Decline In Trade Costs Research Articles

The magnification effect in global value chains

AbstractWe examine the “magnification effect,” which demonstrates that as the number of separable production stages increases, trade increases dramatically as trade costs decline. We empirically investigate the existence of this magnification effect by estimating gravity‐type equations for worldwide trade to obtain the tariff elasticity of trade per industry. We find that tariff elasticity is higher in industries with a greater degree of global value chain participation. These results are observed for both gross and value‐added trade. Furthermore, we find that tariff elasticity is higher in intra‐Asian trade, especially in machinery industries.

Trade, Consumption Pollution and Tax

Consumption is an important source of greenhouse gas (GHG) emissions. This study theoretically analyzes how trade liberalization and consumption tax affect firm locations across countries and GHG emissions originating from consumption. Introducing consumption-originated emissions in a standard footloose capital model, we find several novel results that extend previous analyses of production-originated GHG emissions. First, trade liberalization has a non-monotonic effect on global emissions; that is, as trade costs decline, global emissions initially decrease and then increase. Second, consumption taxes cause carbon leakage; that is, the tax on one country reduces emissions in that country, while increasing it in the rest of the world. Third, optimal consumption taxes that maximize global welfare must be neutral about firm location decisions. In particular, even if firms are asymmetrically distributed across countries in the absence of a consumption tax, the optimal tax level must be identical across countries.

Border effect of agricultural trade between China and the Belt and Road countries: a computable general equilibrium model analysis

In this paper, we constructed a global trade computable general equilibrium model using the input-output table data in 2002, 2007, 2010, and 2015 to measure the border effect of the bilateral trade of agricultural products between China and the Belt and Road (B&R) countries, and designed a simulation analysis under different scenarios for the impact of the B&R initiative on China’s agricultural trade. We discovered that: (1) The border effect of agricultural product trade between China and the B&R countries decreased by 20.9% in 2015 compared with that in 2010, which means that the B&R initiative to some extent reduced the trade barriers and promoted the bilateral agricultural trade between China and the B&R countries. (2) There are different changes in border effect between China’s domestic regions and between unilateral and bilateral border, the decline of border effect in China’s costal area is larger than that in inland area, and the decline in import border is larger than that in export border. (3) With the improvement of the B&R framework and the implementation of supporting policies, the decline in trade costs and in local agricultural product preference as well as the agricultural technology progress will further reduce the border effect. China’s domestic regional trade gap will gradually narrow, the bilateral agricultural trade will be highly active, and the continuous growth of agricultural trade will emerge between China and the B&R countries.

Trade, inequality, and the endogenous sorting ofheterogeneous workers

I present a new general equilibrium framework to quantify the effect of international trade on labor market outcomes such as the skill premium and reallocation of workers for a large number of countries. Worker-level comparative advantage based on workers' heterogeneous productivities is the key feature of the framework. I use household-level microdata to quantify key aspects of the model for 32 countries. I find that the calibrated decline in trade costs during 2000–2007 increased between-educational-type inequality in most countries regardless of country-level comparative advantages. The worker-level comparative advantage across sectors and occupations determines both the direction and the magnitude of the effect of trade on labor market outcomes. I also find that trade liberalization during 2000–2007 significantly contributed to the decline in manufacturing employment and job polarization in high-income countries. In addition, the model shows that the China effect measured by a decline in trade costs with China and an increase in China's manufacturing productivity during 2000–2007 increased inequality in most countries.

Dissecting Trade and Business Cycle Co-movement

Business cycles appear highly synchronized across countries. To understand this empirical phenomenon, I develop a multi-country international real business cycle model with international trade that offers several potential explanations: shocks to TFP, demand, leisure, investment, economic sectors, and bilateral trade. These shocks fully account for movements in gross domestic product and trade shares, completely describing the data during 1992-2014. Calibrating the model to a panel of developed (G7) countries, I find that openness to trade and the volatility of bilateral trade flows, which are manifested in bilateral trade shocks, are essential in synchronizing international business cycles. In contrast, other correlated country-specific shocks play relatively minor roles. This suggests that economic integration through trade has been the primary driver of the co-movement of business cycles internationally. I use my model to also address the \textit{trade co-movement puzzle}, which states that international real business cycle models should be predicting a much stronger link between trade and the correlation of business cycles. Once we account for the dynamics of the decline in trade costs and the volatility of bilateral trade flows, IRBC models do indeed predict a strong link between trade and business cycle co-movement. My finding suggests that more research on the dynamics of trade shocks is crucial when studying cross-country business cycle synchronization.

