International Trade and Investment Program Meeting

March 26-27, 2010
Robert C. Feenstra, Organizer

Matthew J. Slaughter, Dartmouth College and NBER; Kenneth F. Scheve, Yale University; and Xiaobo Lu, Yale University
Envy, Altruism, and the International Distribution of Trade Protection

One important puzzle in international political economy is why lower-earning and less-skilled intensive industries tend to receive relatively high levels of trade protection. This pattern of protection holds even in low-income countries in which less-skilled labor is likely to be the relatively abundant factor of production and therefore would be expected in many standard political-economy frameworks to receive relatively low, not high, levels of protection. Slaughter, Scheve, and Lu propose and model one possible explanation: that individual aversion to inequality-both envy and altruism-lead to systematic differences in support for trade protection across industries, with sectors employing lower-earning workers more intensively being relatively preferred recipients for trade protection. They conduct original survey experiments in China and the United States and provide strong evidence that individual policy opinions about sector-specific trade protection depend on the earnings of workers in the sector. They also present structural estimates of the influence of envy and altruism on sector-specific trade policy preferences. Their estimates indicate that both envy and altruism influence support for trade protection in the United States and that altruism influences policy opinions in China.

Kalina Manova, Stanford University and NBER; Shang-Jin Wei, Columbia University and NBER; and Zhiwei Zhang, Hong Kong Monetary Authority
Firm Exports and Multinational Activity under Credit Constraints

Manova, Wei, and Zhang provide firm-level evidence that credit constraints restrict international trade flows and affect the pattern of foreign direct investment. Using detailed data from China, they show that foreign-owned firms and joint ventures have better export performance than private domestic firms, and this advantage is systematically greater in sectors at higher levels of financial vulnerability measured in a variety of ways. This confirms that financial frictions restrict international trade and is consistent with foreign affiliates being less credit constrained because they can tap internal funding from their parent company. They also find that private Chinese firms are relatively more successful exporters than state-owned enterprises in financially dependent industries. Since SOEs enjoy easier access to lending from Chinese state-owned banks, this pattern suggests that they use resources less efficiently. These results imply that FDI can compensate for domestic financial market imperfections and alleviate their impact on aggregate growth, trade, and private sector development. Credit constraints and host-country financial institutions thus offer a new explanation for the sectoral and spatial composition of MNC activity.

Daniel Berger, New York University; William Easterly, New York University and NBER; Nathan Nunn, Harvard University and NBER; and Shanker Satyanath, New York University
Commerical Imperialism?

Berger, Easterly, Nunn, and Satyanath exploit the recent declassification of CIA documents and examine whether there is evidence of U.S. power and influence being used to influence countries' decisions regarding trade and trade policy. To measure U.S. influence, they use a newly constructed annual panel of CIA interventions aimed at installing and supporting leaders during the Cold War. The presumption is that the United States had greater control over foreign leaders that were installed and backed by the CIA. The researchers show that U.S. interventions were followed by an increased flow of U.S. goods into the intervened country. There was no similar increase in the shipment of goods from intervened countries to the United States. They further find that the increase in imports only occurred in autocratic regimes, where, because leaders are less accountable to their citizens, we expect U.S. influence to have been the most effective. Testing for alternative explanations, they find that the increase in U.S. imports did not arise from a decrease in trading costs with the intervened country. The increase in imports was in industries in which the United States had a comparative disadvantage. They also test whether the increase in U.S. imports arose because of the political ideology of the newly installed regime, or from an increase in the supply of grants and loans by the United States. They show that these alternative explanations do not account for the surge in U.S. imports. Examining specific mechanisms, they provide evidence that government purchases of U.S. products play a central role.

James E. Anderson, Boston College and NBER; and Yoto V. Yotov, Drexel University
Specialization: Pro- and Anti-globalizing, 1990-2002

Anderson and Yotov find that specialization alters the incidence of trade costs to buyers and sellers, with pro-and anti-globalizing effects on 76 countries from 1990-2002. Their structural gravity model yields measures of Constructed Home Bias and the Total Factor Productivity effect of changing incidence. A bit more than half the world's countries experience declining constructed home bias and rising real output, while the remainder of countries experience rising home bias and falling real output. The effects are big for the outliers. A novel test of the structural gravity model restrictions shows that it comes very close in an economic sense.

