Trade Elasticities Research Articles

How do we measure trade elasticity for services?

How do we measure trade elasticity for services?

Trade Elasticities in General Equilibrium: Demand, Supply, and Aggregation

Abstract We develop a general equilibrium model of international trade that incorporates imperfect factor mobility, product entry, and external returns to scale into a unified framework. The effects from these microeconomic channels can be summarized by two composite elasticities that govern supply and aggregation. We structurally derive export supply and import demand curves, develop a heteroskedastic estimator, and estimate supply, aggregation, and demand elasticities across international product markets. Employing our estimated model, we evaluate the impact of recent US protectionist policies and highlight the importance of our estimates and general equilibrium effects for tariff passthrough rates and cross-industry employment reallocations.

Bulkiness of goods and the gravity of international trade: Differential impact of trade barriers

This study investigates how the trade elasticity to trade barriers, or the lack thereof, varies with the bulkiness of goods, measured as the value-to-weight ratio (V/W ratio). The empirical analysis presented herein offers compelling evidence that lighter goods, characterized by higher V/W ratios, demonstrate reduced trade elasticity to distance, contiguity, and colonial relationships but heightened trade sensitivity to language. These findings emphasize the importance of accounting for the variations in V/W ratios when applying gravity models and reveal noteworthy heterogeneity in trade elasticity at the country and trade-pair levels.

Unveiling the causal nexus between Saudi’s seaborne trade and economy: evidence from an ARDL model

An economy’s primary objective is to foster high economic growth, ultimately enhancing the well-being of its citizens. Recent economic strategies have increasingly emphasized trade-oriented policies to achieve this goal. This study delves into the nexus between Saudi seaborne trade (measured in tons) and gross domestic product (GDP), aiming to determine any causal relationship between these economic variables. Using datasets from the Saudi Central Bank and the General Authority of Statistics, this research employs rigorous unit root, cointegration, and causality tests to find the intricate interplay between trade and economic growth in Saudi Arabia. The empirical analysis highlights a robust long-term relationship between Saudi GDP and seaborne trade, suggesting cointegration. Specifically, the findings reveal a significant impact of economic growth on seaborne trade, as indicated by a trade elasticity of 1.08, which implies that changes in GDP yield a substantial shift in trade. For instance, a 1% increase in GDP corresponds to an approximate 1.08% increase in trade volume. The error correction mechanism also illustrates the dynamic adjustment process: deviations of Saudi seaborne trade and economic growth from equilibrium are corrected by 61% and 43%, in the subsequent year. Furthermore, Granger causality tests unveil bidirectional causality between GDP and trade, elucidating that economic growth changes precede trade volume alterations and vice versa. Thus, fostering international trade not only stimulates income but also bolsters the domestic economy of Saudi Arabia.

Spatial Equilibria: The Case of Two Regions

In this paper we characterize the set of equilibria in a generalized version of the canonical two-region economic geography model that nests the class of models in Allen and Arkolakis (2014) as well as Krugman (1991) and features an input–output loop. We provide sufficient conditions for uniqueness of equilibria that — in contrast to the well-know result in Allen and Arkolakis (2014) — allow for positive agglomeration externalities, which concentrate economic activity, even in the absence of congestion effects, which disperse it, and highlight the key role played by three additional parameters: the trade elasticity, which regulates the strength of the dispersion force associated with the decline in the terms of trade caused by migration into a region; trade costs, which weaken this dispersion force by limiting trade across regions; and the importance of the agricultural sector, which pushes against agglomeration forces in manufacturing.

A new approach for estimating trade elasticities and measuring the productivity effects associated with trade

Although there is an extensive literature on the measurement of total factor productivity (TFP) and its decomposition, the benefits of international trade for aggregate TFP have been less frequently studied. Combining the theoretical trade models and the so-called proxy-variable approach, this paper provides a new method for estimating trade elasticities based on a production model where trade elasticities and technological parameters are estimated simultaneously. Our proposed model is used to analyse the main determinants of the degrees of openness (embeddedness) of countries and sectors. Using data from the World Input-Output Database, we find that the pecuniary productivity gains attributable to embeddedness tend, on average, to offset its effect on sectors’ underlying productivity. We also use the model to measure the different factors affecting productivity changes due to the Covid-19 pandemic. We find that the trade-related consequences are important in explaining the contraction in countries’ productions.

