Topics in International Trade
Lightning Round SessionMonday, Jan. 5, 2026 8:00 AM - 10:00 AM (EST)
- Chair: Carlos Zurita, North Dakota State University
How Government Procurement affects Trade: Evidence from the U.S.
Abstract
Government procurement is a major fiscal instrument, yet its implications for international trade remain poorly understood. Using granular U.S. Department of Defense contract data from 2000–2024, I provide the first industry-level evidence on how government spending shapes trade flows. Estimating panel local projections across 375 industries, I find that defense spending induces modest but persistent increases in imports, accumulating to roughly 29% of initial spending over two years, while exports respond minimally. These effects are concentrated in industries that are defense-intensive and globally integrated, suggesting that transmission operates through supply-chain linkages within the defense industrial base. A network decomposition further shows that upstream procurement shocks generate import responses comparable to direct effects, whereas downstream procurement shocks crowd out exports at longer horizons. These findings highlight that defense spending, while predominantly domestic in nature, generates sizable fiscal leakage through international trade channels.US Multinational Companies’ Productivity Growth and the Current Account
Abstract
This paper re-evaluates the US external deficit which has considerably widened during the 1990s. US safe asset provision to the rest of the world is the dominant explanation for the persistent nature of the US external deficit. We suggest that apart from the safe asset hypothesis, there is an important role for technology shocks originating in US multinational companies that have a strong foreign direct investment presence. It is shown that technology shocks that increase the market value of FDI assets are loosening the sustainability constraint on the trade balance and therefore generate persistent trade balance deficits. Our analysis suggests that this channel can explain why the US tech-boom in the 1990s has contributed significantly to the increase of the US trade balance and its duration. Technology shocks have been neglected as a reason for longer lasting trade balance deficits since for these shocks, standard open economy models can only generate temporary trade deficits. We show that our enhanced model – covering both trade and FDI – not only matches well the dynamics of the US external balance but can also account for the observed evolution of FDI related components of the external balance. In particular, US technology shocks can match the increase in net FDI income and a rising FDI capital balance. Our analysis suggests that FDI flows and their determinants should play a more important role in monitoring external imbalances by international organizations.Liberalizing Internal Trade
Abstract
As geopolitical tensions reshape global trade, many economies are turning inward to strengthen domestic integration. This paper focuses on Canada, a large economy with considerable untapped domestic trade potential. We seek to quantify Canada's internal trade barriers and evaluate the gains from eliminating them. Using a multi-sector trade model, we show that removing these barriers could boost per capita GDP by 6.8% and raise employment, with particularly strong effects in service sectors and smaller provinces. Given rising uncertainties in global trade, harmonizing provincial regulations and reducing internal trade costs offer significant productivity gains.Shaking the Ground: The Effect of Natural Disasters on Shaping FDI within the United States
Abstract
This research investigates the impact of natural disasters on foreign direct investment (FDI) in the United States, with a focus on county-level variations and sector-specific effects. While previous studies have explored the broader relationship between FDI and natural disasters at the national level, this study provides a fine-grained geospatial analysis within the U.S., using data from the Agricultural Foreign Investment Disclosure Act (AFIDA) and the Spatial Hazard Events and Losses Database for the United States (SHELDUS). By examining the influence of disasters on FDI in agriculture, a sector uniquely vulnerable to environmental shocks, this study aims to identify the heterogeneous effects of disasters compared to non-agricultural sectors. Employing a difference-in-difference fixed effects model, the research assesses how the frequency and severity of natural disasters shape foreign investment patterns. The findings will contribute to a more nuanced understanding of FDI determinants, offering critical insights for policymakers and investors seeking to mitigate risks in a disaster-prone world.Firm Trade Exposure, Labor Market Competition, and the Worker Incidence of Trade Shocks
Abstract
We merge LEHD job match records with firm-level import and export records from the LFTTD and use them to estimate a large-scale assignment model of the entire U.S. labor market. The model flexibly accommodates frictions from switching regions, industries, trade engagement status, and even particular employers. We construct firm-level estimates of the employment impact of China's WTO entry using exogenous tariff gap variation via four different channels, import and export competition and import and export access, and combine them with the model to evaluate the shock's worker-level incidence.Our results show that the firm composition of shock exposure does matter for medium-run worker-level earnings incidence, with workers at the highly exposed multinational manufacturing firms experiencing the largest shock-induced earnings losses. However, labor market competition causes the shock's impact to spread to seemingly unaffected sectors and trickle down the skill ladder, so that entry-level non-traded service workers and initially unemployed job-seekers account for a large share of earnings losses and particularly unemployment increases.
