International Trade and Investment

December 2-3, 2016
Stephen Redding of Princeton University, Organizer

Alexis Antoniades, Georgetown University; Robert Feenstra, the University of California at Davis and NBER; Mingzhi Xu, the niversity of California at Davis

What is the Price of Tea in China? Towards the Relative Cost of Living in Chinese and U.S. Cities

Feenstra, Xu, and Antoniades examine the price and variety of products at the barcode level in cities within China and the United States. In both countries, there is a greater variety of products in larger cities. But in China, unlike the United States, the prices of products tend to be lower in larger cities. The researchers attribute the lower prices to a pro-competitive effect, whereby large cities attract more firms which leads to lower markups and prices. Combining the effect of greater variety and lower prices, it follows that the cost-of-living for grocery-store products in China is lower in larger cities. The researchers further compare the cost-of-living indexes for particular products between China and the United States. In products with a significant presence of U.S. brands in the Chinese market, the availability of additional Chinese brands leads to greater variety than in the United States, and therefore lower Chinese price indexes for that reason. In products with much less presence of U.S. brands in the Chinese market, however, the observed prices differences between the countries (usually lower prices in China) are partially or fully offset by the variety differences (less variety in China), so that the cost of living in China is not as low as the price differences suggest, especially in smaller cities.

Treb Allen, Dartmouth College and NBER; Costas Arkolakis, Yale University and NBER; and Xiangliang Li, Yale University

On the Existence and Uniqueness of Trade Equilibria

Arkolakis, Allen, and Li prove a number of new theorems that offer sufficient conditions for the existence and uniqueness of equilibrium systems. The theorems are powerful: the researchers show how they can be applied to drastically simplify existing proofs for well known equilibrium systems and establish results for systems not previously characterized. They first present new results concerning the existence, uniqueness, and calculation of a class of models where economic interactions between agents are subject to potentially many sets of bilateral frictions. They then offer a generalization of the gross substitutes condition that can be applied recursively to offer the proofs of existence and/or uniqueness for general equilibrium systems too complicated to be tackled using existing methods. The researchers illustrate the power of this method by providing (for the first time) sufficient conditions for the existence and uniqueness of two well-known trade models: a multi-country monopolistic competition model with heterogenous firms and a (nearly) arbitrary distribution of firm productivities in each country, and of a perfect competition setup with intermediate inputs and input-output relationships.

Sharon Traiberman, Yale University

Occupations and Import Competition

There is a growing concern that many workers do not share in the gains from trade. In this paper, Traiberman argues that occupational reallocation plays a crucial role in determining the winners and losers from trade liberalization: what specific workers do within an industry or a firm matters. Adjustment to trade liberalization can be protracted and costly, especially when workers need to switch occupations. To quantify these effects, Traiberman builds and estimates a dynamic model of the Danish labor market. The model features nearly forty occupations, complicating estimation. To reduce dimensionality he projects occupations onto a lower-dimensional task space. This parameter reduction coupled with conditional choice probability techniques yields a tractable nonlinear least squares problem. Traiberman finds that for the median worker, a 1 percent decrease in income, holding the income in other occupations fixed, raises the probability of switching occupations by .3 percent. However, adjustment frictions can be large — on the order of five years of income — so that workers tend to move in a narrow band of similar occupations. To quantify the importance of these forces for understanding import competition, Traiberman simulates the economy with and without observed changes in import prices. In the short-run, import competition can cost workers up to one half percent of lifetime earnings. Moreover, the variance in earnings outcomes is twice the size of the total gains from trade.

Farid Farrokhi, Purdue University

Global Sourcing in Oil Markets

Trade in oil accounts for a large share of world trade, but occupies a small part of the trade literature. This paper develops a multi-country general equilibrium model that incorporates crude oil purchases by refineries and refined oil demand by end-users. Farrokhi begins by examining data on the crude oil imports of American refineries, then estimates the model by deriving a new procedure that combines data on refineries’ selected suppliers and purchased quantities. Using the estimates to simulate the effects of counterfactual policies on oil trade and prices, Farrokhi finds: (i) A boom in crude oil production of a source changes the relative prices of crude oil across countries modestly which he interprets as the extent to which the behavior of crude oil markets deviates from an integrated global market. (ii) By lifting the ban on U.S. crude oil exports, annual revenues of U.S. crude oil producers increase by $8.4 billion, annual profits of U.S. refineries decrease by $6.5 billion, while American final consumers face a negligibly higher price of refined oil. (iii) Gains from oil trade are immensely larger than gains from trade in the existing models designed for manufacturing.

