Trade Theory Research Articles

Labor‐eliminating technical change in a developing economy

AbstractDeveloping countries face significant challenges arising from automation. While the trade theory literature has tended to focus on factor‐neutral and factor‐augmenting technical change, automation processes suggest another form of technical change is relevant: factor‐eliminating. We explore the impact of a labor‐eliminating technical change in the context of a small developing economy. Unlike labor‐augmenting technical changes, labor‐eliminating technical changes are not necessarily cost‐reducing, and thus will not necessarily be adopted. A manufacturing wage held artificially higher than at the market‐clearing level, as in the Harris–Todaro framework, increases the incentive to automate. We establish the conditions under which firms will adopt a labor‐eliminating technology, and describe the resulting changes in equilibrium outcomes. Under plausible circumstances, automation can actually lower output, and may raise both the rate and level of unemployment. Immiserizing growth becomes a possibility, and can be tied directly to the underlying wage distortion.

The Place of Labor Rights in the European Union’s Environmental Policies

This article analyzes the potential impact of the European Commission’s proposed “European Green Deal” on labor rights, in particular on the rights of workers in lower-income EU Member States. It focuses on environmental measures, already part of the EU’s existing environmental policies and further contemplated in the Green Deal, which prohibit or tax certain polluting production processes. Such measures, insofar as they apply uniformly to traded-good industries, are likely to make firms in lower-income EU Member States less competitive and harm their workers’ rights to work and to fair wages. Thus, even though these environmental measures are worth pursuing for the benefits they procure, the distribution of their costs is likely to run afoul of egalitarian norms. This article puts forward an institutionalist approach to trade theory which recognizes that competitiveness is legally constructed. It argues on the basis of that theory that lower-income countries should be allowed to adopt ambitious industrial policies and subsidize their firms to insulate workers from the disruptions caused by added environmental regulatory costs. More broadly, this article presents an agenda to pursue ambitious environmental transformation while remedying, or at least not worsening, inequalities between workers and citizens in the EU.

International Trade and Public Protest: Evidence from Russian Regions

Abstract How does economic globalization influence domestic political stability? Building on innovations in trade theory, we argue that international trade amplifies political discontent and protest in contexts in which trade losers concentrate, but has a pacifying effect in contexts dominated by beneficiaries of free trade. We examine this argument focusing on variation in Russian regions. Using negative binomial regression models on data from 2007 to 2012, we show that regional education levels condition the effect of trade intensity on protest frequency. High exposure to trade leads to more protests in regions with low average education levels, but fewer protests in regions in which residents are well-educated. Probing the underlying mechanism, we find that the effect of trade on regional economic welfare is conditioned by education levels, that poorly educated Russians face more economic difficulties when they live in regions exposed to trade, and that economically aggrieved individuals participate more in protests.

Trade-induced Unemployment in Labor-abundant and Capital-abundant OIC Countries: Asymmetric Evidence from Quantile-on-Quantile Regression

This study aims to analyze the impact of trade openness on unemployment in labor-abundant and capital-abundant countries of Organization of Islamic Cooperation (OIC) by taking the data from 1991 to 2018. A new technique quantile-on-quantile (QQ) is applied to show how quantiles of trade openness asymmetrically affect the quantiles of unemployment by providing an appropriate framework to capture the overall dependence structure. 8 out of 10 capital-abundant countries show a positive association between trade openness and unemployment, while 7 out of 10 labor-abundant countries indicate a negative effect of trade openness on unemployment. Hence, the majority of selected labor-abundant and capital-abundant countries are validating Heckscher-Ohlin theory of international trade. The results show that the asymmetric intensity of trade-induced unemployment varies with countries at both bottom and upper quantiles of the distribution of data that require individual attention in postulating the policies related to trade and unemployment in OIC countries.

