International Trade and Investment Program Meeting

December 4-5, 2009
Robert Feenstra, Organizer

Edward E. Leamer, UC, Los Angeles and NBER
The Heckscher-Ohlin Framework and the Craft of Economics

Ariel Burstein, UC, Los Angeles and NBER; and Jonathan Vogel, Columbia University and NBER
Globalization, Technology, and the Skill Premium

Burstein and Vogel construct a model of international trade and multinational production (MP) in order to examine the impact of globalization on the skill premium in developed and developing countries. Their framework extends the Heckscher-Ohlin model by incorporating: productivity differences across producers within a sector; skill-biased technology (more efficient producers employ a relatively higher share of skilled workers); and MP. Reductions in trade and/or MP costs induce a re-allocation of resources towards sectors that are intensive in a country's abundant factor (generating a between-effect that increases the skill premium in skill-abundant countries and reduces it in skill-scarce countries) and a re-allocation within-sectors towards more efficient producers who are more skill intensive (generating a within-effect that increases the skill premium in all countries). The researchers study how the model's parameters determine the strength of these two effects. Using a parameterized version of the model that matches salient features of U.S. data on trade and MP, they study the impact on the skill premium of changes in the extent of globalization (the shares of trade and MP in output) and in the composition of globalization (the relative importance of skill-abundant and skill-scarce countries in the global economy). Central to many of their results is the fact that the within-effect is stronger than the between-effect. In response to the three-fold increase in the extent of globalization in the United States over the last 40 years, their model generates an increase in the skill premium of 4 to 6 percent in the United States (or 1=6 to 1=4 of the rise of the college wage premium during this period) and 5 percent in skill-scarce countries.

Costas Arkolakis, Yale University and NBER; Arnaud Costinot, MIT and NBER; and Andres Rodriguez-Clare, Pennsylvania State University and NBER
New Trade Models, Same Old Gains?

Micro-level data have had a profound influence on research in international trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. Arkolakis, Costinot, and Rodriguez-Clare investigate to which extent answers to new micro-level questions have affected answers to an old and central question in the field: How large are the gains from trade? A crude summary of their results is: "So far, not much."

Katheryn Russ, UC, Davis and NBER; and Diego Valderrama, Franklin Templeton Investments
Financial Choice in a Non-Ricardian Model of Trade

Russ and Valderrama join the new trade theory with a model of choice between bank and bond financing. It shows the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs increase welfare but they have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing. The authors identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

Danielken Molina, UC, San Diego; and Marc-Andreas Muendler, UC, San Diego and NBER
Preparing to Export

Molina and Muendler document considerable heterogeneity among Brazilian exporters. Recent starters or switchers differ substantively from continuing exporters in size and export-market penetration. Surprisingly, this heterogeneity is not reflected in the workforce composition regarding observed worker skills or occupations. Using linked employer-employee data, the authors turn to a typically unknown worker characteristic: a worker's prior experience at other exporters. They show that anticipated export status, predicted with destination-country trade instruments, leads firms to prepare their workforce by hiring workers from other exporters. Also, hiring former exporter workers predicts both a wider reach of destinations and a deeper penetration of destinations. This evidence is consistent with the hypothesis that exporters actively prepare for anticipated export-market access and with the idea that few key workers may determine a firm's export success.

Ivan Cherkashin, Pennsylvania State University; Svetlana Demidova, McMaster University; Hiau Looi Kee, The World Bank; and Kala Krishna, Pennsylvania State University and NBER
Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments

Cherkashin, Demidova, Looi Kee, and Krishna model and estimate the responses of firms (who differ in their productivity and face firm and market specific demand shocks) to trade policies in different product and export destinations. Their paper does three things. First, it builds a tractable partial equilibrium model in the spirit of Melitz (2003) which incorporates these dimensions of heterogeneity and is well-suited for empirical work. Second, it shows how to use this model to estimate the structural parameters of interest using only cross-sectional data. Third, it uses the model to perform counterfactual experiments regarding the effects of reducing costs, both fixed and marginal, or of trade preferences (with distortionary Rules of Origin) offered by an importing country. The authors find that both have a catalytic effect which greatly increases exports to all markets. Their counterfactuals make a case for "trade as aid," because such policies can create a win-win scenario for all parties concerned and are less subject to the usual worries regarding the efficacy of direct foreign aid.

JaeBin Ahn, Columbia University; Amit Khandelwal, Columbia University and NBER; and Shang-Jin Wei, Columbia University and NBER
The Role of Intermediaries in Facilitating Trade

Using a database that records the census of firm-level trade by Chinese firms, Ahn, Khandelwal, and Wei provide systematic evidence that intermediaries play an important role in facilitating trade across borders. Intermediaries account for at least 20 percent of China's imports and exports in 2005. This implies that a large number of firms are able to engage in international trade without directly exporting or importing products. The authors modify a heterogenous firm trade model to allow firms to endogenously select their mode of export - either directly or indirectly through an intemediary. The model predicts that intermediaries play a relatively more important role in markets that are more difficult to penetrate. The authors provide empirical confirmation for this prediction and generate new facts regarding the activity of intermediaries.

Mary Amiti, Federal Reserve Bank of New York; and David Weinstein, Columbia University and NBER
Exports and Financial Shocks

A striking feature of many financial crises is the collapse of exports relative to output. In the 2008 financial crisis, real world exports plunged 17 percent while GDP fell 5 percent. Amiti and Weinstein examine whether the drying up of trade finance can help to explain the large drops in exports relative to output. This paper is the first to establish a causal link between the health of banks providing trade finance and growth in a firm's exports relative to its domestic sales. The authors overcome measurement and endogeneity issues by using a unique dataset, covering the Japanese financial crises of the 1990s, which enables them to match exporters with the main bank that provides them with trade finance. Their point estimates are economically and statistically significant, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s.

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