Reduction In Trade Costs Research Articles

Where Will Your Next Holden Come From? The 2004 EU Enlargement and Trade with Australia

AbstractThe impact on Australia of the 2004 EU enlargement highlighted a major change in the global economy. Previous EU enlargements, notably British accession in 1973, diverted trade from third countries such as Australia. After 2004, trade between Australia and new Eastern European EU members boomed. Deep integration allowed EU firms to create regional value chains. Cars produced in regional value chains, often with final assembly in Eastern Europe, are globally competitive. Reduced trade costs contributed to competitiveness, even in distant Australia, where Volkswagen, Audi, Peugeot and Holden cars are imported from Slovakia, the Czech Republic, Hungary and Poland.

Induced Clean Technology Adoption and International Trade with Heterogeneous Firms

ABSTRACTThis paper introduces an environmental externality and factor-biased technology adoption into a trade model with heterogeneous firms. This study explores how firms’ decisions of technology adoption and of exports are affected by openness to trade and the stringency of environmental regulations. It shows that: (1) these decisions induced by tightened environmental policies depend upon whether the upgraded technology is labor-biased or emission-biased; (2) the environmental impact of trade cost reductions on the aggregate emissions and price of emissions permits varies with the factor-biased feature; and (3) regardless of the factor-biased feature, the trade cost reduction induces firms to export and to upgrade the factor-biased technology, while it forces the least productive firms to exit the market. Moreover, the model is further calibrated to simulate policy scenarios of bilateral and unilateral variations in trade variable costs and environmental policies. The bilateral reduction of emissions c...

Induced clean technology adoption and international trade with heterogeneous firms

ABSTRACTThis paper introduces an environmental externality and factor-biased technology adoption into a trade model with heterogeneous firms. This study explores how firms’ decisions of technology adoption and of exports are affected by openness to trade and the stringency of environmental regulations. It shows that: (1) these decisions induced by tightened environmental policies depend upon whether the upgraded technology is labor-biased or emission-biased; (2) the environmental impact of trade cost reductions on the aggregate emissions and price of emissions permits varies with the factor-biased feature; and (3) regardless of the factor-biased feature, the trade cost reduction induces firms to export and to upgrade the factor-biased technology, while it forces the least productive firms to exit the market. Moreover, the model is further calibrated to simulate policy scenarios of bilateral and unilateral variations in trade variable costs and environmental policies. The bilateral reduction of emissions cap may contribute to welfare gains in both home and foreign countries. The unilateral action of tightening environmental policy in the home country may hurt the home country, but makes the foreign country better off.

THE EFFECT OF TRADE FACILITATION ON TRADE MARGIN OF 8 ASEAN-CHINA FREE TRADE AREA COUNTRIES (ACFTA): A GRAVITY MODEL APPROACH

Trade facilitation is an effort of simplification and harmonization of international trade procedures. Trade facilitation that manifested in the form of policy packages that aim to reduce trade costs and improve export growth. Export growth can be sourced from the level of diversity of exported goods (extensive margin) and the volume of exported goods (intensive margin). This study aims to analyze the effect of trade facilitation on the extensive and intensive margin of trade eight member countries of ACFTA during the years 2006-2014. Trade facilitation indicators used in this study consisted of exporters and importers port efficiency. This study uses gravity model and estimation techniques Random Effect Model. The results showed that exporter port efficiency have a positive and significant effect on the extensive margin while importer port efficiency has a positive and significant effect on the intensive margin.

Incremental Benefit and Risk in TPP Membership from the Perspectives of SMEs

Having to comply with the regulations and schemes of a trade environment, it is important for firms to assess the benefits and risks involved with TPP participation. It is the aim of this study to examine to the effectiveness of TPP participation from the perspective of SMEs, focusing on the incremental benefit and risk in TPP participation. Using an AHP analysis, we develop indexes for incremental benefit and risk to identify the relative importance of factors that small and medium sized enterprises (SMEs) expect in TPP participation. Based on the surveys completed by trade-related experts, this study identified the prioritized values in the decision making process towards the TPP participation. Key results show that to SMEs, financial improvement, notably increased sales and trade cost reduction were expected the most as the incremental benefits of TPP participation. Also, it was found that the relative importance of incremental benefit was stronger for firms that have experience exporting to the TPP region, whereas incremental risk was more important to firms without the experience. Based on the findings, theoretical and political implications on the TPP participation are discussed.

