International Trade and Investment

March 23 and 24, 2012
Stephen J. Redding of Princeton University, Organizer

Runjuan Liu, University of Alberta, and Daniel Trefler, University of Toronto and NBER

A Sorted Table of Globalization: White Collar Jobs and the Rise of Service Offshoring (NBER Working Paper No. 17559)

Liu and Trefler study how the rise of trade in services with China and India has affected U.S. labor markets. The topic has two understudied aspects: it deals with service trade (most studies deal with manufacturing trade) and it examines the historical first of U.S. workers competing with educated but low-wage foreign workers. The empirical agenda is complicated by the endogeneity of service imports and the endogenous sorting of workers across occupations. To develop an estimation framework that deals with these, the authors imbed a partial equilibrium model of 'trade in tasks' within a general equilibrium model of occupational choice. The model highlights the need to estimate labor market outcomes using changes in the outcomes of individual workers and, in particular, to distinguish workers who switch 'up' from those who switch 'down'. (Switching 'down' means switching to an occupation that pays less on average than the current occupation). When these insights are applied to matched CPS data for 1996-2007, the cumulative 10-year impact of rising service imports from China and India is as follows: 1) downward and upward occupational switching increased by 17 percent and 4 percent, respectively; 2) transitions to unemployment increased by a large 0.9 percentage points; 3) the earnings of occupational 'stayers' fell by a tiny 2.3 perecent; 4) the earnings impact for occupational switchers is not identified without an assumption about worker sorting. Under the assumption of no worker sorting, downward (upward) switching was associated with an earning change of -13.9 percent (+12.1 percent). Under the assumption of worker sorting, there is no statistically significant impact on earnings.

Kalina Manova, Stanford University and NBER, and Zhiwei Zhang, Hong Kong Monetary Authority

Multi-Product Firms and Product Quality

Manova and Zhang establish four new stylized facts about the operations of multi-product firms using detailed customs data for China. First, manufacturers generate higher bilateral and global sales from their more expensive products. Second, exporters focus on their top-ranked expensive goods, drop cheaper articles, and earn lower revenues in markets where they sell fewer varieties. Third, companies' sales are more skewed towards their core expensive goods in destinations where they offer less products. Finally, export prices are positively correlated with input prices across products within a firm. The authors propose that product quality varies across a manufacturer' merchandise and depends on the quality of intermediate inputs. Moreover, exporters observe a product hierarchy and their core competency lies in expensive varieties of superior quality. This explanation if formalized with a model of heterogeneous multi-product, multi-quality firms. The results have implications for the aggregate and distributional effects of trade reforms and exchange rate movements.

Robert C. Johnson, Dartmouth College, and Guillermo Noguera, Columbia University

Fragmentation and Trade in Value Added over Four Decades

Johnson and Noguera bring together time series data on trade, production, and input-use to compute the value added content of trade over the past four decades (1970-2009). Comparing the ratio of value added to gross exports, they measure changes in production fragmentation for the world as a whole, individual countries, and bilateral trade partners. For the world, the share of value added in trade falls by 10 to 15 percentage points, with two-thirds of the decline occurring in the last two decades. Across countries, declines range from roughly zero to 25 percentage points, with large declines concentrated among fast growing countries undergoing structural transformation. At the bilateral level, there are large differences in size and timing of changes across trading partners. They exploit this variation to show that both non-policy and policy barriers to trade are significant determinants of bilateral fragmentation. For example, we find that regional trade agreements promote fragmentation.