The Intensive Margin in Trade

Is the variation in bilateral trade flows across countries primarily due to differences in the number of exporting firms (the extensive margin) or in the average size of an exporter (the intensive margin)? And how does this affect the estimation and quantitative implications of the Melitz (2003) trade model? The benchmark Melitz model with Pareto-distributed firm productivity and fixed costs of exporting, predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. This paper subjects this theoretical prediction to a reality check drawing upon the World Bank's Exporter Dynamics Database (EDD) which has firm-level exports from 50 developing countries to all destinations. Around 50 percent of the variation in exports across trading partners is shown to be along the intensive margin, contradicting the benchmark Melitz-Pareto model. The paper finds that moving from a Pareto to a lognormal distribution of firm productivity allows the Melitz model to successfully match the role of the intensive margin evident in the EDD. The paper then studies the implications of our findings for quantitative trade theory. Using likelihood methods and the EDD, a generalized Melitz model with a joint lognormal distribution for firm productivity, fixed costs and demand shifters is estimated, and exact hat algebra is used to quantify the counterfactual effects of a decline in trade costs on trade flows and welfare in the estimated model. Finally, these effects are compared to those that would be predicted by the Melitz-Pareto model, with the Pareto shape parameter chosen to match the average trade elasticity implied by the estimated Melitz-lognormal model. The paper shows that the effects on welfare turn out to be quite close to those in the standard Melitz-Pareto model even though the effects on trade flows remain different.

The Intensive Margin in Trade

The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank’s Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50 percent of variation in exports is along the extensive margin—a quantitative victory for the Melitz framework. The remaining 50 percent on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. We find that moving from a Pareto to a lognormal distribution allows the Melitz model to match the role of the intensive margin in the EDD. We use likelihood methods and the EDD to estimate a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs and demand shifters, and use “exact hat algebra” to quantify the effects of a decline in trade costs on trade flows and welfare in the estimated model. The welfare effects turn out to be quite close to those in the standard Melitz-Pareto model when we choose the Pareto shape parameter to fit the average trade elasticity implied by our estimated Melitz-lognormal model, although there are significant differences regarding the effects on trade flows.

The Intensive Margin in Trade

The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank’s Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50 percent of variation in exports is along the extensive margin—a quantitative victory for the Melitz framework. The remaining 50 percent on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. We find that moving from a Pareto to a lognormal distribution allows the Melitz model to match the role of the intensive margin in the EDD. We use likelihood methods and the EDD to estimate a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs and demand shifters, and use “exact hat algebra” to quantify the effects of a decline in trade costs on trade flows and welfare in the estimated model. The welfare effects turn out to be quite close to those in the standard Melitz-Pareto model when we choose the Pareto shape parameter to fit the average trade elasticity implied by our estimated Melitz-lognormal model, although there are significant differences regarding the effects on trade flows.

Entry assumptions and welfare gains from trade

When productivities are not Pareto distributed, welfare gains from trade are not necessarily isomorphic between entry assumptions. Under exogenous entry, the extra adjustment in dividends dampens the relative increase in real wage as trade costs decline, resulting in lower welfare gains than under free entry.

Os custos totais do comércio bilateral brasileiro: determinantes e evolução recente

The objective of this study was to evaluate the total costs of Brazilian trade and the determinants of bilateral trade growth with the ten main trading partners from 1995 to 2012. The method proposed by Novy (2009) was based on obtaining the costs from the gravity equation. The results showed a generalized reduction in total trade costs between countries. Manufactured goods performed similarly to total trade, while those in the agricultural sector showed higher values throughout the period, but with sharper reductions. The contribution of the fall in bilateral costs to the growth of Brazilian trade was significant, although lower than the contribution of income growth. Although there was a continued decline in trade costs, it was noted that lower bilateral costs were associated with trade with developed countries, where the largest investments related to trade facilitation occurred. There are also many opportunities for reducing trade frictions in Brazil, since the country has significantly lower cost performance indicators than the other sample developing countries, which will certainly contribute to increased export competitiveness and to reduce the cost of imports.

Comments by Fredrik Sjöholm, on Economic Implications of Deeper South Asian–Southeast Asian Integration: A CGE Approach

countries see a larger impact. In addition, a more elaborate explanation is needed on the different impacts of trade cost declining on manufacturing sectors. Some countries end up with a larger manufacturing sector whereas other countries experience a shrinking manufacturing sector for the same decline in trade costs. Knowing the exact transmission mechanism of each scenario on income, export, and structural change will improve the understanding and provide more clear policy directions.

Product switching in a model of learning

New exporters add and drop products with much greater frequency than old exporters. This paper explains this behavior with a model of demand learning in which an exporter's profitability on the demand side is determined by a time-invariant firm–destination appeal index, and transient firm–destination–year preference shocks. New exporters must learn about their appeal indices in the presence of these shocks, and respond to fluctuations in demand by adding and dropping products more frequently than older exporters because they have less information about their attractiveness to consumers. Calibrated to match cross-sectional and dynamic moments of the distribution of sales and scope, the model quantitatively accounts for two thirds of the extent of product switching. The model further predicts that in response to a decline in trade costs, existing exporters add new products and new exporters enter a destination. Counterfactual implies that the contribution of product adding to export growth resulting from a fall in trade costs is substantially larger than the contribution of exporter entry.

