Effects Of Trade Costs Research Articles

Attractive target for tax avoidance: trade liberalization and entry mode

AbstractGrowing foreign direct investments (FDIs) have been observed in parallel to the development of tax avoidance by multinational enterprises; however, empirical evidence indicates the asymmetric effects of trade costs on a firm’s entry decision. To give a new rationale and insights into the impacts of transfer pricing and trade liberalization on a firm’s global activities, this study incorporates transfer pricing and investigates a foreign firm’s entry decision: exports, greenfield FDI (GFDI), or cross-border mergers and acquisitions (CM&As). We show that CM&A is the equilibrium entry mode when transfer pricing regulation is loose, whereas the choice between exports and GFDI depends on the fixed costs of GFDI. Moreover, trade liberalization increases the likelihood of CM&A but decreases that of exports because a reduction in trade costs enhances tax-avoidance efficiency due to more intrafirm trade, implying that tax avoidance in the form of CM&A becomes crucial as globalization progresses. Our welfare analysis shows that regulating CM&A based on consumers’ benefits may result in welfare reduction because profit shifting is most effective under CM&A and a host country’s tax revenue from the foreign firm increases. The results imply the importance of considering the link between international tax and antitrust policies.

Trade in times of uncertainty

AbstractThis paper studies the direct and indirect trade volume and trade cost effects of uncertainty on international trade and economic welfare using a structural gravity framework for a panel of 97 developed and developing countries from 2000 to 2018. We find that the sign and magnitude of the effect depend on whether uncertainty originates from the importing or exporting country. Moreover, applying a cross‐sectional gravity model, we show that an uncertainty shock directly reduces cross‐border trade flows. The paper illustrates the suitability of the proposed modelling approach by means of two counterfactual scenario analyses in which we calculate the general equilibrium trade and welfare effects of uncertainty induced by the unexpected outcome of the Brexit referendum in 2016 and the outbreak of the COVID‐19 pandemic in 2020.

The Effect of Trade Costs on the Foreign Trade Size: A Comparative Study of High-Income Countries and UpperMiddle-Income Countries

The Effect of Trade Costs on the Foreign Trade Size: A Comparative Study of High-Income Countries and UpperMiddle-Income Countries

Trade costs and tax transition reform in developing countries

AbstractDeveloping countries are striving to reform their tax revenue structure to reduce its dependence on international trade tax revenue. The present study has investigated the effect of trade costs on this type of tax revenue structure reform (also referred in the present analysis to as ‘Tax transition Reform’—TTR) through the trade openness channel in developing countries. The analysis has used a set of 124 countries over the period from 1996 to 2019 and several econometric estimators. It shows that higher overall trade costs (notably non‐tariff costs) undermine the TTR process, notably in countries that enjoy high degrees of openness to international trade. In other words, countries that wish to pursue their TTR process, while concurrently further opening up their economies to international trade, have to reduce their trade costs.

Inventory, Sourcing, and the Effects of Trade Costs: Theory and Empirical Evidence

Inventory, Sourcing, and the Effects of Trade Costs: Theory and Empirical Evidence

Gravity channels in trade

Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation-costs (TC), and dyadic-preferences (PC). As opposed to the existing literature where gravity variables act like supply shifters (through DC and TC), this paper empirically shows that they act like demand shifters (through PC). Regarding policy, it is implied that welfare-improving globalization cannot be achieved only through reductions in direct costs such as duties/tariffs or transportation costs; it is rather the globalization itself that should be promoted in order to shift the preferences of destination countries toward international products and thus reduce indirect trade costs. The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Gravity and Heterogeneous Trade Cost Elasticities

Abstract How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to popular trade cost variables such as currency unions, trade agreements and World Trade Organization membership. While we estimate that these variables are associated with increased bilateral trade on average, we find substantial heterogeneity. Consistent with the predictions of our framework, trade cost effects are strong for ‘thin’ bilateral relationships characterised by small import shares, and weak or even zero for ‘thick’ relationships.

Spatio-Temporal Dynamics of the Spatial AK Model with Trade Costs

In this paper, we introduce trade costs into the spatial AK model of economic growth and investigate the effects of trade costs on the spatio-temporal dynamics. We formulate an optimal control problem and obtain the evolution of the capital distribution along the optimal consumption trajectory via dynamic programming and semigroup theory. We also consider the convergence of the physical capital in the long-run and derive a value range for the cost coefficient that guarantee the convergence of the detrended capital across the location. Finally, we perform numerical simulations to support the analytical results and illustrate the spatiotemporal dynamics generated by the model.

