International Trade and Investment
March 20 and 21, 2015
Eduardo Morales, Princeton University and NBER, and Michael J. Dickstein, Stanford University and NBER
The decision of firms to participate in export markets drives much of the variation in the volume of trade. To understand this decision, and in particular to predict how firms will react to currency devaluations or changes in trade policies, policymakers need a measure of the costs firms incur when entering foreign markets. Prior estimates of these costs are often large relative to most exporters' observed revenues. Morales and Dickstein show that these estimates depend heavily on how the researcher specifies firms' expectations over the potential revenue they would earn upon entry. In response, the researchers develop a novel moment inequality approach that allows them to (1) recover entry costs placing weaker assumptions on firms' expectations and (2) quantify the effects of counterfactual policies. Their approach both introduces a new set of moment inequalities, odds-based inequalities, and generalizes the revealed-preference inequalities introduced in Pakes (2010). The authors use data from Chilean exporters to show that, relative to methods that must specify firms' information sets, their approach generates estimates of entry costs that are approximately 70 percent smaller than previous measures. The researchers predict gains in export volume from reductions in entry costs and currency devaluations that are between 30 percent and 60 percent larger, respectively, than those predicted by existing approaches.
William Lincoln, Johns Hopkins University, and Andrew McCallum, Federal Reserve Board
Although a great deal of ink has been spilled over the consequences of globalization, we do not yet fully understand the causes of increased worldwide trade. Using confidential microdata from the U.S. Census, Lincoln and McCallum document significant entry into foreign markets by U.S. firms from 1987 to 2006. They show that this extensive margin growth is unlikely to have been due to significant declines in barriers to entry. The researchers instead find evidence of large roles for foreign income growth, free trade agreements, and the development of the internet in driving these trends.
Thibault Fally, University of California, Berkeley, and Russell Hillberry, The World Bank
International supply chains require coordination of numerous activities across multiple countries and firms. Fally and Hillberry develop a theoretical model in which the optimal organization of a supply chain involves a series of linked decisions that equate, at the margin, (domestic or international) transaction costs and the costs of coordinating more tasks within the firm. The parameters that govern the two types of costs explain variation in supply chain length as well as cross-country variation in gross output-to-value added ratios. Comparative advantage within chains depends solely on the coordination cost parameter. Conditional on participation in a chain, countries with lower coordination costs locate downstream. Within a chain, domestic transaction costs only affect countries' absolute advantage, but a country with large transaction costs tends to specialize in those chains for which its coordination costs are especially low. The researchers provide an analytical treatment of trade and welfare responses to trade cost change in a simple two-country model. To explore the model's implications in a richer setting they calibrate the model to match key observables in East Asia, and evaluate implications of changes in model parameters for trade, welfare, the length of supply chains and countries' relative position within them.
Emily J. Blanchard, Dartmouth College, and William Olney, Williams College
This paper demonstrates that the composition of a country's exports is an important driver of educational attainment. Using detailed trade data and a gravity based IV technique, Blanchard and Olney identify the causal impact of changes in the pattern of a country's exports on subsequent educational attainment. Relying on within-country variation over 45 years for 104 countries, the researchers find that exporting lower-skill goods depresses average years of schooling, particularly at the primary level, while exporting higher-skill goods increases schooling at higher educational levels. The results provide new insight into which types of sectoral growth are most beneficial for long-term human capital formation.
Ryan Monarch, Federal Reserve Board
This paper uses confidential U.S. Customs data on U.S. importers and their Chinese exporters to investigate the frictions from changing exporting partners. High costs from switching partners can affect the efficiency of buyer-supplier matches by impeding the movement of importers from high to lower cost exporters. Monarch tests the significance of this channel using U.S. import data, which identifies firms on both sides (U.S. and foreign) of an international trade relationship, the location of the foreign supplier, and values and quantities for the universe of U.S. import transactions. Using transactions with China from 2003-08, Monarch finds evidence suggesting that barriers to switching exporters are considerable: 45% of arm's-length importers maintain their partner from one year to the next, and one-third of all switching importers remain in the same city as their original partner. In addition, importers paying the highest prices are the most likely to change their exporting partner. Guided by these empirical regularities, the author proposes and structurally estimates a dynamic discrete choice model of exporter choice, embedded in a heterogeneous firm model of international trade. In the model, importing firms choose a future partner using information for each choice, but are subject to partner and location-specific costs if they decide to switch their current partner. Structural estimates of switching costs are large and heterogeneous across industries and products. By estimating counterfactuals on 50 of the highest value product categories traded between the U.S. and China, Monarch shows that halving relationship switching costs shrinks the fraction of importers remaining with their partner, with the accompanying improvement in match efficiency generating a 12.5% decrease in the U.S.-China Import Price Index.
Illenin Kondo, Federal Reserve Board
How does trade liberalization affect unemployment across locations within the U.S.? Using direct administrative evidence on trade-induced job displacements, Kondo first documents that locations experiencing more foreign competition not only have higher job destruction rates but also lower job creation rates and thereby lower employment rates. Aggregate import penetration proxies based on industrial composition do not explain these uneven labor market outcomes, highlighting within-industry heterogeneity. In a heterogeneous firms trade model with both head-to-head competition and segmented labor markets, foreign competition has an endogenous correlated effect on job destruction and job creation because the most vulnerable locations are also the least productive. Competitive effects of trade on the entire distribution of variable markups underpin the unequal labor market effects of trade liberalization. In the transition following an unexpected trade liberalization, employment and earnings collapse in the worst hit locations while welfare, inequality, and employment increase in the aggregate.
Robert Johnson, Dartmouth College and NBER; Chad Bown, The World Bank; and Emily Blanchard, Dartmouth College
How do global supply chain linkages modify countries' incentives to impose unilateral import protection? Are these linkages empirically important determinants of tariffs and other policy barriers to trade? To answer these questions, Blanchard, Bown, and Johnson integrate supply chain linkages into the terms-of-trade model of trade policy, and develop testable predictions that relate observed bilateral final goods tariffs to domestic and foreign value-added content. The researchers test the predictions using a new database of bilateral applied tariffs and value-added content derived from global input-output tables for 14 major economies and 15 sectors over the 1995-2009 period. The authors find that domestic content in foreign final goods production lowers bilateral tariffs on final goods imports, consistent with the theory. They also find that foreign value added in domestic final goods production raises import protection for final goods. Both results hold for non-tariff barriers as well.
Delina E. Agnosteva and Yoto Yotov, Drexel University, and James E. Anderson, Boston College and NBER
Agnosteva, Anderson, and Yotov use new methods to apply gravity to flexibly infer regional, interregional and international trade costs of Canada's provinces. A bilateral trade cost function aggregates interregional frictions with origin and destination region internal and border frictions. The ratio of border to intra-regional friction, the relative border friction, varies across regions and raises bilaterally varying Unexplained Trade Barriers (UTBs) to interregional trade. Small remote regions have high relative border frictions while large central regions have low relative border frictions. The researchers' methods should be useful in future investigations of non-uniform regional trade frictions and analogous barriers to migration and direct investment.