International Trade and Investment

Members of the NBER's International Trade and Investment Program met December 6-7 in Stanford University. Program Director Stephen J. Redding of Princeton University organized the meeting. These researchers' papers were presented and discussed:

Dominick G. Bartelme and Ting Lan, University of Michigan and Andrei A. Levchenko, University of Michigan and NBER

Specialization, Market Access and Real Income

Bartelme, Lan, and Levchenko estimate the impact of foreign sectoral demand and supply shocks on real income. Their empirical strategy is based on a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows. The framework allows the researchers to measure foreign shocks and characterize their impact on income in terms of reduced-form elasticities. They use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. The researchers find clear evidence of heterogeneity in the income elasticities of different foreign shocks. Foreign demand shocks in complex intermediate and capital goods have large impacts on real income, and both supply and demand shocks in capital goods have particularly large impacts in poor countries. Counterfactual exercises show that both comparative advantage and geography play a quantitatively large role in how foreign shocks affect real income.

Joseph S. Shapiro, University of California, Berkeley and NBER

The Environmental Bias of Trade Policy

Shapiro documents a new fact, then analyzes its causes and consequences: in most countries, import tariffs and non-tariff barriers are substantially lower on dirty than on clean industries, where an industry's "dirtiness" is defined as its carbon dioxide (CO2 ) emissions per dollar of output. This difference in trade policy creates a global implicit subsidy to CO2 emissions in internationally traded goods and so contributes to climate change. This global implicit subsidy to CO2 emissions totals several hundred billion dollars annually. The greater protection of downstream industries, which are relatively clean, substantially accounts for this pattern. The downstream pattern can be explained by theories where industries lobby for low tariffs on their inputs but final consumers are poorly organized. A quantitative general equilibrium model suggests that if countries applied similar trade policies to clean and dirty goods, global CO2 emissions would decrease by several percent annually, and global real income would not change.

Andrés Rodríguez-Clare, University of California, Berkeley and NBER; Mauricio Ulate, Federal Reserve Bank of San Francisco; and Jose P. Vasquez, University of California, Berkeley

New-Keynesian Trade: Understanding the Employment and Welfare Effects of Sector-Level Shocks

There is a growing empirical consensus suggesting that sector-specific productivity increases in a foreign country can have important unemployment and nonemployment effects across the different regions of a domestic economy. Such employment changes cannot be explained by the workhorse quantitative trade model since it assumes full employment and a perfectly inelastic labor supply curve. Rodríguez-Clare, Ulate, and Vasquez show how adding downward nominal wage rigidity and home employment allows the quantitative trade model to generate changes in unemployment and nonemployment that match those uncovered by the empirical literature studying the "China Shock." They also compare the associated welfare effects predicted by this model with those in the model without unemployment. The researchers find that the China Shock leads to welfare increases in most states of the US, including many that experience unemployment during the transition. On average across US states, nominal rigidities reduce the gains from the China Shock from 36 to 30 basis points.

Nezih Guner, CEMFI; Alessandro Ruggieri, Universitat Autonoma de Barcelona and Barcelona GSE; and James R. Tybout, Pennsylvania State University and NBER

Trade, Offshoring, and the Job Ladder

Over the past 30 years, skill premiums have grown, jobs in the middle of the skill distribution have become relatively scarce, and job and worker turnover rates have declined. At the same time, the fraction of the population attending college has grown, much of the manufacturing work force has shifted into services, and employers' investments in on-the-job training have increasingly favored high-skilled workers. Guner, Ruggieri, and Tybout interpret these patterns through the lens of a dynamic structural model that explains workers' human capital accumulation, unemployment spells, and earnings trajectories over their life cycles. Offshoring and import competition shift job creation away from trade-exposed occupations, thereby changing job offer arrival rates for each worker type, increasing incentives to invest in college degrees, and shifting patterns of employers' investments in on-the-job training. A quantitative version of the model explains observed changes in US labor markets as consequences of a globalization shock and technological progress, isolating the relative importance of each.

