Trade Elasticities Research Articles

Gains from Trade: Does Sectoral Heterogeneity Matter?

This paper assesses the quantitative importance of including sectoral heterogeneity in computing the gains from trade. Our framework draws from Caliendo and Parro (2015) and Alvarez and Lucas (2007) and has sectoral heterogeneity along five dimensions, including the elasticity of trade to trade costs, the value-added share, and the input-output structure. The key parameter we estimate is the sectoral trade elasticity, and we use the Simonovska and Waugh (2014) simulated method of moments estimator with micro price data. Our estimates range from 2.97 to 8.94, considerably lower than those obtained with the Eaton and Kortum (2002) price-based method. Our benchmark model is calibrated to 21 OECD countries and 20 sectors. We compute the gains from trade in our benchmark model, and in several re-calibrated versions of the model in which we eliminate one or more sources of sectoral heterogeneity. Our main result is that sectoral heterogeneity does not always lead to an increase in the gains from trade. There are two reasons for this. First, the magnitudes of our estimated sectoral trade elasticities are relatively high, while the magnitude of our estimated aggregate trade elasticity is low. All else equal, this will lead to higher gains for the aggregate, one-sector model. Second, the sectors with low trade elasticities (hence, implying high gains from trade) are not the sectors with low value-added shares and with high initial trade shares (which would magnify the gains). Hence, the sectoral heterogeneity in our calibrated model does not exert complementary gains from trade effects.

The Long and Short (Run) of Trade Elasticities

We propose a novel approach to estimate the trade elasticity at various horizons. When countries change Most Favored Nation (MFN) tariffs, partners that trade on MFN terms experience plausibly exogenous tariff changes. The differential effects on imports from these countries relative to a control group â?? countries not subject to the MFN tariff scheme â?? can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2018, and estimate the trade elasticity at short and long horizons using local projections (JordA , 2005). Our main findings are that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about â??0.76, and the long-run elasticity ranges from â??1.75 to â??2.25. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial convexities in the costs of adjusting export participation.

Profit Shifting, Import and Export Markups, and the Gains from Trade

This paper develops a multi-sector, multi-country model of international trade and profit shifting which embeds imperfect product markets and markups into Eaton and Kortum (2002)'s Ricardian trade model. Within a country, producers in different sectors face different demand elasticities, and therefore, charge different markups. Moreover, markup distributions for both imports and exports are allowed to vary across countries. We first show theoretically that the gains from trade can depend crucially on the markup distribution for imported goods versus that for exported goods. To then bring the model to the data and to quantify the markup distributions for imports and exports, we estimate both trade elasticities and a rich set of country- and industry-specific import demand elasticities for over 120,000 distinct sector-country pairs and incorporate them into our structural model. We find that cross-country heterogeneities in the markup distribution for exports and imports are an important determinant of the gains from trade and especially the welfare losses from tariffs; By taking markups into account, these losses are up to three times larger (smaller) for net exporters (importers) of high-markup products. Finally, we apply our model to the recent U.S.-China trade war and show that the U.S. experienced significantly higher welfare losses from the tariff war once markups and profit shifting are taken into account, while China slightly benefited overall.

Product-Level Trade Elasticities: Worth Weighting for

Product-Level Trade Elasticities: Worth Weighting for

Foreign Currency as a Barrier to Trade: Evidence from Brazil

I study the role of foreign currency risk in affecting export behavior. The dominant role of the United States Dollar in the international payments system exposes many emerging market firms to exchange rate risk in international trade due to unexpected movements in prices paid in local currency. In 2008, Brazil and Argentina agreed to a “Local Currency Payments” (SML) system, which allowed exporters and importers to operate in their own local currencies. This system was responsible for nearly 10% of exports from Brazil to Argentina by 2012. I estimate the effect of eliminating foreign currency risk via the SML system by leveraging plausibly exogenous municipal variation in access to authorized financial institutions. Using a triple difference design, I find that municipalities with high access to the SML system exported 22% more to Argentina relative to other South American export destinations compared to municipalities with low access. Applying estimates of the trade elasticity from the literature, this effect is equivalent to reducing trade barriers by approximately 10%. I complement this finding with a firm-level analysis using confidential customs data. Export transactions through the SML system were on average 44% larger than otherwise similar transactions. In a stylized model of export behavior, I discuss these results as stemming from export frictions such as risk aversion or currency fees.

Gravity Without Apology: The Science of Elasticities, Distance, and Trade

Gravity as both fact and theory is one of the great success stories of recent research on international trade, and has featured prominently in the policy debate over Brexit. We first review the facts, noting the overwhelming evidence that trade tends to fall with distance. We then introduce some expository tools for understanding CES theories of gravity as a simple general-equilibrium system. Next, we point out some anomalies with the theory: mounting evidence against constant trade elasticities, and implausible predictions for bilateral trade balances. Finally, we sketch an approach based on subconvex gravity as a promising direction to resolving them.