Are bilateral and multilateral aid‐for‐trade complementary?

AbstractUsing the first comprehensive estimates of ad valorem tariff equivalent bilateral trade costs spanning the time period 2002–10, we examine whether the aid‐for‐trade (AFT) inflows reduce bilateral trade costs facing aid recipients. If so, we ask whether the trade costs reduction effects of AFT from bilateral and multilateral sources are complementary. By showing the extent to which the observed trade cost reduction effects of AFT from bilateral (multilateral) sources correlate with the magnitudes of AFT disbursements from multilateral (bilateral) sources, we present plausible explanation for the cross‐country variations in the extent to which AFT promotes trade flows. Our findings have, thus, important policy implications for shaping future discourses on the coordination of disbursements for enhancing the effectiveness of AFT.

Does Aid for Trade Reduce Trade Costs? Panel Data Evidence from Inverse Gravity

Although the Aid for Trade (AfT) initiative was officially launched ten years ago, empirical evidence on its effectiveness in reducing trade costs is still scarce. This paper uses new trade cost estimates inferred from the gravity model to examine how different types of AfT are linked with trade costs. The analysis includes panel data on bilateral trade costs for 182 countries over the period 2002-2013. Overall, I find that AfT is significantly associated with reducing trade costs across all countries, as well as in certain sub-samples based on income group or region. The effects further vary by specific AfT categories, with AfT Policies & Regulations and particularly AfT Facilitation, indicating the largest potential return on AfT disbursed, especially in Least Developed Countries.

Euro introduction and the behaviour of Italian exporting firms

The paper examines the effects on Italian manufacturing firms of trade cost reduction due to the introduction of the euro over the period 1996–2004. Using the gravity approach and a difference-in-differences (DID) empirical strategy, the results reveal the importance of properly controlling for heterogeneity. The euro’s effect on the performance of exporting firms is estimated not to be statistically significant when considering eurozone destination markets as a whole. Nevertheless, an increase of flows to ‘peripheral’ eurozone countries is channelled through the intensive margin. When heterogeneity in terms of firm-level labour-productivity is controlled for, a competition effect emerges in core markets, with a reduction of the intensive margin for less productive firms and an increase for the more productive ones. Finally, more financial contrained firms decreased the extensive margin in core markets, regardless of their productivity level.

Trade Cost Reduction and Foreign Direct Investment in a Vertical Structure

Although empirical evidence shows that a lower trade cost and higher FDI may go hand in hand, the well-known “proximity-concentration” hypothesis does not support this view. We provide a simple explanation for this phenomenon. We show that a lower trade cost on the intermediate goods (with or without a trade cost reduction on the final goods) increases the incentive for FDI in the final goods market. In this respect, we show the roles played by the production technologies of the firms.

The Life-Cycle Dynamics of Exporters and Multinational Firms

This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). We present a dynamic model of trade and MNE activity in which the mode of serving a market depends on the well-known proximity-concentration tradeoff. We show that the option of performing MNE activities in the model produces life-cycle patterns for exporters that differ from those in an export-only model. Calibrating our model to rich firm-level data from France and Norway, our main quantitative finding is that a reduction in trade costs triggers much larger responses in growth rates and exit rates, for young exporters, in the model with MNEs than in the model without MNEs. We also show that the model is largely consistent with a set of new facts on the joint life-cycle dynamic behavior of exporters and MNEs.