International Friends and Enemies

We examine whether, as countries become more economically dependent on a trade partner, they realign politically toward that trade partner. We use network measures of economic exposure to foreign productivity growth derived from the class of trade models with a constant trade elasticity. We establish causality using two different sources of quasi-experimental variation: China’s emergence into the global economy and the reduction in the cost of air travel over time. In both cases, we find that increased economic friendship causes increased political friendship and that our theory-based network measures dominate simpler measures of trading relationships between countries. (JEL D72, E23, F14, F15, F53, O19, P33)

Trade Wars, Nominal Rigidities, and Monetary Policy

Abstract This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.

Improving financial productivity and upgrading in global value chains

This study integrates the financial productivity improvement in a multi–country, multi–sector Ricardian model to examine its impact on China's position within global value chains (GVC). We also differentiate between the trade elasticities of the financial sector concerning intermediate inputs and final consumption. Through counterfactual analysis, our research reveals a consistent upward trajectory in China's GVC positioning at aggregate and sectoral levels that is attributable to financial productivity improvement. This ascent is facilitated by input–output links and cost-saving effects. The findings validate the significance of financial productivity improvement in advancing China's GVC positioning.

Analysis of Financial Development and Trade Performance in Nigeria

Despite the importance of financial development-international trade nexus and its implication for growth, studies have yet to look at the impact of new financial development indicators developed by the International Monetary Fund on international trade performance in Nigeria. This is one of the few attempts made to examine the elasticity of trade to financial development, given the inconclusive findings that permeate the literature. Therefore, this paper investigates the effect of financial development on aggregate trade performance in Nigeria using annual data from 1980 to 2021. The empirical framework is based on the ARDL approach to cointegration and error correction model. The findings revealed that (i) The ARDL bound test revealed the existence of a long-run equilibrium association between the variables; (ii) We find that a unit improvement in financial development induces a 1.1%-1.2% increase in trade performance in the short-run short term and a 9.7% in the long-run; (iii) The results show that a 1% increase in the exchange rate (depreciation) leads to a 0.01% improvement in trade performance in the short-term. The findings have important policy implications. The paper concludes that financial development contributes to trade performance.

Demand Uncertainty, Selection, and Trade

This paper examines the role of uncertainty on elasticities of trade flows with respect to variable trade costs in a canonical model of trade with monopolistic competition and heterogeneous firms. We identify two channels through which uncertainty impacts trade: through export participation thresholds (the selection effect) and the distribution of shocks governing export selection (the dispersion effect). While the selection effect dampens trade elasticities under uncertainty, the dispersion effect is ambiguous. We develop a methodology for using customs firm-level data to quantify trade elasticities under uncertainty, and the magnitude of each of the two channels through which uncertainty impacts trade. We find that uncertainty amplifies trade elasticities, on average, indicating that the dispersion effect of idiosyncratic firm-level shocks dominates -- though the effect is heterogeneous across industries. The overall magnitude of the endogenous selection mechanism on trade elasticities is small, indicating that the main drivers of trade in this class of trade models are overwhelmingly incumbent firms.

African continental free trade area and greenfield investment: Likely effect and transmission channels

AbstractWe examine the likely effect of the African Continental Free Trade Area (AfCFTA) on African investment using data on announced greenfield investment. Departing from existing work on this subject, we add value by providing estimates based on a general equilibrium counterfactual analysis in a structural gravity framework. Results suggest that the stock of announced intra‐African greenfield investment in 2018 would have increased by 0.7 percent from a successful implementation of the AfCFTA in that year relative to the baseline scenario of no agreement, with considerable heterogeneity across source and destination countries. Moreover, the positive effect is found to increase with the depth of the negotiated agreement. Exploring possible transmission channels we find the trade elasticity of announced greenfield investment to be positive, especially for trade in intermediates in African host countries with strong governance indicators. This suggests that, by improving institutional quality and galvanising regional value chains, integration within Africa could also incentivise investment.

