International Trade and Investment

December 2 and 3, 2011
Robert C. Feenstra of the University of California, Davis, Organizer

James Harrigan, University of Virginia and NBER, and Ariell Reshef, University of Virginia

Skill Biased Heterogeneous Firms, Trade Liberalization, and the Skill Premium (NBER Working Paper No. 17604)

Harrigan and Reshef propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand for highly competitive skill-intensive firms. In their model, only the lowest-cost firms participate in the global economy, exactly along the lines of Melitz (2003). In addition to differing in their productivity, firms in their model differ in their skill intensity. They model skill-biased technology as a correlation between skill intensity and technological acumen, and they estimate this correlation to be large using firm-level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest-cost/most-skilled firms expand to serve the export market while less skill-intensive non-exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so the authors provide an explanation for why globalization and wage inequality move together in both skill-abundant and skill-scarce countries. In their model, countries are net exporters of the services of their abundant factor, but there are no Stolper-Samuelson effects because import competition affects all domestic firms equally.

Thomas Sampson, London School of Economics
Selection into Trade and Wage Inequality

Sampson models the impact of trade integration on wage inequality when there is heterogeneity across both workers and firms. By incorporating labor assignment into the heterogeneous firms literature, he develops a model in which positive assortative matching between worker skill and firm productivity explains the employer size-wage premium and the exporter wage premium. Under trade, the selection of high productivity, high skill firms into exporting raises the demand for skill and increases wage inequality in all countries, both on aggregate and within the export sector. This result occurs both when firm productivity is determined by a random draw and when productivity is endogenous to firm level R and D. With endogenous productivity, the increased demand for skill caused by trade liberalization results from technology upgrading by new exporters.

Ariel Burstein, University of California at Los Angeles and NBER; and Javier Cravino, University of California at Los Angeles
Measured Aggregate Gains from International Trade

Do theoretical welfare gains from trade translate into aggregate measures of economic activity? Burstein and Cravino calculate the changes in real GDP and real consumption that result from changes in trade costs in a range of workhorse trade models, following the procedures used by statistical agencies in the United States. Their main fi…ndings are: 1) real GDP and measured aggregate productivity rise in response to reductions in variable trade costs if GDP deflators capture the decline in trade costs; 2) with balanced trade in each country, changes in world real consumption and changes in world real GDP (that is, weighting the change in each country by its nominal GDP) in response to changes in variable trade costs coincide, up to a …first-order approximation, with changes in world theoretical (welfare-based) consumption. The equivalence between measured consumption and theoretical consumption holds country-by-country under stronger conditions. 3) For given trade shares and changes in variable trade costs, changes in real GDP and changes in world real consumption are approximately equal in magnitude across the models considered.

Costas Arkolakis, Yale University and NBER; Natalia Ramondo, Arizona State University; Andres Rodriguez-Clare, University of California, Berkeley and NBER; and Stephen Yeaple, Pennsylvania State University and NBER
Innovation and Production in the Global Economy

Arkolakis, Ramondo, Rodriguez-Clare, and Yeaple develop a monopolistic competition model of trade and multinational production (MP). Firms receive an idiosyncratic vector of productivities for different locations from a multivariate distribution. They also face distance related trade and MP costs. Thus, individual firms face a proximity-versus-comparative-advantage trade-off to serve individual locations from close-by or high-productivity locations. The model gives simple structural expressions for bilateral trade and MP. The authors use these expressions to calibrate the model across a set of OECD countries. They quantify the implications of openness to trade and MP on the allocation of employment between production and innovation, as well as the implications for wages, profits and overall welfare.

Ralph Ossa, University of Chicago and NBER

Trade Wars and Trade Talks with Data (NBER Working Paper No. 17347)

What are the optimal tariffs of the US? What tariffs would prevail in a worldwide trade war? What are the gains from international trade policy cooperation? And, what gains can be expected from future reciprocal trade negotiations? Ossa addresses these and other questions using a unified framework that nests traditional, new trade, and political economy motives for protection. He finds that U.S. optimal tariff average 66 percent, world trade war tariffs average 63 percent, the welfare gains from international trade policy cooperation average 4.4 percent, and there is almost no scope for future reciprocal trade negotiations.

Julian di Giovanni, International Monetary Fund; Andrei Levchenko, University of Michigan and NBER; and Jing Zhang, University of Michigan
The Global Welfare Impact of China: Trade Integration and Technological Change

di Giovanni, Levchenko, and Zhang evaluate the global welfare impact of China's trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. The model implies that the mean gain from trade with China is 0.13 percent, with a range from -0.27 to 0.8 percent. Countries in East Asia tend to gain the most, while many Textile-and-Apparel producing countries experience welfare losses. The authors then simulate two alternative productivity growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well known conjecture (Samuelson 2004), the average country in the world experiences an order of magnitude larger welfare gains when China's growth is unbalanced.

Jiandong Ju, University of Oklahoma; Kang Shi, Chinese University of Hong Kong; and Shang-Jin Wei, Columbia University and NBER
Trade Liberalizations and Global Current Account Imbalances

A wave of trade liberalizations have taken place in both developing and developed countries, including China's WTO accession and the end of import quotas on textile and garments in the United States and Europe. At the same time, both China's current account surplus and the U.S. deficit have risen to an unprecedented level. Are these developments related? Ju, Shi, and Wei study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. They show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, trade reforms can contribute to global imbalances.

Yue Ma, Lingnan University; Heiwai Tang, Tufts University; and Yifan Zhang, Lingnan University
Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters

Ma, Tang, and Zhang analyze the causal relations between firms' productivity, factor intensity, and export participation. Using propensity score matching techniques and firm-level panel data for Chinese manufacturing firms over the 1998-2007 period, they find strong evidence of domestic firms self-selecting into export markets with higher productivity ex ante, and enhanced productivity ex post. No such pattern is observed among foreign-invested firms. They also find that both domestic and foreign new exporters exploit China's low labor costs and specialize in their core competence -- that is,firms become less capital-intensive after exporting, relative to the matched non-exporting counterparts in the same industry. To rationalize these results that contrast with most findings in the existing literature, the authors develop a variant of the multi-product model of Bernard, Redding, and Schott (2010) to consider varying capital intensity across products. Using transaction-level export data, they find that Chinese exporters add new products that are more labor-intensive than existing products and drop products that are less labor-intensive, supporting the model's predictions. Firms with a bigger decline in capital intensity after exporting are found to have a larger increase in measured total factor productivity.

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