Matthieu Bussiere and Giulia Sestieri, Banque de France; Giovanni Callegari, IMF; Fabio Ghironi, Boston College and NBER; and Norihiko Yamano, OECD
Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-9
Bussiere, Callegari, Ghironi, Sestieri, and Yamano provide a new methodology for estimating trade elasticities based on an import intensity-adjusted measure of aggregate demand. They analyze the collapse of world trade that took place in the wake of the 2008-9 global financial crisis: by its magnitude and synchronicity across countries, this contraction was unprecedented since 1945. Regrettably, though, standard empirical trade models-which typically use aggregate measures of demand- fail to account for these developments and severely underestimate the magnitude of the trade collapse. This has led observers to search for alternative explanations, including the drying up of trade finance. These researchers argue that the composition of demand during the crisis played a key role in the collapse of trade, and they highlight two main effects. First, the significant fall in import-intensive categories of expenditure (especially investment, but also private consumption) in key trading nations had a large downward impact on the quantity of imports from the rest of the world. Second, the fragmentation of production across countries implies high import content of exports and, in turn, the propagation of shocks across borders. They provide evidence in favor of these factors, based on the analysis of the new OECD input-output tables and on econometric estimates for a group of OECD countries. Specifically, they show that a new intensity-weighted measure of demand outperforms alternative measures, during the crisis but also in normal times and over the long run. Their measure thus provides a solution to the long-standing Houthakker-Magee (1969) elasticity puzzle.
Daniel Paravisini and Daniel Wolfenzon, Columbia University and NBER; Veronica Rappoport, Columbia University; and Philipp Schnabl, New York University
Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data
Paravisini, Rappoport, Wolfenzon, and Schnabl estimate the elasticity of exports to credit shocks. They exploit the disproportionate reduction in credit supply by banks with high share of foreign liabilities during the 2008 financial crisis as a source of variation . Using matched customs and firm-level bank credit data from Peru, they compare changes in exports of the same product and to the same destination by firms borrowing from different banks. This allows them to account for variation in non-credit determinants of exports. On the intensive margin, the elasticity of exports to credit is 0.23, and it is relatively constant across firms of different size, industry, and other observable characteristics. The researchers find that both the frequency and average size of shipments are sensitive to credit shocks. On the extensive margin, the elasticity of the number of firms that continue supplying a product-destination export market is 0.36, but credit has no effect on the number of entrants. The estimated elasticities imply that the negative credit supply shock accounts for 15 percent of the drop in Peruvian exports during the financial crisis.
Arnaud Costinot, MIT and NBER; Jonathan Vogel, Columbia University and NBER; and Su Wang, MIT
An Elementary Theory of Global Supply Chains
Costinot, Vogel, and Wang develop an elementary theory of global supply chains. They consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods, and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Because of the sequential nature of production, absolute productivity differences are a source of comparative advantage among nations. Using this simple theoretical framework, the researchers offer a first look at how vertical specialization shapes the interdependence of nations.
Richard Baldwin, Graduate Institute, Geneva and NBER, and Anthony Venables, University of Oxford
Relocating the Value Chain: Offshoring and Agglomeration in the Global Economy (NBER Working Paper No. 16611)
Fragmentation of stages of the production process is determined by international cost differences and by the benefits of co-location of related stages. The interaction between these forces depends on the technological relationships between these stages. Baldwin and Venables look at both cost minimizing and equilibrium fragmentation under different technological configurations. Reductions in trade costs beyond a threshold can result in discontinuous changes in location, with relocation of a wide range of production stages. There can be overshooting (off-shoring that is reversed as costs fall further) and equilibrium may involve less off-shoring than is efficient.