Gains from trade: Demand, supply, and idiosyncratic shocks

SummaryFirm‐level sales are often used as a proxy for productivity to quantify welfare gains from trade (GFT) using firm‐level data. This approach ignores the fact that heterogeneity in firm‐level sales is driven by factors other than productivity. Our theoretical and empirical analysis reveals that using sales as a proxy conflates persistent productivity with transitory demand and supply shocks, resulting in an over‐dispersed productivity distribution. Assigning this shock‐inflated productivity to a modeled economy's supply‐side results in overestimated GFT. We show how to obtain unbiased productivity estimates, aggregate trade elasticities, and GFT estimates by exploiting the revenue production function from a single‐source country.

Terms-of-trade and welfare effects of the 2018–2019 US tariff hikes on electrical equipment and plastics

ABSTRACT Despite theoretical analyses of the welfare impact of higher tariffs, empirical studies remain relatively scarce. This study bridges this gap by examining the price, terms-of-trade, and welfare effects of the 2018–2019 US tariff hikes in plastics and electrical equipment products, which are crucial to the US and world trade and are ranked among the top 10 largest total value of imports among the 99 harmonized system broad product groups of US imports during 2018–2019. Accordingly, this study a) derives a flexible partial equilibrium welfare model that accounts for terms-of-trade gains and losses and welfare effects under perfectly and monopolistically competitive market settings; b) estimates trade elasticities using average monthly bilateral exports of trade partners to the US at the 10-digit HS level over the January 2016–August 2020 period; and c) estimates the terms-of-trade, efficiency, and welfare effects of the 2018–2019 tariff hikes using estimated elasticities and trade data at the 4-digit HS level. The results suggest that the tariff hikes yielded negative terms of trade, efficiency, and welfare effects on the US economy, the bulk of the welfare loss resulting from increased international free-on-board import prices. The findings call for in-depth industry-specific analyses before rolling out tariff hikes.

Firm input choice under trade policy uncertainty

We examine the role of trade policy uncertainty (TPU) in shaping the import decisions of firms. In a model where firms must incur sunk costs to adopt new imported varieties of an input, a reduction in TPU for a given input increases imports of that input (a substitution effect) and possibly other inputs (a scale effect). We explore this in the context of China’s accession to the WTO, which bound China’s tariffs. We find that, controlling for current tariffs, the threat of reversion to past high tariffs reduces imports, but much less so after WTO accession, consistent with lower TPU. The current-tariff trade elasticity also increases after WTO entry, reflecting a greater perceived permanence of current tariffs. We find evidence of both substitution and scale effects for imports, and post accession, firms were more likely to adopt products previously subject to higher tariff risk.

The gains from changes in internal trade costs: A quantitative analysis of China

AbstractWe study how internal trade costs affect the Chinese economy. Combining regional and industry data with a multiregional multisector general equilibrium model, we quantify the magnitude of total trade costs and institutional trade costs, and the impact of their changes on aggregate, regional, and sectoral total factor productivity, gross domestic product, and welfare. Using unique data, we estimate the sectoral trade elasticity of internal trade in 16 tradable sectors. We use our calibrated model to perform a variety of counterfactual exercises. We find that the welfare gains are negative for a 5% reduction in total trade costs and for the elimination of institutional trade costs, which can be attributed to inherent inefficiencies in the economy. However, as total trade costs decrease further, the positive welfare effect significantly exceeds the impact of inefficiency. The regional and sectoral effects of changes in trade costs show that the spatial structure of the economy, input‐output linkages, and local factors together determine the heterogeneity of sectoral and regional consequences. Finally, we infer the relative changes in China's internal trade costs from 2012 to 2017, and calculate their economic effects.

Ekonomik ve finansal gelişme Katar'daki CO2 emisyonlarını azaltabilir mi?