Estimating exporter's quality: Do importers agree on rankings?

AbstractA large and growing literature focuses on product quality differentiation and its positive and normative importance for international trade. In this literature, there are a number of approaches that attempt to extract a quality ‘signal’ from noisy price or price–quantity data (i.e., unit value and demand residual approach). I propose a simple test for the robustness of these approaches to quality inference: when purchasing goods from a common set of exporters, do two importers agree on which goods are high quality? Results from Spearman's rank correlation tests show that as we use import demand residuals to measure quality, quality estimates become progressively less consistent and worsen the agreement among importers. Such inconsistency cannot be explained by trade cost effects on exporters' quality suggested by Melitz (2003) and Alchian–Allen hypothesis (Hummels and Skiba, 2004). It is also uncorrelated to differences in the compositions of imports. However, demand residual approach produces strong quality ‘signal’ relative to the noise only in highly differentiated products. Further analyses confirm the role of the differences in consumers' preferences and tastes across importers in the distortion of quality signals.

Imported inputs and the gains from trade

This paper characterizes how plant-level heterogeneity in imported input use affects the aggregate welfare gains from trade. Heterogeneous plants choose a fraction of inputs to source from the lowest cost source country, with the rest purchased domestically. Sourcing more inputs requires higher up-front fixed costs, but reduces variable input costs, so import shares are increasing in plant size. Welfare gains are inversely proportional to the general equilibrium elasticity of the aggregate import share with respect to variable trade costs. A standard bilateral gravity regression underestimates this elasticity by not capturing the effects of trade costs on the input sourcing decision. The welfare gains from trade in the model are therefore lower than the gains implied by a gravity-based estimate of the trade elasticity. When calibrated to Chilean plant-level data, this difference is substantial.

Trade and dietary diversity in Eastern Europe and Central Asia

In public and academic debates, the linkages between agricultural markets and nutrition across the world are vividly discussed. This paper contributes to the ongoing debate by analyzing the relationship between greater openness to trade and dietary diversity. It focuses on the post-communist countries of Eastern Europe and Central Asia where trade reforms triggered growth in trade flows and foreign direct investment, which in turn affected food systems in these countries. This shift provides a natural experiment for studying the effects of trade openness on agricultural markets and consumer behaviour. Reduction in trade barriers, for instance in the context of the accession to the WTO and the EU, and the gradual integration with world markets after 1991 had implications for diets through changes in production, prices and incomes. We utilize country-level panel data for 26 post-communist countries in the period 1996–2013 to assess the effects of trade costs, agricultural trade openness and incomes on dietary diversity measured by the Shannon entropy index. The results from fixed effects and instrumental variables estimation are consistent with previous findings that income growth affects dietary diversity positively. They also provide novel evidence that trade barriers reduce variety of products available in domestic markets, in particular fruits and vegetables.

Multimarket Linkages, Cartel Discipline and Trade Costs

We build a model of tacit collusion between firms that operate in multiple markets to study the effects of trade costs. A key feature of the model is that cartel discipline is endogenous. Thus, markets that appear segmented are strategically linked via the incentive compatibility constraint. Importantly, trade costs affect cartel shipments and welfare not only directly but also indirectly through discipline. Using extensive data on international cartels, we find that trade costs exert a negative and significant effect on cartel discipline. In turn, cartel discipline has a negative and significant impact on trade flows, in line with the model.

An Enhanced Analytical Framework for Evaluating the Effects of Trade Costs along Global Value Chains

In this paper, I present a new multi-regional input-output (MRIO) database with tariffs differentiated by agent. To construct the MRIO, I apply the Broad Economic Categories (BEC) system of concordances to detailed trade and tariff data from the Tariff Analytical and Simulation Tool for Economists (TASTE) Database version 9 to obtain measures of trade and tariff revenues by end-use. I use this trade data by end use to expand the GTAP Database version 9.2, thus incorporating direct linkages from foreign suppliers to domestic producers, investors, and consumers. Further, the new database comprises distinct composite tariff rates for producers, investors, and consumers. I use a constrained optimization procedure to ensure MRIO trade flows aggregate to the original GTAP Database. Through illustrative simulations, I demonstrate the effect of (1) new cross-border trade linkages and (2) tariff escalation for trade policy analysis. I further demonstrate how the addition of differentiated tariffs in the MRIO enhances policy analysis beyond preceding versions of the MRIO.