Costas Arkolakis and Michael Peters, Yale University and NBER, and Sun K. Lee, Columbia University

European Immigrants and the United States' Rise to the Technological Frontier in the 19th Century

Arkolakis, Lee, and Peters study whether immigrants from Europe accelated the rise of the US to the technological frontier in the 19th century through the "import" of new knowledge and productive ideas. To do so, they exploit novel historical data on immigrants' pre-migration occupations. By linking immigration records with the US Federal Population Census, the researchers can construct empirical measures of shocks to the supply of experienced workers across all US counties. They then relate these shocks to patent activity and measures of regional productivity growth obtained from the manufacturing census. The preliminary results suggest that immigrants increased patent activity and that patent activity is positively correlated with future productivity growth.

Bradley Setzler, University of Chicago, and Felix Tintelnot, University of Chicago and NBER

The Effects of Foreign Multinationals on Workers and Firms in the United States (NBER Working Paper 26149)

Governments go to great lengths to attract foreign multinational enterprises because these enterprises are thought to raise the wages paid to their employees (direct effects) and to improve outcomes at incumbent local firms (indirect effects). Setzler and Tintelnot construct the first US employer-employee dataset with foreign ownership information from tax records to measure these direct and indirect effects. They find the average direct effect of a foreign multinational firm on its U.S. workers is a 7 percent increase in wages. This premium is larger for higher skilled workers and for the employees of firms from high GDP per capita countries. The researchers leverage the past spatial clustering of foreign-owned firms by country of ownership to identify the indirect effects. An expansion in the foreign multinational share of commuting zone employment substantially increases the employment, value added, and -- for higher earning workers -- wages at local domestic owned firms. Per job created by a foreign multinational, the estimates suggest annual gains of 16,000 USD to the aggregate wages of local incumbents, of which about two thirds is due to indirect effects. The researchers compare their findings to the value of subsidy deals received by foreign multinationals.

Alejandro G. Graziano, University of Maryland; Kyle Handley, University of Michigan and NBER; and Nuno Limão, University of Maryland and NBER

Brexit Uncertainty and Trade Disintegration (NBER Working Paper 25334)

Graziano, Handley, and Limão estimate the uncertainty effects of preferential trade disagreements. Increases in the probability of Britain's exit from the European Union (Brexit) reduce bilateral export values and trade participation. These effects are increasing in trade policy risk across products and asymmetric for UK and EU exporters. The researchers estimate that a persistent doubling of the probability of Brexit at the average disagreement tariff of 4.5% lowers EU-UK bilateral export values by 15 log points on average, and more so for EU than UK exporters. Neither believed a trade war was likely.

Vanessa I. Alviarez, University of British Columbia; Javier Cravino, University of Michigan and NBER; and Natalia Ramondo, University of California, San Diego and NBER

Accounting for Cross-Country Income Differences: New Evidence from Multinational Firms

Alviarez, Cravino, and Ramondo develop a new accounting framework to decompose cross-country differences in output-per worker into differences in 'country-embedded factors' and differences in 'aggregate firm know-how'. By 'country-embedded factors' the researchers refer to the components of productivity that are internationally immobile and impact all firms in a country, such as institutions, natural amenities, and workers' quality. In contrast, 'firm know-how' encompasses those components that generate differences across firms within a country, and that can be transferred internationally, such as blue-prints and intangible capital. The researchers' approach relies on data on the cross-border operations of multinational enterprises (MNE). It builds on the notion that MNEs can use their know-how around the world, but they must use the factors from the countries where they produce. The researchers find that, across the countries in their sample, differences in aggregate firm know-how account for 40 percent of the cross-country differences in TFP, 22 percent of the differences in output per-worker, and are strongly correlated to observed differences in income per-capita.

Wulong Gu, Statistics Canada; Alla Lileeva, York University; and Daniel Trefler, University of Toronto and NBER

Global Sourcing from Low-Wage Countries: Implications for R&D and Employment

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