The impact of destination tariffs on China’s exports: Country, firm, and product perspectives

Based on multi-product heterogeneous firm trade theory, we combine China's customs data with the World Integrated Trade Solution’s (WITS) tariff data from 2002 to 2013 and analyze the impact of destination tariffs on China's exports at the country, firm, and product levels. The results reveal that tariffs had a negative effect on country-level exports and their extensive margins. After controlling for the inter-firm composition effect, tariffs had negative effects on firm-level exports and their intensive margins, but positive effects on their extensive margins. After also controlling for the within-firm export composition effect, tariffs had a negative impact on the exports of core products; however, the negative impact diminished as the core grade and technological content of the products increased. Using these elasticities to analyze Sino-U.S. trade frictions, we determine that the additional U.S. tariffs reduced China's exports of high-tech products more than its medium- and low-tech products.

Stability Test and Regression Analysis of EU Carbon Tax on Coastal Trade

Wang, L., 2020. Stability test and regression analysis of EU carbon tax on coastal trade. In: Al-Tarawneh, O. and Megahed, A. (eds.), Recent Developments of Port, Marine, and Ocean Engineering. Journal of Coastal Research, Special Issue No. 110, pp. 227–230. Coconut Creek (Florida), ISSN 0749-0208.Things are happening in the context of the implementation of the carbon tax in the European Union. This paper focus on the current situation of Sino-European trade, and is expected to discuss the impact of EU carbon on Sino-Europea trade by qualitative and quantitative analysis. The empirical analysis shows that since the recent introduction of carbon tax in EU countries, carbon tax has been increasing, and carbon tax has been added to commodity prices, which directly leads to an increase in export trade. This conclusion is slightly in conflict with traditional trade theory. Due to the imperfect collection mechanism in the implementation of the carbon tax in the EU, the reduction in trade volume caused by the decrease in export trade volume may be less than the increase in trade volume caused by the increase in prices, thus increasing the volume of export trade.

Production Globalization and the Segmentation of the Global Manufacturing Sector*

I review three key claims regarding the impact of production globalization on manufacturing workers worldwide, and subject them to empirical scrutiny. Some argue that production globalization causes a “race to the bottom” that leads to a downward convergence of manufacturing workers’ labor power worldwide. Others suggest instead that production globalization leads to an upward convergence of labor power among manufacturing workers worldwide. A third perspective is agnostic with respect to the average level of this labor power, but predicts divergence between the global North and global South. Using a novel empirical approach to cross-national and temporally comparable measurement of manufacturing labor market power, I show that both the (country-average) level and (between-country) dispersion of labor market power have increased worldwide since the mid-1960s. To explain these trends, I juxtapose insights from Heckscher-Ohlin trade theory with those from the interdisciplinary literature on global value chains and production networks. Both predict that globalization should increase labor market power more in the global North than in the global South. However, the former focuses on labor demand shocks from international trade, while the latter focuses on relationships between firms in the North and South in light of the strategic behavior of network/chain leaders. Augmenting the empirical approach to the measurement of the aggregate positional power of national manufacturing firms developed elsewhere, I show that both international trade and positional power matter for the distribution of manufacturing labor-market power worldwide, but the latter effects are stronger. I conclude by positioning these results within larger debates about the fate of labor in a globalized manufacturing economy.

Mind the Gap of Inequalities Between and Within Countries

"Mind the gap!" is an expression meaning a visual or audible warning phrase to take caution while crossing the gap between the train door and the platform. The subject of this paper is to highlight the existing inequalities, even the case of East-West, and the necessity that, by political will and concrete economic and social measures, not only by warnings, mitigate these disparities for the benefit of the parties concerned.
 This means that, through continuous political awareness of these inequalities, paying attention to this scourge of today’s world and implementing such measures in order to ensure a strategic game type win-win.
 The methods used in this paper are represented by primary data collected from international reports and situations about the status of today’s world countries and national analyses published. All these data and information become base for the analyses of this issue and the emergence of valuable recommendations, rather than conclusions, regarding the counterbalance East and West, apart from the famous and classic example of David Ricardo regarding the theory of the international trade between the rich and developed North and the poor and underdeveloped/developing South, in Europe and the world.
 Awareness, alertness and prompt responses to all challenges and a balanced development type win-win, here they are the keys for a modus vivendi and sustainable evolution.