Gianmarco Ottaviano, Università di Bologna; Giovanni Peri, UC, Davis and NBER; and Greg C. Wright, UC Davis
Immigration, Offshoring and American Jobs

Increased immigration and offshoring over the last decades has generated deep concerns about the effect of both phenomena on the jobs of American workers. How many "American jobs" are taken away from U.S.-born workers due to immigration and offshoring? Or is it possible, instead, that immigration and offshoring, by promoting cost-savings and enhanced effciency in firms, spur the creation of native jobs? Ottaviano, Peri, and Wright consider a multi-sector version of the Grossman and Rossi-Hansberg (2008) model with a continuum of tasks in each sector and augment it to include immigrants with heterogeneous productivity in tasks. They use this model to jointly analyze the impact of a reduction in the costs of offshoring and of the costs of immigrating to the United States. The model, with resonable parameter restrictions, predicts that while cheaper offshoring reduces the share of natives among less skilled workers, cheaper immigration does not, but rather reduces the share of offshored jobs instead. Moreover, since both phenomena have a positive "cost-savings" effect, they may leave unaffected, or even increase, total native employment of less skilled workers. This model also predicts that offshoring will push natives toward jobs that are more intensive in communication-interactive skills and away from those that are intensive in manual-routine skills. The researchers test the predictions of the model on data for 58 manufacturing industries over the period 2000-7 and find evidence in favor of a positive productivity effect, such that immigration has a positive net effect on native employment while offshoring has no effect on it. They also find some evidence that offshoring has pushed natives toward more communication-intensive tasks while it has pushed immigrants away from them.

Jose Fillat, Federal Reserve Bank of Boston; and Stefania Garetto, Boston University
Risk, Returns, and Multinational Production

Fillat and Garetto start by unveiling a new empirical regularity: multinational corporations tend to exhibit systematically higher returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to have higher earnings yields and returns than firms selling only in their domestic market. To explain this pattern, the researchers develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Firms can serve the foreign market through trade or foreign direct investment, thus becoming multinationals. Multinational firms are more exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the option premium (sunk cost) that they paid to become multinationals. The theory provides a complementary explanation for the cross section of returns by exploiting the production side from an international point of view. The authors calibrate the model to match U.S. export and FDI dynamics, and use it to explain cross-sectional differences in earnings yields and returns.

Douglas A. Irwin, Dartmouth College and NBER
Do Tariffs Affect the Terms of Trade? Evidence from U.S. Tariff Shocks

A classic economic question concerns the incidence of import duties and the extent to which domestic consumers or foreign exporters bear the burden of the tariff, yet direct empirical evidence on this question is scarce. Irwin studies the impact of two large tariff shocks - the Smoot-Hawley increase in 1930 and the Underwood-Simmons reduction in 1913 - on monthly product-level import prices. In the case of Smoot-Hawley, the results suggests that, in 19 of 25 goods considered, import prices did not fall significantly when the higher duties were imposed, suggesting that domestic consumers paid the tariff in most cases. In the case of the Underwood-Simmons tariff reduction, import prices did not rise significantly in 12 of 15 cases. Irwin also uses weekly data on the domestic and import price of raw sugar to examine the incidence of tariffs more directly. Here an interesting puzzle emerges: tariff reductions are completely passed through to domestic consumers, but only about a third of tariff increases are.

Jonathan Eaton, Pennsylvania State University and NBER, Sam Kortum, University of Chicago and NBER, Brent Neiman, University of Chicago, and John Romalis, University of Chicago and NBER
Trade and the Global Recession

The World Trade Organization forecasts that the volume of global trade will in 2009 exhibit its biggest contraction since World War II. This large drop in international trade is generating significant attention and concern. Given the severity of the current global recession, is international trade behaving as we would expect? Or alternatively, is international trade shrinking due to factors unique to cross border transactions per se? Eaton, Kortum, Neiman, and Romalis merge an input-output framework with a structural gravity trade model in order to quantitatively answer these questions. The framework distinguishes a drop in trade resulting from a decline in the tradable good sector from a drop resulting from worsening trade frictions. They demonstrate empirically that given the geographic distribution and size of the decline in demand for manufactures, the overall decline in trade flows of manufactured goods is unexpectedly large. They use the model to solve numerically several counterfactual scenarios which give a quantitative sense for the relative importance of trade frictions and other shocks in the current recession. Their results suggest that the decline in demand for manufactures is the most important driver of the decline in manufacturing trade. An increase in trade frictions also plays an important role, but one that varies substantially across countries.