International Trade and Investment

December 4-5, 2015
Robert Feenstra of the University of California, Davis, Organizer

Ana Fernandes and Martha Pierola, World Bank; Peter Klenow, Stanford University and NBER; Sergii Meleshchuk, University of California, Berkeley, and Andrés Rodríguez-Clare, University of California, Berkeley and NBER

The Intensive Margin in Trade: Moving Beyond Pareto

The Melitz model with Pareto-distributed firm productivity has become a tractable benchmark in international trade. It predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners will occur on the extensive margin (the number of firms exporting). In the World Bank's Exporter Dynamics Database on firm-level exports from 45 countries, however, Fernandes, Klenow, Meleshchuk, Rodríguez-Clare, and Pierola find that half of export variation occurs on the intensive margin (exports per exporting firm). The researchers explore several ways to explain this discrepancy. Most importantly, firm productivity does not follow a Pareto distribution.

Ina Simonovska, University of California, Davis and NBER; Federico Etro, University of Venice Ca' Foscari; and Paolo Bertoletti, University of Pavia

International Trade With Indirect Additivity

Bertoletti, Simonovska, and Etro develop a general equilibrium theory of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. The theory generates a new prediction that markups are independent from destination population but increasing in destination per capita income, as documented by the empirical literature. Trade liberalization delivers incomplete cost pass-through and the key implication is that the welfare gains from trade are significantly lower than those predicted by theories that feature full pass-through; the gap in welfare increases with firms' pricing-to-market elasticities. The researchers outline a tractable parametric specification of indirectly additive preferences that further predicts that small firms grow more during trade liberalization and pass through changes in costs to a higher degree than do large productive ones. The authors estimate the model's parameters to match moments from cross-firm and cross-country data and they quantify the welfare cost of autarky as well as the gains from the proposed Transatlantic Trade and Investment Partnership agreement.

Carsten Eckel, University of Munich, and Stephen Yeaple, Pennsylvania State University and NBER

Is Bigger Better? Multi-product Firms, Labor Market Imperfections, and International Trade

International trade is primarily conducted by large, multi-product firms (MPFs) that pay above average wages and exhibit high productivity. In this paper, Eckel and Yeaple introduce labor market frictions and worker heterogeneity into the standard Krugman framework and show that the augmented model simultaneously generates both small, non-exporting single-product firms (SPFs) and large, exporting MPFs. Further, the MPFs that emerge pay higher wages and exhibit higher measured labor productivity than SPFs. Despite their exceptional performance, MPFs are inefficient because they use their ability to extract rents from their workers to expand into high unit input activities. Trade liberalization always raises the real income of high wage workers and lowers real income for low wage workers but has an ambiguous effect on aggregate welfare. Although trade liberalization forces MPFs to become more efficient, it also reallocates resources from small, efficient firms to the large, inefficient firms. The model highlights the need to know why firms "excel" before drawing welfare conclusions regarding cross firm reallocations of resources.

Treb Allen, Northwestern University and NBER, and David Atkin, MIT and NBER

Volatility, Insurance and the Gains from Trade

By reducing the negative correlation between local prices and productivity shocks, trade liberalization changes the volatility of returns. In this paper, Allen and Atkin explore the second moment effects of trade. Using forty years of agricultural micro-data from India, the researchers show that trade increased farmer's revenue volatility, causing farmers to shift production toward crops with higher mean and lower variance yields. They then develop a many location, finite good quantitative general equilibrium Ricardian trade model with flexible bilateral trade costs. The model yields tractable expressions highlighting the role of geography in determining equilibrium prices and patterns of specialization across space. By combining this framework with tools from the portfolio choice literature, the authors characterize how volatility affects farmer's crop choice and gains from trade. Finally, they structurally estimate the model — recovering farmers' unobserved risk-return preferences from the gradient of the mean-variance frontier at their observed crop choice — to quantify the second moment welfare effects of trade. The researchers find that while greater trade openness increased farmer’s volatility, the welfare cost of this increased volatility was dwarfed by the first moment gains from trade.