International Friends and Enemies

We develop sufficient statistics of countries' bilateral income and welfare exposure to foreign productivity shocks that are exact for small shocks in the class of models with a constant trade elasticity. For large shocks, we characterize the quality of the approximation, and show it to be almost exact. We compute these sufficient statistics for over 140 countries from 1970-2012. We show that our exposure measures depend on market-size, cross-substitution and cost of living effects. As countries become greater economic friends in terms of welfare exposure, they become greater political friends in terms of United Nations voting and strategic rivalries.

Exchange Rate of the Ruble Modeling

As underlying determinants of the author’s model are used capital flows, import and export operations, elasticities of cross-country trade, terms of foreign trade, indexes of real GDP, indexes of domestic and export prices, solutions of microagents. The model was verified on data from the crisis period in Russia 2013-2015. The simulation results are applied to the analysis of contemporary monetary policy of Russia.

The Return to Protectionism*

AbstractAfter decades of supporting free trade, in 2018 the United States raised import tariffs and major trade partners retaliated. We analyze the short-run impact of this return to protectionism on the U.S. economy. Import and retaliatory tariffs caused large declines in imports and exports. Prices of imports targeted by tariffs did not fall, implying complete pass-through of tariffs to duty-inclusive prices. The resulting losses to U.S. consumers and firms that buy imports was $51 billion, or 0.27% of GDP. We embed the estimated trade elasticities in a general-equilibrium model of the U.S. economy. After accounting for tariff revenue and gains to domestic producers, the aggregate real income loss was $7.2 billion, or 0.04% of GDP. Import tariffs favored sectors concentrated in politically competitive counties, and the model implies that tradeable-sector workers in heavily Republican counties were the most negatively affected due to the retaliatory tariffs. JEL Code: F1.

ONE EMU FISCAL POLICY FOR THE EURO

We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

EXPORTS AND IMPORTS, IS THERE SIMULTANEITY? A STRUCTURAL MODEL FOR SUPERTRADING ECONOMIES

The determining of exports and imports independently, which is a common assumption in the literature, may be over restrictive for extremely open economies. As an alternative, this study proposes and estimates structural models for the simultaneous determination of trade flows in three extremely open economies (Ireland, Belgium and Singapore). It confirms the existence of an interrelation between exports and imports and, as a result, the existence of a bias in the estimates of trade elasticities when the interrelation is not taken into account.

Currency devaluation and trade balance: Evidence from the US services trade

This study aims to revisit the effectiveness of using currency devaluation as a policy tool to improve trade balance by estimating the exchange rate elasticities of services trade between the US and rest of the world with quarterly disaggregated services trade data from 1999 to 2015. Empirical results reveal that the impacts of currency devaluation on individual services trade are mixed and largely depend on the nature of services. Using currency devaluation to raise export services trade and reduce import services trade seems to be more effective in the long-run but not in the short-run. It is interesting to note that some individual services trades are insensitive to exchange rate changes. The estimates also reveal that most categories of services trade are income elastic and economic growth plays a key role in determining the imports and exports of services trade.

Monetary Unions and National Welfare

This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of members of the union. Therefore, it is argued that countries with similar shocks should establish a monetary union so that the cost of one-size-fits-all monetary policy is minimized. This study reveals that when there are inefficient shocks (namely those which distort the economy asymmetrically and break the 'divine coincidence') and countries are large, the classical approach fails. In that case, monetary regime choice should depend on relative variation (mean preserving spread) of inefficient shocks rather than proximity of shocks. A union implicitly imposes cooperation in monetary policy between its members. This cooperation improves response to foreign inefficient shocks while it worsens responses to domestic inefficient shocks slightly less in terms of domestic welfare. Therefore, a country chooses monetary union over flexible exchange rate regime if variation of foreign shocks is close to or larger than variation of domestic shocks. That is on the condition that losing exchange rate flexibility is not costly or has a small cost. In this way, the domestic country 'ties the hand of the foreign country' and prevents foreign monetary policy actions which hurt domestic welfare. Both countries benefit from cooperation provided by the union, if variances (spreads) of domestic and foreign shocks are close enough. Then, a monetary union becomes Pareto Improvement. How close variances should be so that monetary union is welfare increasing or Pareto Improvement, and welfare loss or gain of losing exchange rate flexibility are contingent upon price rigidity and trade elasticity.

