in our model. In this framework we derive the effects of trade integration, that is, a decline in trading costs for intermediate goods, on the equilibrium outcome.     

Endogenous vertical restraints in international trade

This paper examines interbrand competition between a domestic and a foreign manufacturer who market their products through intermediaries. The contracts manufacturers offer these intermediaries are endogenous. In equilibrium contracts may specify exclusive territories (ET), depending on the degree of substitutability between products and the level and degree of transparency of trade barriers. Trade liberalization, through lower or more transparent barriers, may lead manufacturers to use ET, thereby substituting private anti-competitive arrangements for government-imposed barriers. This substitution may decrease competition and welfare, and thus create a role for competition policy in a freer trade environment.     

Growth, welfare and optimal trade taxes: a fallacy of composition

Optimal export taxation rules out the possibility of immiserizing growth in a two-country world. Thus, productivity increases in the exporting sector must be welfare improving. This paper shows that in a multicountry world such reasoning commits a fallacy of composition. Simultaneous growth of exporting nations can lead to welfare losses in the presence of unilaterally optimal export taxes. Also, optimal export taxes can decline in response to such growth. This result further strengthens the possibility of perverse welfare movements. Thus, standard policy recommendations of increasing productivity in the exporting sector may lead to unintended and self-defeating outcomes.