Anna Gumpert, the University of Munich; Andreas Moxnes, the University of Oslo and NBER; Natalia Ramondo, the University of California at San Diego and NBER; and Felix Tintelnot, the University of Chicago and NBER

New Facts on Exporters' and Multinational Firms' Life-Cycle Dynamics

This paper documents new facts on the life-cycle behavior of multinational firms and exporters based on panel data sets from Norway, France, and Germany. First, new exporters have substantially higher exit rates than new multinational affiliates, while export experience in a market prior to opening an affiliate lowers exit rates for the new affiliate only modestly. Second, once partial-year effects are taken into account, exporters do not look different from multinational firms in terms of their life-cycle sales profile, regardless of prior export experience. Finally, there is a significant difference in domestic size when a multinational firm starts — and exits — activities abroad; there is no such size difference for exporters. Gumpert, Moxnes, Ramondo, and Tintelnot extend the model of trade and multinational activity in Helpman, Melitz, and Yeaple (2004) to a dynamic setting in which firm productivity follows a Markov process and multinational firms incur a sunk cost to enter foreign markets. These entry costs are key to match the salient facts in the data, both qualitatively and quantitatively. Moreover, giving firms the option of opening affiliates abroad allows the model to be better reconciled with the data on export dynamics and turns out to be key for trade liberalization episodes.

Andrew Bernard, Dartmouth College and NBER, and Swati Dhingra, London School of Economics

Importers, Exporters and the Division of the Gains from Trade

This paper examines the microstructure of import markets and the division of the gains from trade among consumers, importers and exporters. When exporters and importers transact through anonymous markets, double marginalization and business stealing among competing importers lead to lower profits. Trading parties can overcome these inefficiencies by investing in richer arrangements such as bilateral contracts that eliminate double marginalization and joint contracts that also internalize business stealing. Introducing the microstructure of import markets into a trade model, Bernard and Dhingra show that trade liberalization increases the incentive to engage in joint contracts, thus raising the profits of these exporters and importers at the expense of consumer welfare. The researchers examine the implications of the model for prices, quantities and exporter-importer matches in Colombian import markets before and after the U.S.-Colombia free trade agreement. U.S. exporters that started to enjoy duty-free access were more likely to increase their average price, decrease their quantity exported and reduce the number of import partners. These exporters increased their average tariff-inclusive price by as much as 25 percent, leading to a low average pass-through rate of less than 4 percent for all imports that received duty-free access into Colombia.

Mary Amiti, Federal Reserve Bank of New York; Mi Dai, Beijing Normal University; Robert Feenstra, the University of California at Davis and NBER; and John Romalis, the University of Sydney and NBER

How Did China's WTO Entry Benefit U.S. Consumers?

China's rapid rise in the global economy following its 2001 WTO entry has raised questions about its economic impact on the rest of the world. In this paper, Amiti, Dai, Feenstra, and Romalis focus on the U.S. market and potential consumer benefits. The researchers find that the China trade shock reduced the U.S. manufacturing price index by 6.4 percent between 2000 and 2006. In principle, this consumer welfare gain could be driven by two distinct policy changes that occurred with WTO entry. The first, which has received much attention in the literature, is the U.S. granting permanent normal trade relations (PNTR) to China, effectively removing the threat of China facing very high tariffs on its exports to the U.S. A second, new channel the researchers identify is China reducing its own input tariffs. The results show that China's lower input tariffs increased its imported inputs, boosting Chinese firm's productivity and their export values and varieties. Lower input tariffs also reduced Chinese export prices to the U.S. market. In contrast, PNTR only increased Chinese exports to the U.S. through its effect on new entry, but had no effect on Chinese productivity nor export prices. The researchers find that at least 60% of the China WTO effect on U.S. price indexes was through China lowering its own tariffs on intermediate inputs.

Justin Pierce, Federal Reserve Board, and Peter Schott, Yale University and NBER

Trade Liberalization and Mortality: Evidence from U.S. Counties

Pierce and Schott investigate the impact of a large economic shock on mortality. They find that counties more exposed to a plausibly exogenous trade liberalization exhibit higher rates of suicide and related causes of death, concentrated among whites, especially white males. These trends are consistent with the researchers' finding that more-exposed counties experience relative declines in manufacturing employment, a sector in which whites and males are disproportionately employed. They also examine other causes of death that might be related to labor market disruption and find both positive and negative relationships. More-exposed counties, for example, exhibit lower rates of fatal heart attacks.

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