Jose Asturias, Georgetown University; Manuel García-Santana, Universitat Pompeu Fabra; and Roberto Ramos, Bank of Spain

Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

What are the economic channels through which transportation infrastructure affect income? Asturias, García-Santana, and Ramos study this question using a model of internal trade in which states trade with each other. In contrast to the previous literature, the researchers do so in a framework that incorporates pro-competitive gains: changes in transportation costs affect the distribution of markups by changing the level of competition that firms face. The authors apply this model to the case of the Golden Quadrilateral (GQ), a large road infrastructure project in India. They discipline the parameters of the model using micro level manufacturing and geospatial data. They find that: i) the project generates large aggregate gains, ii) both standard and pro-competitive gains are quantitatively relevant.

Ralph Ossa, University of Chicago and NBER

A Quantitative Analysis of Subsidy Competition in the US (NBER Working Paper No. 20975)

What motivates regional governments to subsidize firm relocations and what are the implications of the subsidy competition among them? In this paper, Ossa addresses these questions using a quantitative economic geography model which he calibrates to U.S. states. The researcher shows that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. He also shows that subsidy competition creates large distortions so that there is much to gain from a cooperative approach. Overall, Ossa finds that manufacturing real income can be up to 3.9 percent higher if states stop competing over firms.

James Harrigan, University of Virginia and NBER; Ariell Reshef, University of Virginia; and Farid Toubal, Paris School of Economics

The March of the Techies: Technology, Trade, and Job Polarization in France, 1994-2007

Using administrative employee-firm-level data from 1994 to 2007, Harrigan, Reshef, and Toubal show that the labor market in France has become polarized: employment shares of high and low wage occupations have grown, while middle wage occupations have shrunk. During the same period, the share of hours worked in technology-related occupations ("techies") grew substantially, as did imports and exports, and the researchers explore the causal links between these trends. Their paper is the first to analyze polarization in any country using firm-level data. Their data includes hours worked classified into 22 occupations, as well as imports and exports, for every private sector firm. The authors show that polarization is pervasive: it has occurred within the nonmanufacturing and manufacturing sectors, and both within and between firms. Motivated by the fact that technology adoption is mediated by technically qualified managers and technicians, the researchers use an innovative measure of the propensity to adopt new technology: the firm-level employment share of techies. Using the subsample of firms that are active over the whole period, they show that firms with more techies in 2002 saw greater polarization from 2002 to 2007. Within manufacturing firms, importing causes skill upgrading while exporting causes skill downgrading within blue-collar workers. To control for the endogeneity of firm-level techies and trade in 2002, the researchers use values of techies and trade from 1994 to 1998 as instruments. They also show that employment in firms with more techies in 2002 grew more rapidly from 2002 to 2007, using the same instrumental variable strategy. They conclude that technological change, mediated through techies, is an important cause of polarization in France. Trade is less important.

Wolfgang Keller, University of Colorado and NBER, and Hale Utar, Bielefeld University

International Trade and Job Polarization: Evidence at the Worker-Level

Job polarization is the shift of employment and earnings from mid-level wage jobs to both high- and low-wage jobs. Employing longitudinal employee-employer matched data on all workers and firms in Denmark, Keller and Utar investigate the role of international trade for job polarization as Danish workers faced intense import competition from China over the period 1999 to 2009. Using an instrumental variables approach the researchers show that import competition from China is an important cause of job polarization in Denmark, about four times the size of the effect of offshoring. The authors confirm a strong role for technical change and computerization for polarization, although these factors cannot explain the rise in low-wage employment by the early 2000s. The removal of restrictions on textile exports with China's entry in the World Trade Organization provides a quasi-experimental setting that shows the authors' instrumental variables approach captures the substance of trades causal effect on job polarization. Import competition leads to job polarization by shifting workers from initially abundant manufacturing jobs to both high- and low-paying services jobs. Low-educated workers lose mid-level jobs, and move into low-wage jobs to a greater extent that more educated workers. Finally, when exposed to import competition women transition less well than men into high-wage jobs.

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