TRADE, TECHNOLOGICAL CHANGE, AND WAGE INEQUALITY: THE CASE OF MEXICO

AbstractFollowing the U.S.–Mexico trade integration, the skill premium rose dramatically in Mexico. Standard trade theory predicts the skill premium in a skill‐scarce country should fall—not rise—following such an integration. This article reconciles theory and data by building a model in which intermediate producers in Mexico begin to produce for the U.S. supply chain following liberalization. To do so, they must rent ideas from the United States, which are more skill‐intensive, thus increasing the skill premium. This mechanism is supported by the data: Mexican plants and industries that trade more with the United States rent more U.S. technology and have higher skill premia.

Halal food export and Malaysia’s potential: the applicability of the gravity theory of trade

PurposeThe gravity theory of trade explains the potential for trade between nations, but its application to trade in halal food has been questioned by previous studies. This study aims to investigate this issue and the role of trading partners’ economic strength and their distance from one another to identify Malaysia’s potential to export food to key halal markets.Design/methodology/approachThe gravity theory of trade was used to examine Malaysia’s top 10 food exports to key halal markets from 2000–2017. The gravity panels were estimated using the Hausman-Taylor modelling technique to control for endogeneity within the model.FindingsThe application of the gravity theory of trade to a halal market context provides mixed results. Although the high economic strength (gross domestic product) of the trading partners enhances halal trade, the distance between the partners does not affect the volume of halal food exports. Moreover, the study identifies Malaysia’s potential to export only a few food commodities to key halal markets.Originality/valueThis study challenges the applicability of the gravity theory of trade to the halal food market. The study extends the model with additional controls for behavioural aspects and applies it to commodity-specific segregated trade in halal food. The findings underscore the need to extend the theory beyond its current focus when explaining trade opportunities in halal markets.

The U.S.–China trade imbalance and the theory of free trade: debunking the currency manipulation argument

ABSTRACT The U.S.–China trade imbalance is commonly attributed to a Chinese policy of currency manipulation. However, empirical studies failed to reach consensus on the RMB misalignment. We argue that this is not a consequence of poor measurement but of theory. At the most abstract level the conventional principle of comparative cost advantage suggests real exchange rates will adjust so as to balance trade. Therefore, the persistence of trade imbalances tends to be interpreted as arising from currency manipulation facilitated by foreign exchange interventions. By way of contrast, the absolute cost theory explains trade imbalances as the outcome of free trade among nations that have unequal real costs. We argue that a disparity in real costs is the root cause of the U.S.–China trade imbalance.

Growing Olive Oil Export and Intra-Industry Trade in Mediterranean Countries: Application of Gravity Model

While olive oil production is spreading to the non-traditional producer countries, including the US, Australia, and New Zealand, Mediterranean countries are still major producers and exporters. However, little is known about their olive oil exports simultaneously growing in tandem with their large volume of imports. This paper examines the factors that affect olive oil exports and imports in Mediterranean countries. Using balanced panel data of olive oil trade in Mediterranean countries from 1998 to 2016, we estimated the commodity-specific gravity model. Results suggest that an increase in the overall bilateral size of trading partners positively affects the flow of olive oil trade. The difference in factor endowments has a negative impact on exports, whereas its effect is positive on their imports. The members of the European Union (EU) are competitive in olive oil export, and the volume of its import is large among the EU countries whose per capita income and demand properties are similar. These results support Linder’s hypothesis rather than the predictions from the traditional Heckscher–Ohlin trade theory. The simultaneous export and import of olive oil in Mediterranean countries implies the relevance of a growing intra-industry trade rather than a country’s specialization following its comparative advantage.

