International Trade and Investment
March 22 and 23, 2013
Alberto Cavallo, MIT; Brent Neiman, University of Chicago and NBER; and Roberto Rigobon, MIT and NBER
Cavallo, Neiman, and Rigobon use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, they show that the law of one price holds perfectly within currency unions for thousands of goods sold by each of the retailers, implying that good-level real exchange rates are equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that it is the common currency per se, rather than the lack of nominal volatility, that results in the lack of cross-country differences in the prices of these goods. Second, they use a novel decomposition to show that most of the cross-sectional variation in good-level real exchange rates reflects differences in prices at the time that products are first introduced, as opposed to the component emerging from heterogeneous pass-through or from nominal rigidities during the life of the good. In fact, international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.
JaeBin Ahn, International Monetary Fund
Ahn identifies and estimates the direct impact of bank liquidity shocks on real economic activity by exploring letter-of-credit import transactions in Colombia during the 2008-9 global financial crisis. The detailed dataset on letter-of-credit transactions allows for exploiting within-importer-exporter variations across issuing banks. The study finds substantial effects of bank liquidity shocks on letter-of-credit import transactions: a 1 percentage point decline in bank deposit growth led to a 4.5 percentage point decline in imports in intensive margins, and to a 5 percent increase in the exit probability in extensive margins. Further, the estimate suggests that adverse bank liquidity shocks can explain at least 38 to 47 percent of the collapse in import transactions via letters of credit in Colombia.
Dennis Novy, University of Warwick, and Alan Taylor, University of Virginia and NBER
Novy and Taylor offer a new explanation for why international trade is so volatile in response to economic shocks. Their approach combines the uncertainty shock idea of Bloom (2009) with a model of international trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but in the latter case with higher costs . Because of the fixed costs of ordering, firms hold an inventory of intermediates. The authors show that in response to an uncertainty shock, firms optimally adjust their inventory policy by disproportionately cutting their orders of foreign intermediate goods. In the aggregate, this leads to more of a contraction in international trade flows than in domestic economic activity. They confront the model with newly compiled monthly aggregate U.S. import data and industrial production data going back to 1962, and with disaggregated data going back to 1989. Their results suggest a tight link between uncertainty and the cyclical behavior of international trade.
Andrei Levchenko, University of Michigan and NBER, and Jing Zhang, University of Michigan
Levchenko and Zhang evaluate the role of sectoral heterogeneity in determining the gains from trade. They first show that in the presence of sectoral Ricardian comparative advantage, a one-sector sufficient statistic formula using total trade volumes as a share of total absorption systematically understates the true gains from trade. Greater relative sectoral productivity differences lead to larger disparities between the gains implied by the one-sector formula and the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries and 19 sectors, they then show that the multi-sector formula implies on average 30 percent higher gains from trade than the one-sector formula, and as much as 100 percent higher gains for some countries. Next they set up and estimate a quantitative Ricardian-Heckscher-Ohlin model in which no version of the formula applies exactly, and they compare a range of sufficient statistic formulas to the true gains in the model. Confirming their earlier results, they find that formulas that do not take into account sectoral heterogeneity understate the true gains from trade in the model by as much as two-thirds. The one-sector formulas understate the gains by more in countries with greater dispersion in sectoral productivities.
Robert Johnson, Dartmouth College and NBER, and Andreas Moxnes, Dartmouth College
Comparative advantage and trade costs shape the geography of cross-border supply chains and trade flows. To quantify these forces, Johnson and Moxnes build a model of trade with multistage production that features technology differences both across and within individual production stages. They estimate technology and trade costs in the model via simulated method of moments, matching bilateral shipments of final and intermediate goods for sixteen countries. Using the estimated model, they investigate the extent to which supply chains magnify trade elasticities and respond to changes in trade costs or productivity. They find no magnification effects for moderate changes in trade costs, but relatively large adjustments in supply chains.
Xue Bai, Pennsylvania State University; Kala Krishna, Pennsylvania State University and NBER; and Hong Ma, Tsinghua University
Before 2004, private Chinese firms were not allowed to export directly, only through intermediaries, unless their registered capital was quite large. As part of joining the WTO, China eliminated these restrictions by 2004. Even though intermediaries can facilitate exports, especially by smaller firms, restricting the choice of export mode may well have unforeseen costs. If direct trading results in more opportunities to learn about technology and preferences, and thus creates greater learning from exporting, then such rules may end up slowing down export growth. Bai, Krishna, and Ma estimate a dynamic discrete choice model (using matched production and customs data for China) in which firms choose their export status and mode. The model recovers not only the sunk and fixed costs of exporting according to mode, but also the evolution of productivity and demand under different export modes. The results suggest that firms learn more from direct exporting than from indirect exporting. The researchers also find that starting direct exporting requires significant start-up costs, whereas starting indirect exporting is much cheaper. Moreover, climbing the export ladder by starting off as an indirect exporter and then transitioning into direct exporting is cheaper than exporting directly to begin with. Policy experiments suggest that with learning-by-exporting, restricting direct trading rights is very costly comparing to the benefits from an established intermediary sector. However, if firms do not learn from exporting at all, the case is reversed because of the high costs associated with direct trading. The authors see this as a first step in a larger research agenda of examining the causes of China's remarkable export growth and what role joining the WTO plays in explaining this.
Brian Kovak, Carnegie Mellon University; Ryan Michaels, University of Rochester; and David Byrne, Federal Reserve Board
As intermediate inputs are increasingly purchased from low-price markets such as China, it is essential to know whether low-price suppliers simply produce lower quality products or whether they offer real quality-adjusted discounts compared to their higher-price competitors. Kovak, Michaels, and Byrne study cross-country differences in price and quality in the market for semiconductor wafer manufacturing services. Using a proprietary transaction-level dataset, they document substantial constant-quality price differences across suppliers, and shifts toward lower priced suppliers. Chinese producers on average charged 17 percent less than leading Taiwanese producers for otherwise identical products and increased their market share by 14.7 percentage points from 2000 to 2011. They introduce a model with costs of switching that can sustain realistic quality-adjusted price dispersion and which predicts pricing dynamics that are present in the data but are inconsistent with alternate explanations. They conclude by discussing the implications of their findings for existing approaches to cross-country quality measurement and for productivity measurement when facing quality-adjusted price dispersion