International Trade

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Michigan 2
Hosted By: American Economic Association
  • Chair: Anson Soderbery, Purdue University

Endogenous Politics and the Design of Trade Institutions

Kristy Buzard
,
Syracuse University

Abstract

Political pressure is undoubtedly an important influence in the formulation of trade agreements and the institutions that govern them. Much of the literature that speaks to the design of trade policy institutions takes the political pressure that governments face as resulting from an exogenous, stochastic process. This paper shows that when political pressure arises endogenously, important results may be overturned and new insights into the motivation for features of the trade agreements we observe and rules of organizations such as the WTO come to light. Developing a model that integrates both exogenous and endogenous political pressure and taking a general approach to the government objective function, I show that governments may want to use tariff caps both to force special interest groups to continue lobbying after a trade agreement is signed and to reduce the magnitude of that lobbying effort. The presence of endogenous politics can also destroy the ability of an escape clause as traditionally defined in the literature to provide flexibility in times of large negative political shocks when lobbies use the flexibility to seek rents. This can explain why the use of WTO Safeguards are conditioned on measurable economic indicators.

Technological Spillovers and Dynamics of Comparative Advantage

Yury Yatsynovich
,
Rensselaer Polytechnic Institute

Abstract

This paper builds a dynamic model of international trade in the presence of cross-sector technological spillovers. It investigates the impact of spillovers on uniqueness and multiplicity of balanced growth paths (BGP) and describes the forces that govern the dynamics of sector productivity and comparative advantage. Under isolated clusters of sectors there exists a continuum of BGPs. In this case the number of newly generated technologies inside each cluster is proportional to the amount of labor allocated to the cluster. This allows larger clusters to generate proportionally more technologies and grow at the same rate as smaller ones. As a result, the initial relative productivity and comparative advantage of clusters are preserved and the balanced growth path depends on the initial productivities of sectors. Under weak connectedness of clusters (each cluster sends or receives technologies from other clusters) technologies that are generated by larger clusters spills to smaller ones and allow the latter to grow faster. As a consequence, less productive sectors are catching up and the comparative advantage of the initially large sectors diminishes. In this case the BGP is unique, characterized by the absence of comparative advantage and has zero inter-sectoral trade flows. The paper describes conditions under which the welfare-improving industrial policy is possible. It requires the presence of inter-sector spillovers. Under only intra-sector spillovers the economy is isomorphic to the one with equalized Marshallian externalities across sectors and no re- allocation of labor can improve its welfare. The strength of cross-sector technological spillovers is quantified using the US patent data. The calibrated model is used for computing the welfare maximizing policy. As the model shows, the optimal policy can increase the economy-wide productivity by 3.5% comparing to the no-policy case.

The Role of the Most Favored Nation Principle of the GATT/WTO in the New Trade Model

Wisarut Suwanprasert
,
Vanderbilt University

Abstract

I study the impact of the Most Favored Nation (MFN) principle of the GATT/WTO on the characterization of Pareto-improving bilateral trade agreements. The paper offers four main predictions. First, bilateral trade agreements improve the welfare of negotiating countries and leave the welfare of the outside country unchanged only if they include third-country tariff adjustments. Second, the MFN principle guarantees that a bilateral trade agreement always improves the welfare of the outside country and potentially causes a free-rider problem. Third, the MFN principle can prevent possible Pareto-improving trade agreements if initial tariffs are generally low or the elasticity of substitution is sufficiently low. The MFN principle has been effective in the past, but it may prevent further tariff negotiations. Lastly, free trade agreements (FTAs) could be more desirable than bilateral trade agreements under the MFN principle. I quantify the firm-delocation effects and welfare effects in three counterfactual situations: a bilateral trade agreement without third-country tariff adjustments, a bilateral trade agreement under the MFN principle, and a global free-trade economy. The quantitative results support the model predictions.

Entrepreneurial Risk and Diversification through Trade

Federico Esposito
,
Yale University

Abstract

Firms face considerable uncertainty about consumers' demand, arising from the existence of random shocks. In presence of incomplete financial markets or liquidity constraints, entrepreneurs may not be able to perfectly insure against unexpected demand fluctuations. The key insight of my paper is that firms can reduce demand risk through geographical diversification. I first develop a general equilibrium trade model with monopolistic competition, characterized by stochastic demand and risk-averse entrepreneurs, who exploit the imperfect correlation of demand across countries to lower the variance of their total sales, in the spirit of modern portfolio analysis. The model predicts that both entry and trade flows to a market are affected by its risk-return profile. Moreover, welfare gains from trade can be significantly higher than the gains predicted by standard models which neglect firm level risk. After a trade liberalization, risk-averse firms boost exports to countries that offer better diversification benefits. Hence, in these markets foreign competition becomes stronger, increasing average productivity and lowering the price level more. Therefore, countries with better risk-return profiles gain more from international trade. I then look at the data using Portuguese firm-level trade flows from 1995 to 2005 and provide evidence that exporters behave in a way consistent with my model's predictions. Finally, I estimate the parameters of the model with the Simulated Method of Moments to perform a number of counterfactual exercises. The main policy counterfactual reveals that, for the median country, the risk diversification channel increases welfare gains from trade by 15% relative to models with risk neutrality.

Managing Export Complexity: The Role of Service Outsourcing

Giuseppe Berlingieri
,
ESSEC Business School, OECD, and CEP

Abstract

This study investigates the determinants of service outsourcing, and professional and business services in particular, an industry that accounts for half of the growth of the total service sector. Drawing on the insights of a model of the boundary of the firm based on adaptation costs and diminishing return to management, I argue that an increase in coordination complexity (i.e. more inputs in the production process) leads firms to outsource a higher share of their total costs and to focus on their core competences. Since country-specific service inputs are needed to export to a particular country (e.g. a specific advertisement campaign), I proxy coordination complexity with the number of export destination markets and I find support for the theory using an extensive dataset of French firms. Over time, firms that export to more countries increase the amount of purchased business services. The finding is quantitatively very significant and robust to firm size, export intensity, internal production, and many other determinants of outsourcing proposed in the literature. The firm-level evidence also contributes to opening the black box of fixed export costs and to establishing a new causal link between globalization and structural transformation exploiting exogenous demand shifters.
JEL Classifications
  • F1 - Trade