Bruce Blonigen, University of Oregon and NBER; Lionel Fontagne and Farid Toubal, Paris School of Economics; and Nicholas Sly, University of Oregon

Cherries for Sale: The Incidence of Cross-Border M&A

Blonigen, Fontagne, Sly, and Toubal reconcile two opposing views regarding cross-border merger and acquisition activity: do multinationals seek target firms that are high-value "cherries" or underperforming "lemons." They show that foreign firms will be relatively more attracted to targets in the domestic country that had high productivity levels several years prior to acquisition, but then suffered a negative productivity shock (that is, cherries for sale). With high ex ante productivity levels, target firms are able to invest in large export networks that are valuable to foreign multinationals because of locational differences and trade costs. Subsequently, domestic firms that experience reductions in productivity no longer find their established network as valuable to serve independently, increasing the surplus generated by a foreign acquisition. The authors build a sequential model with multilateral export behavior by heterogeneous firms, dynamic productivity and M&A activity. Microdata from French firms across 1999-2006 provide strong evidence that both the established export networks and productivity losses among target firms promote cross-border acquisitions.

Natalia Ramondo, Arizona State University; Veronica Rappoport, Columbia University; and Kim J. Ruhl, New York University

Horizontal vs. Vertical FDI: Revisiting Evidence from U.S. Multinationals

Using firm level data from the Bureau of Economic Analysis, Ramondo, Rappoport, and Ruhl document a new set of facts regarding the behavior of U.S. multinational firms. First, they find that intra-firm trade is concentrated among a small number of large affiliates. The median affiliate reports no shipments to the parent, and directs the bulk of its sales to unrelated parties in its country of operation. In this sense, "horizontal" rather than "vertical" FDI seems to better capture the role of most U.S. affiliates abroad. Second, multinational firms often own vertically linked affiliates, as defined by the input-output coefficients between their respective industries of operation. These vertical chains, however, are not associated with a corresponding intra-firm flow of physical goods between upstream and downstream units of production. These findings suggest that a comparative advantage of multinational corporations is their ability to transfer intangible—rather than physical—inputs along vertically linked production units.

Fernando Leibovici and Michael Waugh, New York University

International Trade and Intertemporal Substitution

Leibovici and Waugh study a dynamic extension of international trade models and its ability to explain the behavior of imports at business-cycle frequencies. Their premise is that because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in income and prices. They formalize this idea and find that their calibrated model is quantitatively consistent with cyclical properties of U.S. imports. They then show that given the behavior of output and relative prices during the 2008-9 crisis, the model goes a long way toward explaining the collapse in U.S. imports.

Andrew B. Bernard, Dartmouth College and NBER; Emily J. Blanchard, Dartmouth College; Ilke Van Beveren, Lessius University College; and Hylke Y. Vandenbussche, CORE, Université Catholique de Louvain

Carry-Along Trade

Large multi-product firms dominate international trade flows. Bernard, Blanchard, Van Beveren, and Vandenbussche document new facts about multi-product manufacturing exporters that are not easily reconciled with existing multi-product models. Using linked production and export data at the firm-product level, they find that the overwhelming majority of manufacturing firms export products that they do not produce. Three quarters of the exported products and 30 percent of export value from Belgian manufacturers are in goods that are not produced by the firm, so-called Carry-Along Trade (CAT). The shares of CAT products and CAT exports are strongly increasing in firm productivity leading CAT exports to be concentrated in the largest and most productive firms. They develop a general model of Carry-Along Trade and examine the conditions under which it can rationalize the patterns observed in the data.

Doireann Fitzgerald, Stanford University, and Stefanie Haller, ESRI

Exporters and Shocks

Aggregate exports are not very responsive to movements in real exchange rates, although they respond strongly to trade liberalizations, a fact sometimes referred to as the International Elasticity Puzzle. Fitzgerald and Haller use ten years of merged plant census and customs micro data for Ireland to provide micro evidence on the origins of this puzzle by estimating firm-level responses to both market-specific macro shocks and firm-market-specific tariff shocks. They modify the standard approach in the literature to estimating participation and sales equations in order to accommodate our focus on the effect of shocks rather than steady state behavior, and to allow for costs of adjustment on the intensive as well as the extensive margin. They use firm-year fixed effects to focus on the within-firm-year effects of shocks that vary across destination markets. They find low elasticities of both participation and sales with respect to real exchange rate movements, but larger elasticities with respect to changes in tariffs, consistent with adjustment costs along both dimensions. The estimates of firm-level sales elasticities are similar to those obtained using aggregate data.

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