The European wood pellets for heating market - Price developments, trade and market efficiency

Competitive international markets imply adjustments towards competitive spatial equilibrium in which excess from one market is transferred to another and prices are equilibrated except for remaining differences that can be assigned to transfer costs. The European market for wood pellets used in small-scale heating systems has been expanding significantly over the past decade. Small scale pellet heating is arguably a mature technology, but whether the market is mature is another question. In this paper we analyse recent data on trade flows and price developments between Italy, Austria, Germany and France to understand the developments of wood pellet market efficiency and to draw conclusions about market function. The objective of this study is to establish a framework to test the European residential wood pellet market for competitive spatial equilibrium using modern trade theory. We find mainly inefficiently integrated markets with remaining positive marginal profits and detectable arbitrageurs’ activity. Based on a thorough discussion of these findings and the underlying data we outline possible methodology advancements and list policy recommendations to secure access and affordability of this renewable heating commodity in the long run.

China's Belt and Road Initiative: Implications for intra‐regional trade in Africa

This paper considers the prospects and promises of continent‐wide infrastructure projects under China's Belt and Road Initiative (BRI), and its implications for intra‐regional trade and economic development in Africa. Building on the supply side theory of trade and economic development, and taking cognizance of the impacts of asymmetric market sizes on trade integration, this paper argues that continent‐wide infrastructure projects are perhaps not the biggest constraints to intra‐Africa trade. Consequently, the paper recommends caution in pursuing regional infrastructure projects under the BRI. Given that the economies of most African countries depend largely on natural resources, the BRI could be adopted strategically to establish and manage infrastructure projects that would relax the binding constraints to structural transformation and allow for the development of manufacturing and/or service capabilities in the respective countries, especially in niche areas.

Does trade openness andFDIreduce inequality? Evidence from South Asia

AbstractThis study seeks to examine whether trade openness and inward FDI may affect income distribution in an unbalanced panel of five South Asian countries over the period of 1990–2016. The analysis of the model involves the examination of likely non‐linear effect of both trade and FDI on income distribution. Therefore, dynamic panel system‐generalized method of moments (SYS‐GMM) estimator has been applied to mitigate the problem of non‐linearity and possible endogeneity. In the second stage, the model is extended to test the impact of education on income inequality. The hypothesis was that secondary school enrolment speeds up the process of adoption of contemporary technology and decreases inequality. The results reveal that trade and FDI have significant effects on income inequality, however, inverted U‐shaped curve holds for trade as purposed by the trade theory. The component wise effect of trade was also held, except imports from advanced countries. The joint effect of trade and FDI through education has produced mixed results. South Asia needs to invest in social infrastructure and swifter the process of openness to achieve the desired goal of equitable prosperity.

Implementasi Prinsip Fair Trade oleh The Body Shop sebagai Upaya Peningkatan Kesejahteraan Masyarakat Rwanda

The second half of the twentieth century witnessed unprecedented growth in the number of international actors. There has been a dramatic increase in the number of non-state actors that, on many occasions, helped solve problems and improve lives. This makes the responsibility of people’s welfare no longer only held by the government. One of the most prominent examples is the role of Body Shop on improving the living standard of Rwandan. Twenty four years after the genocide that killed almost 800,000 people, the country of Rwanda is rebuilding with the support of international communities, including multinational corporations. The Body Shop’s Community Trade commitment has been a key part of bringing local producers into international supply chains and empowering them. Therefore, the research question in this paper is “How is the role of The Body Shop on implementing fair trade principles towards the Rwandan society?” To answer the research question, the authors use several theories and concepts; such as pluralism, multinational companies, and fair trade theory. In addition, the research method to be used by the authors is a qualitative study method. This research found that The Body Shop has launched a Moringa Community Trade program as an embodiment of efforts to improve the welfare of Rwandan people after the genocide occurred. This community trade initiative aims to be one small step forward to achieve financial stability for the people currently living and working in Rwanda.

