North-South Trade Model Research Articles

Bilateral free trade agreements in a four-country model with a digital technology perspective

Using a four-country North-South trade model with two identical countries in each region, this paper studies two types of bilateral free trade agreements: symmetric free trade agreements between countries in the same region, and asymmetric free trade agreements between countries from different regions. It first shows that a symmetric free trade agreement is always beneficial to its members and characterizes when it will increase or decrease the welfare of all countries. It then characterizes when an asymmetric free trade agreement is beneficial to its members and when it is beneficial to all countries.Results of this paper provide a digital technology perspective for international trade agreements. In particular, they imply that countries with less advanced digital technologies in general have incentives to catch up to the more advanced countries and that in some instances it is also in the interest of the digitally more advanced countries to help the digitally less advanced countries shrink the technology gap.

Migration and Imitation

This paper develops a North–South trade model with heterogeneous labour and horizontally differentiated products, and compares the implications of two policies: Southern intellectual property rights (IPR) and Northern immigration policy, with the latter aiming to attract Southern talent as a means of pre‐empting imitation. Individuals self‐select into becoming entrepreneurs and innovate (imitate) in the North (South). The likelihood of imitation depends on product quality, imitator's talent and IPR strength. Several interrelated channels of competition are identified. Allowing high‐talent migration when IPR protection in the South is weak shifts imitation to low‐quality products and innovation to high‐quality products. The outcome is in stark contrast to the policy of strengthening Southern IPR, which limits low‐talent imitation in the South and encourages low‐quality innovation in the North. Migration also increases the income of low‐talent entrepreneurs, as well as the average quality of products imitated by high‐talent entrepreneurs in the South. Global income rises with migration, but is not guaranteed to rise with stronger Southern IPR.

North–South asymmetry, unilateral environmental policy and carbon tariffs

AbstractThis paper focuses on the potential impact of a carbon tariff on carbon emissions, North–South trade and welfare. We use a North–South trade model, where North implements a unilateral environmental policy on domestic carbon‐intensive industries followed by a carbon tariff on imports from South. Unlike the existing studies, we allow asymmetry in clean production technologies and marginal environmental damage. We show that a carbon tariff can reduce the global carbon emission via the use of a more advanced clean production technology in North, which increases the firm profit and welfare. However, improvement in welfare of North is associated with a decrease in global trade flows and welfare of South. We find that, in the presence of asymmetry in clean production technologies between North and South, a carbon tariff introduced by the North can eliminate carbon leakage, but the exports of South decrease below the pre‐unilateral environmental policy level and hence North can potentially use a carbon tariff for trade protectionism in the name of reducing carbon leakage in South.

Vertical specialization in North–South trade: Industrial relocation, wage and welfare

AbstractThis paper presents a North–South trade model with vertically linked industries and examines how declining costs of trade across stages of production encourage vertical specialization and affect wages and welfare. As trade costs fall below a threshold, the production of all final goods relocates to the South and vertical specialization emerges. In some industries, production of intermediate goods also relocates against comparative costs because of benefits of co‐location, and further declines in trade costs lead to reshoring. A country may temporarily lose from falling trade costs, but both countries can be better off after trade costs fall sufficiently.

Migration and Imitation

This paper develops a North-South trade model with heterogeneous labour and horizontally differentiated products and compares the implications of two policies: Southern intellectual property rights (IPRs) and Northern immigration policy that aims to attract Southern talent as means of preempting imitation. Individuals self-select into becoming entrepreneurs and innovate (imitate) in the North (South). The likelihood of imitation depends on product quality, imitator’s ability, and strength of IPRs. Several interrelated channels of competition are identified. Allowing high-ability migration when IPRs protection in the South is weak shifts imitation to low-quality and innovation to high-quality products. The outcome is in stark contrast to the policy of strengthening IPRs, which limits low-quality imitation and encourages low-quality innovation. High-ability migration also increases the income of lowability entrepreneurs, as well as the average quality of products in the high-ability imitation sector in the South.

Economic analysis of e-waste market

Despite international regulations that prohibit the trans-boundary movement of electronic and electric waste (e-waste), non-reusable e-waste is often illegally mixed with reusable e-waste and results in being sent to developing countries. As developing countries are not well prepared to properly manage e-waste, this illegal trade has important negative externalities and creates ‘environmental injustice’. The two main information problems on the e-waste market are imperfect monitoring and imperfect information on the so-called ‘degree of purity’ of the e-waste. In this paper, we use a simple bilateral North–South trade model and show that there exists an alternative e-waste market that is better than the standard e-waste market for developing countries. This alternative e-waste market is a joint trade in reusable and non-reusable e-waste. In both cases, we consider demand and supply sides, plus the equilibrium of the e-waste market to show that the alternative market that we propose is better for developing countries.

