International Trade and Investment

March 27-28, 2009
Robert Feenstra, Organizer

Bernardo Blum, University of Toronto, Sebastian Claro, Central Bank of Chile, and Ignatius Horstmann, University of Toronto
Intermediation and the Nature of Trade Costs: Theory and Evidence

Blum and his co-authors use a new dataset of matched importer-exporter transactions for Chile and Colombia to document basic characteristics of the ways that trade is intermediated. They find that, in virtually every Chilean exporter-Colombian importer pair, at least one of the parties is a large international trader. Also, more than half of the Chilean exporters sell to only one Colombian importer. These exporters sell smaller amounts and fewer HS codes to Colombia and to the world but sell large amounts and more HS codes per importer. Also, they sell to importers that purchase larger amounts and more HS codes. Based on these characteristics, the authors develop a model of trade in which firms have access to multiple intermediation technologies and choose one as part of the equilibrium. The authors show that a two-intermediation-technology model can capture the basic features of the data. Using this model, they explore the ways that changes in the trading environment, including trade reforms, affect trade costs and trading activity.

Gene Grossman, Princeton University and NBER, and Esteban Rossi-Hansberg, Princeton University and NBER
Task Trade Between Similar Countries

Grossman and Rossi-Hansberg propose a theory of task trade between countries with similar relative factor endowments that may, however, differ in size. Firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and higher aggregate output. The researchers discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size and examine how the pattern of specialization reflects the key parameters of the model.

Irene Brambilla, Yale University and NBER, Daniel Lederman, World Bank, and Guido Porto, Universidad Nacional do La Plata
The Quality of Trade: Exports, Export Destinations and Wages

Brambilla and her co-authors explore the links between exporting firms and wages in Argentina. They claim that exporting per se may not be conducive to higher wages but that the destination of exports, especially exporting to higher income countries, is. They postulate a quality theory of export destination and wages, whereby exporting to high-income countries requires quality upgrades that are skill intensive and that lead firms to offer higher wages (especially for skilled workers). They test their theory using a panel of Argentine manufacturing firms. The data span the period 1998-2000 and thus include the Brazilian devaluation of 1999. The researchers use the exogenous changes in exports and exports destinations brought about by this devaluation to identify the causal effect of exports and export destinations on wages. They find that only Argentine firms exporting to high-income countries paid higher average wages than domestic firms or firms focused on neighbor countries. They also find that this link between exporting to high-income countries and wages is present in sectors with a large scope for product differentiation. This lends strong support to the quality upgrading mechanism.

Kalina Manova, Stanford University and NBER, and Zhiwei Zhang, Hong Kong Monetary Authority
Export Prices and Heterogeneous Firm Models

Manova and Zhang examine the variation in export prices across firms, products, and destinations to distinguish between alternative trade models with firm heterogeneity in productivity and quality. They use a unique new dataset on the universe of Chinese trading firms in 2005, and establish six new stylized facts. First, firms charge higher unit prices in larger, more distant markets. Second, higher export prices are associated with lower export quantities and greater revenues, both across firms within a destination and across destinations within a firm. Third, firms that export more to more destinations have higher average export and import prices, and fourth, they price discriminate more across trade partners. Fifth, more firms export to larger, more proximate markets. Finally, the maximum price observed across Chinese exporters in a given destination-product market rises with market size and falls with distance, while the opposite holds for the minimum export price. The researchers interpret these results in the context of four recent (classes of) models, and conclude that none of them alone can match all stylized facts. They suggest that their findings instead are consistent with a framework in which firms adjust both quality and mark-ups across destinations.

Andrei Levchenko, University of Michigan , and Julian di Giovanni, International Monetary Fund
Firm Entry, Trade, and Welfare in Zipf’s World

The firm size distribution is extremely fat-tailed: it follows a power law with exponent close to minus 1, a phenomenon known as Zipf's Law. Using a multi-country model of production and trade in which the parameters are calibrated to match the observed distribution of firm size, di Giovanni and Levchenko show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.5 percent. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin -- newly imported goods -- vanishes. This quantitative exercise shows that the extensive margin of imports accounts for only about 3 percent of the total gains from a 10 percent reduction in trade barriers.

Jiandong Ju, International Monetary Fund, and Shang-Jin Wei, Columbia University and NBER
When is Quality of Financial System a Source of Comparative Advantage?

Does finance follow the real economy, or the other way around? Ju and Wei unite the two competing schools of thought in a general equilibrium framework. Their key result is that there are threshold effects defined by a set of deep institutional parameters (cost of financial intermediation, quality of corporate governance, and level of property rights protection) that can be used to separate economies of high-quality institutions from those of low-quality institutions. On one hand, for economies with high-quality institutions, the view that finance follows the real economy is essentially correct. Equilibrium output and prices are determined by factor endowment. Further improvement in the institutions does not affect patterns of output. On the other hand, for economies with low-quality institutions, the view that finance is a key driver of the real economy is essentially correct. Not only is finance a source of comparative advantage, but also an increase in capital endowment has no effect on outputs and prices. The model here extends a standard one-sector, partial equilibrium model of corporate finance to a multi-sector, general equilibrium analysis. Surprisingly, but consistent with data, the authors show that the size of financial markets (relative to GDP) does not change monotonically with either the quality of institutions or with the factor endowment. Free trade may reduce the aggregate income of an economy with low-quality institutions. Financial capital tends to flow from economies with low-quality institutions to those with high-quality institutions.

Bruce Blonigen, University of Oregon and NBER
New Evidence on the Formation of Trade Policy Preferences

Blonigen revisits the issue of people’s preferences for international trade protection examining survey data from the American National Election Studies. In contrast to previous analysis using these data, he first shows that both individuals’ skills and the international trade characteristics of their employment industry affect their trade policy preferences. Second, he documents that many people do not feel informed enough to state a preference on trade protection, which is inconsistent with assumptions of standard political economy models. He examines the factors that correlate with being uninformed, and shows that inferences from actual trade policy outcomes can be incorrect if one does not account for this uninformed group. Finally, he examines and finds that individuals’ retirement decisions have systematic effects on both their

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