Arms-length Trade Research Articles

Export prices, selection into exporting and market size: Evidence from China and India

This paper empirically analyses the export pricing behaviour of Chinese and Indian exporters when there is selection into exporting. Previous exchange rate pass-through estimates that did not take selection into account could be biased if selection into exporting is correlated with pricing strategy. We use 6-digit product-level data across high- and low-income export destinations over the period 1994–2007 and assess a number of determinants of the degree of pass-through of exchange rates to export prices, such as the level of external demand, exporter’s wage cost, degree of competition in export markets, currency volatility and the direction of currency movements. We find systematic differences in the pricing strategies of Chinese and Indian exporters while uncovering a selection bias in exports to high-income markets, although the pricing of exports to low-income markets is independent of the decision to export. Export prices do not increase systematically with the destination market per capita income, and tend to be less sensitive in shipments to advanced nations. Export prices of India are sensitive to the volatility of the trade-weighted nominal effective exchange rate (NEER), indicating heterogeneity in prices to maintain competitiveness, but not in China as volatility is insignificant given a fixed currency system. It is also revealed that a country with a relatively flexible currency regime and arms-length trade such as India is more likely to exhibit incomplete pass-through, whereas a country with an inflexible currency system and involved in outward processing trade is more likely to have full pass-through as shown in the case of China.

Services trade policy and manufacturing productivity: The role of institutions

We study the effect of services trade restrictions on manufacturing productivity for a broad cross-section of countries at different stages of economic development. Decreasing services trade restrictiveness has a positive impact on the manufacturing sectors that use services as intermediate inputs in production. We identify a critical role of institutions in importing countries in shaping this effect. Countries with high institutional quality benefit the most from lower services trade restrictions in terms of increased productivity in downstream industries. We show that the conditioning effect of institutions operates through services trade that involves foreign establishment (investment), as opposed to cross-border arms-length trade in services.

Offshoring: A Canadian Story

Offshoring becomes an increasingly important strategy for Canadian businesses to compete in domestic and international markets. It is facilitated by advances in transportation and communications technologies and by the liberalization of trade and foreign direct investment (FDI) regimes in many countries. These changes allow firms to substitute cheap foreign suppliers for expensive domestic ones. They also permit firms to engage in vertical disintegration and offshore some of their activities to their foreign-based affiliates, or to third parties (through arms-length trade) in foreign countries. This paper has three major objectives. First discusses offshoring business models and their potential economic benefits. Secondly, it documents the trends in Canadian businesses' offshoring activities. Finally, it provides empirical evidence on whether Canadian businesses' productivity performance is enhanced by these activities, and on whether the productivity effect depends on the location of offshoring.

Entrepreneurship, innovation, and corruption

Efforts to control corruption increase levels of trust in the ability of the state and market institutions to reliably and impartially enforce law and the rules of trade. Such trust facilitates the development of arms-length trade and the coordination of complex economic activities. We posit that better control of corruption will also be associated with rising levels of innovation and entrepreneurship. Absent such trust, however, monitoring and other transactions cost should restrict the scale and scope of trade and thus, hamper productivity and investment in innovation and entrepreneurship. Longitudinal data from 64 nations lends support to our propositions, thus helping unpack the puzzling relationship between entrepreneurship, innovation, and corruption.

Accounting for the Growth of MNC-based Trade using a Structural Model of U.S. MNCs

U.S. foreign trade has grown much more rapidly than GDP in recent decades. But there is no consensus as to why. More than half of U.S. foreign trade consists of arms-length and intra-firm trade activity by multinational corporations (MNCs). Thus, in order to better understand the growth of trade, it is important to understand the reasons for the rapid growth in MNC-based trade. This paper uses confidential BEA data on the activities of U.S. MNCs to shed light on this issue. Specifically, we estimate a simple structural model of the production and trade decisions of U.S. MNCs with affiliates in Canada, the largest trading partner of the U.S., using data from 1983-96. We then use the model as a framework to decompose the growth in intra-firm and arms-length trade flows into components due to tariff reductions, changes in technology, changes in wages, and other factors. We find that tariff reductions can account for a substantial part of the increase in arms-length MNC-based trade. But our model attributes most of the growth of intra-firm trade to technical change, with tariff reductions playing only a secondary role. Simple descriptive statistics provide face validity for this result, since arms-length trade grew much more rapidly in industries with the largest tariff reductions, while intra-firm trade grew rapidly even in industries where tariffs were negligible to begin with. Our work makes a number of other contributions: Our descriptive analysis of the BEA firm level data, which has rarely been made available for research, suggests that few MNCs fit into the neat vertical vs. horizontal dichotomy of the theoretical literature. Also, we find that MNC decisions to engage in intra-firm and arms-length trade are unrelated to tariff levels. The growth in MNC-based trade due to tariff reductions has been almost entirely on the intensive margin, among the subset of firms already engaged in such activities. Finally, the estimation of our model requires the development of a number of new econometric procedures. We present new recursive importance sampling algorithms that are the continuous and discrete/continuous analogues of the GHK method.

New concepts and measures of the globalisation of production

The paper introduces a measure of cross-border supply to allow for both armslength trade and direct production from foreign investments. It explores the implications of this for measures of trade flows and for the concepts of intra-industry supply.

Effective Protection and Intra‐Industry Trade: Some Positive and Normative Issues

The distinction between nominal and effective tariffs (or protection) is well established in the theoretical literature, albeit in the context of the traditional analysis of inter‐industry trade flows. This analysis is based upon assumptions such as product and production homogeneity, non‐increasing returns, armslength trade, and small open economy country conditions. Relaxation of some or all of these assumptions has direct implications for effective protection analysis under any type of trade flows. As is now widely recognised, however, relaxation of these assumptions is also likely to be associated with intra‐industry specialisation and exchange. It is to this wider issue of effective protection analysis in the context of “within‐industry” specialisation (vertical and/or horizontal) and of two‐way trade, that this paper is addressed.