This study investigates the impacts of economic and financial development on carbon emissions in Qatar between 1975 and 2018 by analyzing the results of the ARDL and VECM tests. We do so by considering two model specifications, Model 1 and 2, considering CO2 emission is a dependent variable. In Model 1, economic growth and its square are considered as independent variables to test the basic Environmental Kuznets Curve (EKC) hypothesis. The results provide evidence to confirm the EKC hypothesis for Qatar. In Model 2, various economic and financial variables are specified as regressors, and all the independent variables have a statistically significant impact on CO2 emissions at a 1% level. The coefficient of real income per capita implies that an increase in income will increase carbon emissions by 72%. On the other hand, financial development's carbon elasticity indicates that an increase in financial development will decrease CO2 emissions by 32%. The carbon elasticity of foreign trade signifies that an increase in trade will decrease CO2 emissions by 33%.

Мировая торговля: долгосрочные тренды и структурные сдвиги

The paper considers long-term trends of global trade and there structural changes. We determine the elasticity of trade to GDP and the dynamics of the ratio of goods and services exports, as well as structural shifts in the major countries and regions of the world. The case study was focused on the USA–China trade relations and contradictions. Since 2007, PRC is the undisputed world’s largest exporter of goods. According to author’s estimates, in 2022 China was ahead of the United States in the total merchandise export by 1.5 trillion dollars. This corresponds to 6.3% of total world exports or 5.8% of US GDP. The trade war unleashed by former president D. Trump administration in 2018–2019 inevitably resulted in a decline in bilateral trade. However, this was just a temporary trend. The recent WTO statistics shows that US imports from China recovered by 2021 both in general volume and in the main categories of goods, both for intermediate and final consumption. Moreover, in 2022 its value, in particular for the analyzed commodity groups (aluminum, iron and steel) exceeded the indicators of 2017–2018. The author argues that, most importantly, there are long-term and fundamental implications of the trade conflict between the US and China rather than a transient decrease in mutual trade between the two flagships of globalization. In particular, it substantially exacerbated the protectionist biases in the international trade policies that became evident after the global financial crisis of 2008–2009. It triggered appearance of new rapidly rising actors at the international trade field such as India and Brazil. This points at major underlying shifts in the global production and supplies schemes. Basically, tensions between the two flagships of globalization produced much higher uncertainty in the global trade which, in the next decade, is unlikely to show the dynamics comparable to that of the period 2002–2008.

Quantifying economic impacts of trade agreements with heterogeneous trade elasticities

AbstractBilateral trade relationships between countries vary across products. Such heterogeneity poses challenges when assessing the economic impacts of trade agreements. This paper estimates bilateral trade elasticities at the product level and explores these impacts using a hypothetical no‐deal Brexit as an example. Our findings indicate that the European Union's demand for the United Kingdom products is often less elastic compared to products from other trading partners. We also observed substantial heterogeneity in the elasticities across products and a negative correlation between these elasticities and tariffs. These factors mitigate extent of trade welfare losses compared to a scenario using homogeneous elasticities.

Diminishing gains from trade across countries: Interaction between trade elasticity and openness

This paper theoretically shows that when the trade elasticity is allowed to be country specific and it increases with trade openness across countries, it is possible for the gains from trade to decrease with trade openness across countries under certain conditions, which we call as the diminishing gains from trade. In order to empirically test this possibility, country-specific trade elasticity measures are estimated by using quarterly time-series data for 40 countries, where the model-implied macroeconomic relationship between the home expenditure share and the real income per capita is employed. The average trade elasticity is estimated about 2.7, with a range between 0.3 and 11.9 across countries, which corresponds to the gains from trade of about 30% for the average country. Instead, when a common trade elasticity of 2.7 is used for all countries, the gains from trade are underestimated by about 8% for the average country, showing the importance of using country-specific trade elasticity measures. In a secondary cross-country analysis, the country-specific trade elasticity estimates are shown to increase and the gains from trade are shown to decrease with trade openness measures. It is implied that there are diminishing gains from trade across countries with respect to their trade openness.