Beatriz de Blas, Universidad Autonoma de Madrid, and Katheryn Russ, University of California, Davis and NBER
Teams of Rivals: Endogenous Markups in a Ricardian World (NBER Working Paper No. 16587)
de Blas and Russ show that an ostensibly disparate set of stylized facts regarding firm pricing behavior can arise in a Ricardian model with Bertrand competition. Generalizing the Bernard, Eaton, Jenson, and Kortum (2003) model allows firms' markups over marginal cost to fall under trade liberalization, but to increase with FDI, matching empirical studies in international trade. The authors are able to mesh this dichotomy with the existence of pricing-to-market and imperfect pass-through, as well as to capture stylized facts regarding the frequency and synchronization of price adjustment across markets. The result is a well specified distribution for markups that previously could only be seen numerically and a way to quantify endogenous pricing rigidities emerging from a market structure governed by fierce competition among rivals.
David H. Autor, MIT and NBER; David Dorn, CEMFI and IZA; and Gordon H. Hanson, University of California, San Diego and NBER
The China Syndrome: Local Labor Market Effects of Import Competition in the U.S.
U.S. imports from low-income countries have increased dramatically since 1990, with most of this growth stemming from rising imports of Chinese goods. Autor, Dorn, and Hanson explore the effect of import competition on U.S. local labor markets that were differentially exposed to the rise of China trade between 1990 through 2007 because of differences in their initial patterns of industry specialization. The focus on local labor markets rather than industries as the unit of analysis allows the authors to analyze a broad set of economic impacts, both within the manufacturing sector and, critically, in the surrounding labor market. Instrumenting Chinese imports to the United States using contemporaneous, industry-level Chinese import growth in other high-income countries, they find that increased exposure of local labor markets to Chinese imports leads to higher unemployment, lower labor force participation, and reduced wages. The employment reduction is concentrated in manufacturing, and explains one third of the aggregate decline in U.S. manufacturing employment between 1990 and 2007. Wage declines occur in the broader local labor market, too, and are most pronounced outside of manufacturing. Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits. These transfer payments are two orders of magnitude larger than the corresponding rise in Trade Adjustment Assistance benefits. Nevertheless, transfers fall far short of offsetting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade. Our estimates imply that the losses in economic efficiency from trade-induced increases in the usage of public benefits are, in the medium run, of the same order of magnitude as U.S. consumer gains from trade with China.
John McLaren, University of Virginia and NBER, and Shushanik Hakobyan, University of Virginia
Looking for Local Labor-Market Effects of the NAFTA (NBER Working Paper No. 16535)
Using U.S. Census data for 1990 and 2000, McLaren and Hakobyan estimate effects of the NAFTA agreement on U.S. wages. They look for any indication of effects of the agreement on local labor markets dependent on industries vulnerable to import competition from Mexico, and on workers employed in industries competing with Mexican imports. They find only modest local labor-market effects, but a strong industry effect, dramatically lowering wage growth for blue-collar workers in the most affected industries. These distributional effects are much larger than aggregate welfare effects estimated by other authors. In addition, they find strong evidence of anticipatory adjustment in places whose protection was expected to fall but had not yet fallen; this adjustment appears to have conferred an anticipatory rent to workers in those locations.
Kyle Handley, University of Maryland, and Nuno Limao, University of Maryland and NBER
Trade and Investment under Policy Uncertainty: Theory and Firm Evidence
Handley and Limao provide theoretical and empirical evidence that trade policy uncertainty can significantly affect investment and entry into export markets. When market entry costs are sunk, policy uncertainty can create a real option value of waiting to enter foreign markets until conditions improve or uncertainty is resolved. Using a dynamic, heterogeneous firms model the authors show that investment and entry into export markets is reduced when trade policy is uncertai, and that preferential trade agreements (PTAs) are valuable to exporters even if applied trade barriers are currently low or zero. They derive a structural equation that predicts how firm entry responds to changes in applied tariffs and a theory-based measure of policy uncertainty. They test their predictions using Portugal's accession to the European Community in 1986 with new firm-level trade data. They find that the accession removed uncertainty about future preferences and this channel led to substantial investment and entry of Portuguese exporters into EC markets. They argue that these results have broader implications for many other PTAs that aim to secure pre-existing preferences and that their approach also can be applied to analyze other sources of policy uncertainty.