Vertical Fragmentation and International Sourcing

In a North-South model of international trade, we analyze the ways firms procure their inputs in the presence of relationship-specific investments and incomplete contracts. There are heterogenous final-good producers that are located in the North and compete in monopolistic competition. Production entails a well-defined sequence of highly complementary stages such that a failure in any one of them destroys the whole project. In this environment, we first characterize an equilibrium in which based on their productivity, firms decide where to buy their inputs in each production stage. While doing so, they also choose their ownership structure in order to alleviate the hold-up problem they face due to contract incompleteness. Next, we examine how within sectoral heterogeneity and variations in industry characteristics affect the relative prevalence of firms that choose to (i) procure inputs from different locations, and (ii) form different organizational structures.

Intellectual property rights, international licensing and foreign direct investment

This paper develops a North-South trade model to examine the effect of the enforcement of intellectual property rights (IPR) in the South on inward foreign direct investment (FDI) by taking into account international licensing and the informational advantage of FDI. The focus of this paper is on the strategic influence of international licensing on the optimal entry mode of firm N. The main findings of this paper are as follows. First, the optimal entry mode for firm N in the absence of IPR protection is FDI when the innovation size is large but the variance of demand and the fixed setup cost are small, while selecting exporting otherwise. Second, the enforcement of IPR in the South can promote FDI when the innovation size is small, while discouraging FDI when the innovation size is moderate and large. Third, the enforcement of IPR protection will most likely decrease the total output and the welfare level in the South under international licensing, while the reverse may occur as a result of changing the firm N’s entry mode from FDI to exporting.

Assessing the dynamics of terms of trade in a model of cumulative causation and structural change

ABSTRACT The motivation for this paper stems from the steady decline in the share of consumer expenditures on goods produced in the global south, coupled with the (empirically ambiguous) Singer/Prebisch hypothesis that this can be explained by a secular decline in the southern terms of trade. Drawing on these sources of inspiration, the paper sets out to study the dynamics of the terms of trade using a multi-sector growth model based on the principle of cumulative causation. The upshot is a North-South model of growth and trade in which the evolution of the terms of trade depends on differential rates of productivity growth in different sectors of the economy - and in which terms of trade dynamics may not be the best guide as to whether or not there is an uneven development problem.

Private Governance Undermined: India and the Roundtable on Sustainable Palm Oil

Are emerging markets undermining private environmental governance? In the past, most trade in agricultural commodities occurred between developed and developing countries, but in recent years the volume of South-South trade has increased significantly. The booming demand from emerging markets for food, feed, and fiber is now a key driver behind agricultural expansion, causing large-scale deforestation and biodiversity loss in the tropics. By examining the case of palm oil, this article argues that existing private governance institutions are not well equipped to deal with this crisis. They continue to operate on the basis of a North-South trade model, trying to leverage the market power of big-brand companies to achieve their sustainability goals. However, the effectiveness of this mechanism is increasingly undermined by the rise of South-South trade and the different structure and institutional context of emerging market value chains.

A North-South Trade Model of Offshoring and Unemployment

This paper analyzes a North-South trade model with offshoring and unemployment due to union wage setting. A reduction in the cost of offshoring decreases employment in the North except possibly if there is little offshoring initially. If the scale of Northern firms also falls, then each Northern agent’s welfare declines. Unions have an incentive to reduce their own bargaining power by strategically delegating wage negotiation so as to cushion the negative employment effects.

Unilateral Emission Cuts and Carbon Leakages in a Dynamic North–South Trade Model

The effects of a unilateral cut in emissions are analyzed in a dynamic two-country model. Two (intermediate) goods are produced, one of which uses the fossil fuel. These inputs are traded and combine to produce a final good. The effect of a cut in fossil fuel use by a bloc (e.g. Annexure 1 countries in the Kyoto Protocol) depends on whether the fuel is priced at marginal cost or above. In the latter case a “green paradox” may appear. The paper’s contribution lies in analyzing the dynamics and trade implications of the unilateral action.