Capital Accumulation and the Welfare Gains from Trade

We compare the welfare gains from a reduction in trade costs implied by a dynamic model with capital accumulation to a standard static trade model. The static and dynamic trade models differ in their welfare implications along four dimensions: transition costs, endogenous capital, composition of expenditure between investment and consumption goods, and computation of the trade elasticity. We provide a theoretical decomposition of these four effects, then quantify them in a parameterized example. Gains from trade differ considerably in the two models, even though they imply the same trade elasticity and import penetration ratio. In our base case, removal of a 100% trade cost increases welfare by 14% in the static model and 20% in the dynamic model. Our decomposition demonstrates that the most important difference between the two models is the endogeneity of capital.

Technology, Market Structure and the Gains from Trade

We study the gains from trade in a new model with oligopolistic competition, firm heterogeneity, and innovation. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Trade liberalisation can also reduce the number of firms competing in each market, thereby increasing markups on both domestic and export sales. For the majority of exporters, however, the pro- competitive effect prevails and their average markups decline. The incomplete pass-though and the reduction in the number of competitors instead dominate for top-exporters – the top 0.1% of firms – which end up increasing their markup. In a quantitative exercise we find that the aggregate effect of trade-induced markup changes is pro-competitive and accounts for the majority of the welfare gains from trade. Trade-induced changes in competition affect survival on domestic and export markets and firms’ decision to innovate. All exporters, and especially the top exporters, increase their market size after liberalisation which, in turn, encourages them to innovate more. Hence, top exporters contribute negatively to welfare gains by increasing their markups but positively by increasing innovation and productivity. Firms’ innovation response accounts for a small but non-negligible share of the welfare gains while the contribution of selection is U-shaped, being negative for small liberalisations and positive otherwise. A more globalised economy is therefore populated by larger, fewer and more innovative firms, each feature representing an important source of the gains from trade.

Does Financial Market Structure Impact the Cost of Capital?

We provide evidence on market structure and the cost of raising capital by examining market structure changes in US equity markets. Only the Nasdaq's Order Handling Rules (OHR), the one reform that reduced institutional trading costs, lowered the cost of raising capital. Using a difference-in-differences framework relative to the NYSE and that exploits the OHR's staggered implementation, we find that the OHR reduced the underpricing of seasoned equity offerings by one to two percentage points compared to a pre-OHR average of 3.6 percent. The effect is largest in stocks with the largest reduction in institutional trading costs after the OHR.

Aid for Trade and the Trade Facilitation Agreement: What They Can Do for LDCs

The Aid for Trade (AFT) initiative, launched in 2005 to help developing and especially the Least Developed Countries (LDCs) integrate the rules of the World Trade System adopted in the Uruguay Round turned out to be more about mobilizing support for the stalled Doha Round negotiations. A decade later, a broadened AFT agenda has eluded effective evaluation. The recently concluded Trade Facilitation Agreement (TFA) provides an ideal opportunity to narrow the scope of AFT activities to heed the call for ‘Managing for Development Results’ (MfDR). The article reviews the evidence on trade costs distinguishing between LDCs and Landlocked LDCS (LLDCs). The article also includes new estimates of time in transit for international parcel data that is measured relatively accurately. New estimates provide support for allocating a greater share of AFT funds towards LDCs and particularly towards LLDCs, both groups showing higher trade costs than comparators and less progress in reducing trade costs since 1995. On average, time in customs for imports and exports are also significantly higher for both groups than for their respective comparators. LDCs and LLDCs have systematically lower scores for the components in the new Organisation for Economic Cooperation and Development (OECD) Trade Facilitation Indicator (TFI). These new estimates suggest that a successful implementation of the TFA, defined as moving halfway towards the frontier value of the TFI for the respective country grouping could reduce trade costs for imports of LDCs by 2.5% and by 4.5% for LLDCs. Even though there is more to trade costs than customs management, monitoring implementation of the TFA would be part of the Istanbul Program of Action (IPoA) and a stepping stone towards the concrete trade performance targets that have lacked in AFT activities so far.