The double EMG distribution and trade elasticities

AbstractUsing Brazilian export data that, unlike many trade data sets, have a full record of small export sales, this paper reconsiders trade elasticities and the welfare gains from trade. Using the Brazilian data, this paper provides novel evidence on the properties of the distributions of log‐export sales and shows that the double exponentially modified Gaussian (EMG) distribution parsimoniously captures these properties. Using the double EMG distribution in a standard monopolistic competition model of trade, this paper demonstrates that data truncation, which is prevalent in many data sets, leads to an upward bias in measuring the partial elasticity of trade with respect to variable trade costs. This bias subsequently leads to the underestimation of the gains from trade by 1% to 9% depending on the extent of data truncation, a range that is commensurate with typical economic growth and large booms.

Protection for maturing industries: Evidence from Canadian trade patterns and trade policy, 1870–1913

AbstractAs industries mature, experience is accumulated, productivity increases, trade performance improves on domestic and international markets and learning potential dissipates. Using theory‐consistent empirical specifications, I find a strong, robust negative relationship linking tariff rates to trade performance for manufactured products that matured during the first decade after Canada prioritized protectionist policy objectives in 1879. This relationship also holds at a more aggregate industry level, where I can use other measures of maturity, control for import penetration, use historically contemporaneous trade elasticity estimates, link trade performance to trade restrictiveness and effective rates of protection and where I can instrument for import penetration and trade performance using a two‐stage IV–GMM estimation approach. The results suggest that after 1890 the Canadian government carefully cut tariffs on products produced by maturing Canadian producers and this retreat from protectionism significantly lowered the static deadweight losses resulting from Canadian trade policy during the post‐1890 period.

Tariffs and the Risk of Invasive Pest Introductions in Commodity Imports: Theory and Empirical Evidence

Expanded world trade carries with it increased risks of biological invasions and the ecological and economic damage that accompanies them. The economics literature has suggested that it might be desirable to use tariffs as corrective Pigouvian taxes to reduce those risks. This paper conducts a theoretical and empirical investigation of that proposition and provides the first comprehensive analysis of the potential effectiveness of tariffs as a measure to reduce the arrival of invasive pest species. A theoretical analysis focusing on individual shipments indicates that the effect of higher tariffs on invasive pest introductions is ambiguous and depends on whether marginal pest abatement cost is more or less responsive to changes in shipment volume and pest levels than is the marginal loss from expected pest interceptions. The theoretical framework provides the foundation for an econometric model of the effects of tariffs, shipment value, and duty free status on the risk of invasive pest introductions in import shipments of fruits and vegetables. We estimate the model using data from surveillance screening conducted by the Animal and Plant Health Service of the US Department of Agriculture from 2005-2014. Shipment data is used to separately estimate the responsiveness of the number of shipments to changes in the tariff rate and the removal of duty free status. The estimated parameters of these two models are then used to calculate the effects of raising tariff rates/removing duty free status on the probability of invasive pest detection and on the expected number of invasive pest detections per year for commodities differentiated by type, region of origin, growing season, and port of entry. For commodities currently facing positive tariffs our empirical analysis shows that tariff rates exert a negligible influence on the probability of detecting an invasive pest and on the annual number of shipments. Raising tariffs on these commodities would have a small effect on the expected number of invasive pest introductions. For commodities that currently enter duty free, our analysis suggests that removal of duty free status would reduce both shipments and intercept probabilities, thereby decreasing expected detections per year, especially for commodities currently responsible for the most pest intercepts. But removing duty free status from these commodities would likely undermine other goals of US trade policy as well as lowering consumer welfare due to higher fruit and vegetable prices and less variety in winter diets. We estimate trade elasticities for a subset of commodities and find the consumer welfare loss to be on the order of $14 million per expected intercept avoided.

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.

Welfare and trade elasticity with multinational production

AbstractWe explore welfare properties in a firm heterogeneity model with multinational production and export. The presence of multinational production plays a crucial role in delivering a partial trade elasticity of total sales by exporters and affiliates that is no longer constant, and depends on both supply and demand parameters. We then analyse counterfactual scenarios. Multinational production with intra‐firm trade increases welfare gains by up to 4% with respect to a model with only export and no truncation. Multinational production à la Helpman et al. (American Economic Review, 2004, 94, 300) generates the largest welfare gains from liberalisation.

Estimating the trade elasticity over time

This paper estimates the trade elasticity in a continuous way. Following a trade cost shock, trade elasticity estimates are about 1 after one quarter, about 5 after one year, and about 7 after five years.

Estimating the Trade Elasticity: A Structural VAR Approach

Using quarterly data on the U.S. imports from its major trading partners and the corresponding trade costs, this paper estimates the trade elasticity by using a panel structural vector autoregressive model that can distinguish between short-run versus long-run elasticity measures in a continuous way and is robust to any endogeneity problem. The estimated trade elasticity measures are highly consistent with studies in alternative literatures, suggesting a short-run value of about 1 (after one quarter), a medium-run value of about 5 (after one year), and a long-run value of about 7 (after five years).