An Enhanced Analytical Framework for Evaluating the Effects of Trade Costs along Global Value Chains (Supplementary files)

An Enhanced Analytical Framework for Evaluating the Effects of Trade Costs along Global Value Chains (Supplementary files)

The Politics of Tariff Cooperation in the Presence of Trade Costs

This study explores tariff cooperation under a representative democracy, comparing national welfare realized in three trading regimes: most favored nation (MFN), customs union (CU), and free trade agreement (FTA). Two points are addressed: Why have FTAs increased in recent decades when theoretical studies predict that CUs increase the level of national welfare? Second, why are most CUs formed between countries located near each other while FTAs can be formed between countries located far away? We build a model that examines the effect of trade costs and how tariff policy is determined in a representative democracy. We find that when the countries' income distribution is largely skewed, an FTA is more beneficial due to trade costs. However, when member countries are located near each other, a CU realizes the higher welfare.

The impact of trade costs on the European Regional Trade Network: An empirical and theoretical analysis

AbstractUsing intra‐European interregional trade data, we analyze the topology of the E.U. regional trade network. A triad census analysis confirms the intuition that the interregional trade network (and, thus, the European economic integration) is far from being complete. The majority of the E.U. interregional trade patterns are characterized by simple, at best bilateral, configurations. Moreover, we analyze the effect of trade costs in shaping the topological structure of the network. It emerges that the relative presence of simple trade configurations increases with distance, while the relative presence of more complex trade configurations decreases with distance. Finally, we discuss the theoretical underpinnings of these empirical facts through a simple new economic geography model with three regions. In this model, we analyze how trade costs shape the pattern of the trade network. On the whole we find a correspondence between theoretic and empirical results. However, details differ and they suggest directions for further research.

Impact of market access and comparative advantage on regional distribution of manufacturing sector

BackgroundThis paper discuss the effects of trade costs and comparative technology on industry location for the economy of China.MethodsThe model assumes differences in comparative technology and different intraregional and interregional trade costs, and argues how different factors influence the location of industrial value added.ResultsBy processing the designed model, equations were set up to check whether the conclusions from our mathematical model are credible under panel data at the provincial level of China from 1995 to 2014. We found that the location of industrial value added in a region strongly related to infrastructure and local market size.ConclusionsGeographical location of a region is an important factor for deciding which factor should be handled first (either intraregional or interregional).

Gravity Channels in Trade

Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation costs (TC), and dyadicpreferences (PC). When PC is ignored as is typical in existing studies in the literature, it is shown that nearly all gravity effects are due to distance, 29 percent through DC and 71 percent through TC. The tables turn as the additional channel of PC is introduced and shown to dominate other channels, with adjacency contributing about 45 percent, distance about 32 percent, colony about 14 percent, free trade agreements about 7 percent, and language about 2 percent. It is implied that gravity variables mainly capture the effects of demand shifters rather than supply shifters (as implied by the existing literature). The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Gravity Channels in Trade

Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation-costs (TC), and dyadic-preferences (PC). When PC is ignored as is typical in existing studies in the literature, it is shown that nearly all gravity effects are due to distance, 29 percent through DC and 71 percent through TC. The tables turn as the additional channel of PC is introduced and shown to dominate other channels, with adjacency contributing about 45 percent, distance about 32 percent, colony about 14 percent, free trade agreements about 7 percent, and language about 2 percent. It is implied that gravity variables mainly capture the effects of demand shifters rather than supply shifters (as implied by the existing literature). The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Price Dispersion across U.S. Districts of Entry

This paper investigates the price dispersion of U.S. imports at the good-category level across U.S. districts of entry. Although there is a large heterogeneity across goods, on average, the implied markups of a simple model explain about 31% of the price dispersion, while the implied marginal costs of production explain about 69%; the effects of trade costs, for which we have actual data, are almost none. The results are robust to the consideration of possible endogeneity problems, multiplicative versus additive trade costs, and measurement errors in prices.