Can the Japanese agri-food producers survive under freer trade? A general equilibrium analysis with farm heterogeneity and product differentiation

The roles of firm heterogeneity and product differentiation in the manufacturing industries have attracted research attention on the “new new trade theory.” The agricultural sectors also produce new goods using product differentiation through breeding, branding, and other activities. In reaction to globalization, the Japanese Government has sought to revitalize its agri-food sectors by promoting exports of differentiated products. This computable general equilibrium study examines the relevance of this policy, focusing on five agri-food sectors other than grains. We simulate Japan’s three trade deals and a policy intervention that cuts fixed export costs to promote exports. We show that only a few agri-food sectors can increase exports and maintain domestic output under freer trade, and that export promotion would markedly increase entrants into export markets and increase exports of the vegetables and fruit, and processed food product sectors. In these trade deals, tariff and nontariff barriers have different impacts on trade, output, and farm/firm entry.

New Industrial Countries in Global Trade in 2007–2018

After 2007 year the world economy entered not only a financial crisis, but also structural changes in the international division of labor. The crisis affected different sectors and trading partners, which influences their position in the global economy. While world trade has returned to a dynamic growth path since 2011, the global economy has undergone qualitative change due to the decline in exchange of well-developed countries and growth in trade of New Industrial Countries (NIC). The emerging trends of trade after the crisis is worth examining, for at least two reasons: firstly, because, through the crisis, they verify the theories of international trade, while at the same time giving a response — the thesis of which theories correspond to modern reality. Secondly, they shed light on the shaping of the future division of labor in the global economy and the new balance between sectors and partners. After 2007, international exchange was growing by increasing the demand for technologically advanced products, on diversity, and on services. The increase of NIC in global trade points to the importance of competitiveness factors, diffusion of knowledge and development of Global Value Chains. The EU and the USA are seeing the steady progress of NIC, especially when it comes to exchanging office and telecommunications equipment, chemicals, computers, construction and travel services, but they are of marginal importance when it comes to charges for intellectual property rights.

International trade and income convergence: Sorting out the nature of bilateral trade

AbstractThe paper argues that the dynamics of trade induced income convergence depend on the nature of bilateral trade between nations. To justify this argument, the paper presents a comprehensive approach that explicitly accounts for trade among OECD countries (north–north trade), trade between OECD and SSA countries (north–south trade) and trade among SSA countries (south–south trade). The approach also allows for the identification of the direct and indirect effects of bilateral trade on income convergence. The results show that bilateral trade among OECD countries accelerates income convergence both directly and indirectly. This result appears to be consistent with the new trade theories by Krugman, Journal of International Economics, 1979, 9, 469–479; Krugman, American Economic Review, 1980, 70, 950–959. and the intuitions of Heckscher, The effect of foreign trade on the distribution of income 1919, 1950, 1–32 and Ohlin, Interregional and international trade, 1933. The trade‐convergence relationship for OECD to SSA trade is the strongest both directly and indirectly. This is the empirical evidence that the nature of this bilateral trade, promotes one directional knowledge spillover from developed to developing countries, which enables developing countries to adopt new technologies and grow faster than their rich counterparts. However, bilateral trade among SSA countries does not have any significant effect on income convergence.

Regional Specialization in the Colombian Manufacturing Industry: A New Economic Geography Approach

The New Trade Theory(NTT) and New Economic Geography (NEG) explain production specialization of countries or regions by benefits stemming from economies of scale, which are available even when trade partners are in similar economic conditions and with even resource endowments. Conversely, the traditional trade theory relies on comparative advantages that emerge from differences in technology and costs. Recently, some authors propose to combine both theories. After discussing the theoretical background, the paper presents an empirical analysis based on panel data which tries to explain the branch and regional structure of manufacturing industry in Colombia. The results confirm the importance of natural advantage, resource endowments, transport costs and the access to national and international industrial circuits in shaping the spatial structure of manufacturing and its development trends.