Impacts of globalization on tariff settings

This study investigates the effects of globalization—specifically, a reduction in trade costs—on trade policies implemented under unilateral and cooperative policy regimes. The results demonstrate opposite responses to the advancement of globalization under the two regimes: (i) the unilateral policy regime induces governments to raise tariff rates with the progress of globalization, while (ii) the cooperative policy regime allows governments to reduce tariffs.

Unlocking FDI development gains through facilitation

The World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) holds enormous promise to gear up trade flows. WTO estimates suggest successful implementation of the TFA could reduce trade costs by 14%, which in turn could raise global goods exports by US$ 1 trillion a year – potentially boosting the world economy at a time of flagging growth. What is more, the body’s World Trade Report found that developing countries stand to capture more than half those gains, a ramification with significant implications for international development efforts.

Revitalizing the Global Trading System: What Could the G20 Do?

Since 2008, G20 leaders have repeatedly committed themselves not to resort to protectionism and to conclude WTO negotiations expeditiously. The jury is out on the extent to which they lived up to the first promise; they failed to deliver the second. Anemic global trade growth rates since 2010 implies that trade has not been a driver of much needed economic dynamism. This paper argues that the G20 should pursue a more ambitious trade agenda and that there is much that greater leadership by the G20 could do to reinvigorate the trading system. A first step would be to commit to concrete actions that can be implemented by individual governments on a concerted basis and that center on reducing trade costs and improving access to services for firms. The Chinese presidency should also seek to have the G20 commit to more effective monitoring and analysis of trade policy broadly defined (including subsidies and investment incentives) and the impact of the many preferential trade agreements involving China, the EU and the US, the world’s largest trading powers.

Regulatory Entry Barriers, Rent Shifting and the Home Market Effect

AbstractThis paper introduces regulatory entry barriers in a model of the home market effect. The entry barriers generate local rents that have unexpected but significant implications. First, the home market effect is magnified. Second, when countries are sufficiently unequal in size and rents are sufficiently large, symmetric reductions in trade costs reduce welfare in the small country. Third, entry barriers increase the large country's market size and, surprisingly, can increase its welfare. Fourth, a unilateral increase in trade protection shifts foreign rents to the home country. This rent‐shifting effect amplifies the standard production relocation motive for trade policy intervention.

Does ICT Development Flatten the Globe? Evidence from International Trade Costs Data

This study attempts to bring new perspectives on the death of distance hypothesis by examining to what extent the intensification of ICT has contributed to attenuate the effect of distance on international trade issues. Our analysis is based on an extended gravity model constituted of 2827 country pairs observed from 2002 to 2012. The model is estimated by using the Hausman-Taylor instrumental variable approach to deal with specificities of the panel gravity models that cannot be treated in classical fixed-effect or random-effect models. The estimations confirm significant beneficial effects of ICT regarding trade costs reduction. We found that bilateral trade costs are significantly low between countries that have a more densified communication network. And this effect appears to be strongly heterogeneous regarding the distance. In particular, we found that the impact of ICT on trade costs is greater when the distance between the trading partners is more important. We also found that the elasticity of trade costs to distance decreases as the level of ICT increases. These results appear robust to various sensitivity and robustness checks and are consistent with other studies. Finally, the results obtained in this study suggest the existence of strong distance-neutralizing effect of ICT. JEL Classifications Code: F14 ; O33

The role of direct flights in trade costs

Effects of direct flights on trade costs are investigated using micro price data at the city level. After controlling for local retail/distribution costs, traded input prices are obtained to be further used in the measurement of trade costs across cities through arbitrage conditions. The existence of a direct flight enters trade costs regressions negatively and significantly. The results are shown to be robust to the consideration of many control variables, nonlinearities in the effects of distance on trade costs, possible endogeneity of having direct flights between cities and alternative definitions of the data. The direct flights that are shown to be determined by bilateral air services agreements are further shown to reduce trade costs through an endogeneity analysis; the main policy implications are twofold: (i) international trade policies through aviation services, such as Open Skies Agreements of the US, are alternative trade policy tools to reduce international trade barriers; (ii) direct flights facilitate the integration of internal markets as in the case of European Union.