International Trade and Investment

November 30 - December 1, 2012
Robert Feenstra of University of California, Davis, Organizer

Mary Amiti, Federal Reserve Bank of New York; Oleg Itskhoki, Princeton University and NBER; and Jozef Konings, University of Leuven

Importers, Exporters, and Exchange Rate Disconnect

Large exporters are simultaneously large importers. Amiti, Itskhoki, and Konings show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First they develop a theoretical framework that combines variable markups caused by strategic complementarities with endogenous choice to import intermediate inputs. The model predicts that firms with high import shares and high market shares have low exchange rate pass-through. Next they test and quantify the theoretical mechanisms using Belgian firm-product-level data with information on exports by destination and imports by source country. They confirm that import intensity and market share are the prime determinants of pass-through in the cross-section of firms. A small exporter with no imported inputs has a nearly complete pass-through of over 90 percent, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously high-market-share and high-import-intensity firms, which helps to explain the low aggregate pass-through and exchange rate disconnect observed in the data.

Logan Lewis, Federal Reserve Board of Governors

Menu Costs, Trade Flows, and Exchange Rate Volatility

U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, then neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. Lewis tests models capable of replicating price data against trade flows. Even with significant short-run frictions, the models still imply a trade response to exchange rates stronger than what is found in the data. Moreover, using significant cross-sector heterogeneity, the comparative statics implied by the model find little to no support in the data. These results suggest that while complementarity in price setting and sticky prices can explain pricing patterns, some other short-run friction is needed to match actual trade flows. Furthermore, the muted response found for sectors with high long-run substitutability implies that simply assuming low elasticities may be inappropriate. Finally, there is evidence of an asymmetric response to exchange rate changes.

Donald Davis, Columbia University and NBER, and Jonathan Dingel, Columbia University

A Spatial Knowledge Economy (NBER Working Paper No. 18188)

Leading empiricists and theorists of cities have recently argued that the generation and exchange of ideas must play a more central role in the analysis of cities. Davis and Dingel develop the first system-of-cities model with costly idea exchange as the agglomeration force. Their model replicates a broad set of established facts about the cross-section of cities. It provides the first spatial equilibrium theory of why skill premums are higher in larger cities, how variation in these premiums emerges from symmetric fundamentals, and why skilled workers have higher migration rates than unskilled workers when both are fully mobile.

Olga Timoshenko, George Washington University

Product Switching in a Model of Learning

New exporters add and drop products with much greater frequency than old exporters. Timoshenko rationalizes this behavior with a model of demand learning in which an exporter's profitability on the demand side is determined by a time-invariant firm-destination appeal index, and transient firm-destination-year preference shocks. New exporters must learn about their appeal indexes in the presence of these shocks, and respond to fluctuations in demand by adding and dropping products more frequently than older exporters because they have less information about their attractiveness to consumers. Calibrated to match a cross-section distribution of sales and scope, the model quantitatively accounts for the contribution of the extensive margins to aggregate Brazilian exports. The model also predicts that in response to a decline in trade costs, existing exporters add new products and new exporters enter a destination. The counterfactual implies that the contribution of product adding to export growth that results from trade liberalization is three times larger than the contribution of exporter entry.

Ralph Ossa, University of Chicago and NBER

Why Trade Matters After All (NBER Working Paper No. 18113)

Ossa shows that accounting for cross-industry variation in trade elasticities greatly magnifi…es the estimated gains from trade. The main idea is as simple as it is general: while imports in the average industry do not matter too much, imports in some industries are critical to the functioning of the economy, so that a complete shutdown of international trade is very costly overall.

Lauren Cohen and Christopher Malloy, Harvard University and NBER, and Umit Gurun, University of Texas at Dallas

Channels of Influence (NBER Working Paper No. 18312)

Cohen, Gurun, and Malloy demonstrate that simply by using the ethnic makeup surrounding a firm's location, they can predict, on average, which trade links are valuable for firms. Using customs and port authority data on the international shipments of all U.S. publicly-traded firms, they show that firms are significantly more likely to trade with countries that have a strong resident population near their firm headquarters. They use the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations, and to identify a causal link between local networks and firm trade links. Firms that exploit their local networks (strategic traders) see significant increases in future sales growth and profitability, and outperform other importers and exporters by 5-7 percent per year in risk-adjusted stock returns. In sum, these results document a surprisingly large impact of immigrants' economic roles as conduits of information for firms in their new countries.

Wolfgang Keller and Carol H. Shiue, University of Colorado-Boulder and NBER, and Ben Li, Boston College

Shanghai's Trade, China's Growth: Continuity, Recovery, and Change since the Opium War (NBER Working Paper No. 17754)

Keller, Li, and Shiue provide an analysis of China's trade performance from the 1840s to the present. Based on a new historical benchmark, they argue that China's recent gains are not exclusively attributable to the reforms since 1978. Rather, trade and growth in China can be understood by developments that were set in motion in the nineteenth century. The focus here is on Shanghai, the world's largest port, which began direct trade relations with Western nations starting in 1843. The authors find first that trade today is by no means inexplicably high from the perspective of the nineteenth century. Applying the well-known gravity equation of trade for the historical period, they demonstrate that when this relationship is projected into the modern period, it fits today's actual trade in China quite well. Next they show that the volume of China's trade during the treaty port era was increasing with the foreign presence in China, as measured by foreign firms and residents, just as it is today. Further, treaty port FDI raises China's trade today, even controlling for today's FDI, which suggests that FDI is one of the sources of persistence in China's foreign trade that they document. Then the authors show that China's share in world GDP since the 1870 is highly correlated with Shanghai's openness, suggesting that the nineteenth century liberalization that started in Shanghai had slowly emerging economy-wide effects over the following 150 years. They also find that China followed the same steps of adopting a more open trade regime as other countries in the world in the Post World War II period, albeit with some lag.

Antoine Gervais, University of Notre Dame, and J. Bradford Jensen, Georgetown University and NBER

Are Services Tradable? Evidence from U.S. Microdata

The service sector accounts for the majority of global production and employment, and a significant share of global trade. However, limitations in official statistics preclude a detailed examination of bilateral service trade flows using standard methods, such as the "gravity equation." Instead, Gervais and Jensen develop and implement a new methodology that exploits detailed, highly reliable microdata on U.S. establishments to identify cross-industry variation in the tradability of services. They use their estimates to evaluate the share of services susceptible to international competition, estimate the potential gains from policy liberalization in services trade, and characterize the types of service activities that are tradable.