Offshoring, globalization, and welfare

We investigate the issue of offshoring in a general-equilibrium model of two countries and one sector of increasing returns to scale. Our model uncovers that offshoring occurs and endogenously evolves in a bell-shaped pattern when trade costs decline, explaining some stylized facts in developed countries. Furthermore, this simple framework can be applied to examine the welfare issue. We find that a fall in offshoring costs benefits the high-wage country but hurts the low-wage country. On the other hand, the low-wage country benefits with trade liberalization. The impact of falling trade costs on the welfare of the high-wage country depends on the values of offshoring freeness.

Bailout Policy in a Globalized Economy

This paper explores how trade integration influences the decision by national governments to bailout manufacturing firms. We develop a 2-country model of generalized oligopoly with heterogenous firms and trade costs. High-cost firms are eligible for a bailout while low-cost firms are profitable. Our results show that trade liberalization influences both political benefits of a bailout and its relative cost as compared to a laissez-faire policy. If the fall in trade cost is so large that it allows high-cost firms to become exporters, governments might move away from a bailout policy to a laissez-faire policy. In contrast, a marginal decline in trade costs that does not affect the export status of high-cost firms, always makes governments more prone to adopt a bailout decision.

Uncertainty and Trade Agreements

We explore conditions under which trade agreements can provide gains by reducing trade policy uncertainty. Given the degree of income risk aversion, this is more likely when economies are more open, export supply elasticities are lower, and economies more specialized. Governments have stronger incentives to sign trade agreements when the trading environment is more uncertain. As exogenous trade costs decline, the gains from reducing tariff uncertainty become more important relative to reducing average tariff levels. We also develop a simple “sufficient statistic” approach to quantify the gains from managing trade policy uncertainty, and examine the impact of ex ante investments on such gains. (JEL D81, F13)

Trade costs, wage difference, and endogenous growth

AbstractIn this paper, we develop an endogenous growth and international trade model with two countries in which equilibrium wages in the two countries are different between two countries. First, when trade costs are high, the share of manufacturing firms in the large country increases with a decline in trade costs because of market size. However, the share of firms then decreases with a decline in trade costs when trade costs are low because of wage differences. Finally, all firms agglomerate in the small country, since production costs in the small country are low. In this process, the innovation sector shifts its location from the large‐market and high‐wage country to the small‐market and low‐wage country.

Competing Industrial Standards and the Impact of Trade Liberalization

The main purpose of this study is to illustrate, with simple trade theory, the relationship between competing industrial standards and trade liberalization. We assume that there are two competing industrial standards in an international context, each of which applies to a group of differentiated products. A product can be used only in combination with other products based on the same industrial standard. We examine the impact of trade liberalization (i.e., a decline in trade costs) on consumers’ choice of a standard. It will be shown that the degree of indirect network effects, captured with substitution between differentiated products, plays an important role as a determinant of the impact of trade liberalization.

A simple model of foreign brand penetration under monopolistic competition

The main purpose of this study is to illustrate, with a simple monopolistic competition trade model, how trade liberalization (i.e., a decline in trade costs) can affect domestic entrepreneurs’ decision between providing domestic or foreign brands, and thus the degree of foreign brand penetration. It is shown that, as trade costs decrease, more entrepreneurs choose to provide foreign brands. Furthermore, the shift to foreign brands is shown to magnify the negative impact of trade liberalization on the profits of firms selling domestic brands.

Capital Taxes, Trade Costs, and the Irish Miracle

This paper uses detailed international trade data to examine whether the rapid growth of Ireland in the 1990s and its accompanying substantial increase in trade in goods and services might have been spurred by an interaction of low taxation of capital and declining international trade costs. Both tariffs and other trade costs for an important class of goods and services have declined to very low levels in the 1990s, while the expansion of foreign direct investment worldwide in that period suggests a great drop in technological and policy barriers to managing international production. The decline in trade costs has profound effects on small economies that also levy low levels of capital taxation. Such economies exhibit a great increase in the production and export of products that have high capital intensity. This implication receives strong support in detailed trade data. The expansion of such modern, high labor-productivity sectors has been identified as an important recent feature of Irish growth. (JEL: F12, F14, F21, F43, H25)

Economic integration and tax policy with endogenous foreign firm ownership

This paper analyses the impact of economic integration on tax policy in a model where corporate taxation is motivated by the desire to tax profits accruing to foreigners and the number of foreign owned firms is endogenous. Increasing economic integration is modeled as a decline in trade costs or tariffs. It turns out that declining trade costs lead to increasing profit taxes if the government may use import tariffs. If tariffs are not available, declining trade costs induce profit taxes to decline as well. A mandatory reduction in tariffs also triggers profit tax reductions. We conclude that the existence of foreign firm ownership may fail to prevent profit taxes from declining as economic integration proceeds.