International Trade and Investment

Kalina Manova, Stanford University and NBER, and Davin Chor, Singapore Management University

Off the Cliff and Back? Credit Conditions and International Trade During the Global Financial Crisis (NBER Working Paper No. 16174)

Manova and Chor study the collapse of international trade flows during the global financial crisis. They use detailed data on monthly U.S. imports during this period and show that adverse credit conditions were an important channel through which the crisis affected trade volumes. They identify the impact of credit tightening by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial dependence across sectors. Countries with higher interbank rates and thus tighter credit markets exported less to the United States during the peak of the crisis. These effects were especially pronounced in sectors that require extensive external financing, have few collateralizable assets, or have limited access to trade credit. Exports of financially dependent industries were thus more sensitive to the cost of external capital than exports of less dependent industries, and this sensitivity rose during the financial crisis. The quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention.

Feenstra, Li, and Yu examine why credit constraints for domestic and exporting firms arise in a setting where banks do not observe firms' productivity. To maintain incentive-compatibility, banks lend below the amount needed for first-best production. Exporters are equally constrained on both their domestic and export sales, but more constrained than domestic firms, because of the longer time needed for export shipments. Greater default risk faced by exporters and higher fixed costs interact with this constraint to reduce exports on the extensive margin. The empirical application to Chinese firms strongly supports these theoretical results.

Jessie H. Handbury, Columbia University, and David E. Weinstein, Columbia University and NBER
Is New Economic Geography Right? Evidence from Price Data

The agglomeration force behind the New Economic Geography literature initiated by Krugman is based on the notion that larger markets should have a lower variety-adjusted price index. There have been no tests of this idea, until this paper. Using a rich dataset covering 10-20 million purchases of grocery items, Handbury and Weinstein find that after controlling for store and shopping effects: 1) aggregate grocery prices are lower in larger cities; 2) residents of larger cities have access to substantially more varieties than residents of smaller cities; and 3) these forces combine to substantially lower variety adjusted prices in large cities. In short, Krugman is right.

James R. Markusen, University of Colorado and NBER
Putting Per-Capita Income back into Trade Theory

In international trade, a major role for per capita income as opposed to simply country size was persuasively advanced by Linder (1961). Yet this crucial element of Linder's story was abandoned by most later trade economists in favor of the analytically-tractable but counter-empirical assumption that all countries share identical and homothetic preferences. Markusen collects and unifies a number of disjoint points in the existing literature and builds on them using simple and tractable alternative preferences. Adding non-homothetic preferences to a traditional models helps him to explain such diverse phenomena as growing wage gaps, the mystery of the missing trade, home bias in consumption, and the role of intra-country income distribution, solely from the demand side of general equilibrium. With imperfect competition, Markusen also can explain higher markups and higher price levels in higher per capita income countries, and the puzzle that gravity equations show a positive dependence of trade on per capita incomes, with aggregate income held constant. The effects of growth are quite different depending on whether it is growth in productivity or through neutral factor-endowment growth, and this paper suggests possible calibration, estimation, and gravity equations. The final section presents some empirical results that give preliminary but strong support to the crucial assumption that produces many of the results just mentioned: goods with high capital-labor ratios in production are systematically goods with high income elasticities of demand in consumption.

A. Kerem Cosar, University of Chicago, Booth School of Business; Nezih Guner, Universitat Autonoma de Barcelona; and James R. Tybout, Pennsylvania State University and NBER

Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy (NBER Working Paper No. 16326)

Cosar, Guner, and Tybout explore the effects of tariffs, trade costs, and firing costs on firm dynamics and labor markets outcomes. Their analysis is based on a general equilibrium model with labor market search frictions, wage bargaining, firing costs, firm-specific productivity shocks, and endogenous entry/exit decisions. Firing costs reduce firms' profits and discourage them from quickly adjusting their employment levels in response to idiosyncratic shocks. Tariffs and other trade costs reduce rents for efficient firms and increase rents for inefficient firms, as in Melitz (2003). These well-known effects interact with idiosyncratic productivity shocks and with scale economies in hiring costs to determine the equilibrium size distribution of firms, entry/exit rates, job turnover rates, rate of informality, and cross-firm wage distributions. After fitting this model to Colombian micro data on establishments and households, the authors use counter- factual simulations to isolate the effects of that country's trade liberalization and labor market reforms circa 1990. They find that Colombia's tariff cuts, in isolation, would have shifted jobs toward large, stable firms, reducing job turnover and informality in the long run. Further, since firms pay higher wages when they wish to rapidly expand, the shift of jobs toward such firms would have compressed the top end of the wage distribution. On the other hand, Colombia's firing costs reductions, in isolation, would have led some large inefficient producers to contract, driving up job turnover rates and informality. Finally, however, the combination of tariff cuts and reduced firing costs that was implemented led to larger increases in turnover and informality than would have occurred if tariffs had been held fixed. The reason is that reduced firing costs made firms adjust their sales more dramatically in response to productivity shocks, while openness amplified this effect by making adjustments on the export margin more important.

Quantitative results from a large class of structural gravity models of trade depend critically on the elasticity of trade with respect to trade frictions. Eaton and Kortum (2002) develop an innovative method to estimate this parameter from disaggregated price data. Simonovska and Waugh prove that their estimator is biased in finite samples, but it is consistent. They quantitatively show that the bias is severe and that the data requirements necessary to eliminate it in practice are extreme. They then develop a simulated method of moments estimator that builds on their methodology and they demonstrate its effectiveness in small samples. They apply it to new disaggregated price and trade flow data for the year 2004 and estimate the elasticity of trade for 123 countries. The estimate of the elasticity is roughly 4, nearly 50 percent lower than Eaton and Kortum's (2002) estimation strategy suggests. This difference doubles the welfare gains from international trade across various models.

James Harrigan, University of Virginia and NBER, and Victor Shlychkov, Columbia University

Export Prices of U.S. Firms

Economists have documented systematic heterogeneity in the prices that are charged for the same traded products. Starting with (Schott 2004), it has been established that even within narrowly defined product categories, average prices differ systematically with the characteristics of importing and exporting countries. There have been only a few studies that examine export price variation across markets using firm-level data. Harrigan and Shlychkov are the first to use U.S. firm-level data to look at export pricing, and they establish some new facts: 1) After controlling for selection into exporting using a two-step Tobit estimator, they find that exporting firms do not charge systematically different prices as a function of destination market characteristics. 2) The product-level correlation between export prices and destination market characteristics found by Baldwin and Harrigan (2010) is due to a selection effect, where firms that charge higher prices are more likely to select into tougher markets. 3) Within product categories, firms that are more productive and skill-intensive charge higher prices, while more capital-intensive firms charge lower prices. The authors show that these facts are supportive of models where more successful firms produce higher quality goods using more skill-intensive techniques.