How Should Developing Countries Cope with Pollution-Migration? An Extended Model of North-South Trade and its Numerical Simulation

In recent years, with rapidly growing world trade and increasingly stricter environmental controls in developed countries, some enterprises have transferred heavily polluting plants to developing countries where environmental controls are more relaxed. This kind of pollution-“migration” is therefore threatening the environment of some developing or rather “emerging” countries. How to achieve a balance between economic development and environmental protection has already become an important issue that needs to be handled appropriately by developing countries when actively engaging in industrial migration. This paper extends the North-South trade model by introducing environmental pollution taxation to make an in-depth analysis. The calculation of the model leads to the conclusion that motivation of polluting companies in developed countries decreases when transferring to developing countries with a rising environmental pollution tax. Through numerical simulation, this paper finds the minimum environmental pollution tax rate that is likely to prevent industrial migration. When the tax is lower than this, pollution migration would not be stop; and if the tax is too high, it will hurt the economic development of developing countries. Hence, the minimum environmental pollution tax is the optimal tax rate for balanced development.

Technological intensity of the export structure and the real exchange rate

This paper discusses the effects of the real exchange rate (RER, defined as the price of the foreign currency in units of the domestic currency, adjusted by price levels) on the diversification and technological intensity of the export structure. Based on a North-South Ricardian model of trade with a continuum of goods, in which comparative advantage depends on the RER and leads and lags in innovation and diffusion of technology, two hypotheses are suggested and tested. The first one is that a higher RER allows for a higher diversification of exports. The second hypothesis is that this diversification implies an upgrading in the technological intensity of exports. We find favorable evidence for the two hypotheses from a panel data study, including 111 counties in the period 1962–2008. These results suggest that a competitive RER should be considered a relevant variable in the process of economic development as it encourages the transformation of the pattern of specialization.

World trade patterns and prices: The role of productivity and quality heterogeneity

This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Recent empirical literature identifies two groups of evidence — the product lines evidence on different export strategies and sources of competitiveness across product groups and countries, and the aggregate trade flows evidence on a positive relation between the income per capita and both export and import prices (also conditional on the exporter). We attempt to provide a theoretical background for these findings and focus on the North–South productivity differences in a four country North–South trade model with two dimensions of firm heterogeneity. Differences in the firms' product quality and cost efficiency impose different competitiveness sources when entering more difficult markets and result in the observed export and import prices and consumption bundles across the rich and poor countries.

Patent Protection, Southern Innovation and Welfare in a North–South Trade Model

In a North–South trade model, we analyse the implications of southern patent protection on southern innovation, profits and welfare. Southern patent protection may make the northern firm worse off and the southern firm better off by increasing the southern firm's incentive for innovation and affecting the nature of competition in the world market. The impact of southern patent protection on a country's welfare and on world welfare depends on the cost of southern innovation and the degree of product substitutability. We provide important insights into the outcomes of international negotiations regarding patent enforcement in the southern countries.

Multilateral trade liberalization and public goods provision in a North-South trade model with nonhomothetic preferences

Under nonhomothetic preferences developing countries are less likely to gain from multilateral trade liberalization than developed countries. This paper shows that this relative disadvantage for developing countries changes when the effects on public good provision are taken into account. The impact it has depends on the strength of their comparative advantage in export markets. We show that a strong (weak) comparative advantage in export markets mitigates (reinforces) the relative disadvantage of multilateral trade liberalization for developing countries. Moreover, in the presence of public goods provision, the relative disadvantage for developing countries with a strong comparative advantage is further mitigated when also income differences within countries are taken into account.

The Coexistence of High Unemployment and Good Economic Performance in Large Open Developing Countries

AbstractThe Harris–Todaro labor reallocation mechanism is embedded into a North–South trade model and a theoretical model is provided to explain the coexistence of high unemployment and good economic performance as large developing countries become more open to trade. The relative improvement in the total factor productivity of the Southern manufacturing sector is conjectured to give rise to this phenomenon. Although it induces an increase in the demand for labor in the Southern urban areas, this increase in demand is outweighed by an increase in supply brought by the reallocation of labor from rural to urban areas. The final result is higher unemployment. The model is supported by some empirical evidence.

International Outsourcing and Long-Run Growth in a Variety Expansion Model

We develop a North-South trade model including the opportunity for outsourcing in a variety expansion framework and derive the effect of an increase in outsourcing on long-run growth. We find that the effect of increased outsourcing on the growth rate of product variety is contingent on the labor size of the Northern and Southern economy. In particular, if the relative labor size of South to North is smaller, outsourcing the production of intermediate goods to Southern economy can have negative effects on economic growth.

Environmental Product Standards in North–South Trade

AbstractConsumption is one channel through which the environment is damaged. To protect the environment, various product standards have been introduced across the world. This paper uses a new economic geography framework to explore the effects of environmental product standards on environment in a North–South trade model. It examines the situation in which the North unilaterally introduces an environmental product standard. Specifically, those products that do not meet the standard are not allowed to be sold in the North's market. It is found that such a standard may worsen the North's environment but improve the South's environment as a result of firm relocation.