Drug War and Cross-Border Trade: The Case of U.S.-Mexican Border
Abstract
The border between Mexico and the US has been a topic of discussion in various domains. Mexico is known to export, among other products, electric machinery, automobiles, and nuclear reactors while importing, on the other side, plastics as well as medical instruments from the US. However, violence and drug trafficking pose challenges to the trade. Mexican drug lords control the US drug market and transport drugs using several routes from southern Mexico to the US–Mexico border. In 2006, President Felipe Calderon waged an aggressive war against drug trafficking that included military interventions in northern Mexico where cartel violence was rampant.Previous studies have investigated the consequences of this war on violence, worker migration, and firms’ exports, but there has not been a hypothesis formulated regarding its impact on trade at the US-Mexico border. This paper attempts to fill that gap by analyzing the impact of the war on drugs on trade through the Mexico-U.S. border. Using data on exports and imports from the U.S. Census Bureau (January 2003–September 2008), we analyze how cross-border trade was impacted from the U.S.
Using a Bayesian structural time-series model, we find that exports at border ports increased beyond counterfactual expectations, while imports declined. A key mechanism driving these results is the cost of trading. Cartel-related violence imposes hidden costs affecting firms’ ability to trade. Increased security from military interventions may have reduced these costs, facilitating exports and simultaneously hindered imports. Our findings highlight the broader economic implications of anti-drug policies. By analyzing the intersection of security and trade, this study contributes to the literature on the economic effects of the war on drugs and offers valuable insights for policymakers.
The Great Decline of China's FDI and Its Policy Response
Abstract
Recent uncertainties, including the Covid-19 pandemic, have exposed vulnerabilities in a global supply chain long optimized for efficiency. As countries seek to reduce reliance on any single supplier—particularly China—foreign direct investment (FDI) in the country has declined sharply. In this study, we examine China’s major policy instrument for attracting FDI—the Encouraged Industry Catalogue for Foreign Investment—and assess its effectiveness in promoting inward FDI. To do so, we construct a unique dataset that links FDI project data aggregated at the industry level with industry labels manually mapped to the text of China’s FDI policies. Exploiting the fact that two versions of the Encouraged Catalogue were released between 2020 and 2024—with several industries included for the first time in the second version—we estimate the impact of these first-time inclusions using a difference-in-differences approach. We find that, compared to industries never included in any version of the catalogue, those newly included received, on average, 40% more investment post-inclusion. However, event study results indicate that this increase is short-lived. We argue that waning domestic demand amid weakening property market risks impeding investments. Importantly, our findings remain robust after accounting for foreign protectionist measures targeting Chinese industries and subnational policies targeting specific sectors.Exchange Rate Disconnect in General Equilibrium: the Role of Trade Shocks
Abstract
Standard macro models fail to explain why real exchange rates are volatile and disconnected from macro aggregates. This paper presents a simple two-country, two-traded-good Real Business Cycle model that can solve this puzzle. The model assumes shocks to total factor productivity and ‘trade shocks’, modeled as exogenous shifts in a country’s local spending bias. These trade shocks capture, in a reduced form way, preference/technological shifts between domestic and imported goods and changes in trade costs/protectionism. Estimated trade shocks exhibits wide cyclical fluctuations that are weakly correlated across OECD countries. The paper shows that trade shocks are a more powerful source of fluctuations in the real exchange rate and the trade balance than productivity shocks. A positive shock to a country’s local spending bias appreciates the country’s real exchange rate and boosts its output. By contrast, a positive productivity shock depreciates the real exchange rate (while also raising domestic output). A model with joint productivity shocks and trade shocks can generate a realistic correlation between real activity and the real exchange rate, i.e. a correlation that is close to zero.Trade shocks also help to explain the empirical volatility of the real exchange rate and the trade balance. The paper considers a widely discussed alternative explanation for exchange rate volatility and exchange rate disconnect: shocks to the uncovered interest parity (UIP) condition, i.e. financial shocks (see, e.g., Kollmann, 2002; Itskhoki and Mukhin, 2021). Bayesian model estimates suggest that trade shocks are more important drivers of the real exchange rate and the trade balance than UIP shocks.Digging Up the Value Chain: Mineral Export Restrictions and Industrial Upgrading
Abstract
This paper examines mineral export restrictions as an industrial policy tool to promote downstream industrial upgrading. The imposition of such restrictions leads to a sharp and persistent decline in exports of targeted minerals. While downstream exports rise in both value and quantity, these gains dissipate rapidly along the value chain and are largely confined to basic metal products, the immediate downstream sector. There is no significant export-stimulating effect for technologically complex goods or for products that rely on extensive complementary inputs. Moreover, countries tend to deepen specialization in downstream products in which they already hold a comparative advantage, rather than diversifying into new product lines. Overall, while mineral export restrictions can generate sector-specific downstream gains, they are insufficient to induce the broader industrial upgrading that many developing country governments envision.JEL Classifications
- F2 - International Factor Movements and International Business