International Trade and Investment
March 18-19, 2016
Robert C. Johnson, Dartmouth College and NBER, and Rudolfs Bems, International Monetary Fund
Johnson and Bems examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. The researchers define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, the researchers demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
Ferdinando Monte, Georgetown University, and Stephen J. Redding and Esteban Rossi-Hansberg, Princeton University and NBER
Many changes in the economic environment are local, including policy changes and infrastructure investments. The effect of these changes depends crucially on the ability of factors to move in response. Therefore a key object of interest for policy evaluation and design is the elasticity of local employment to these changes in the economic environment. Monte, Redding, and Rossi-Hansberg develop a quantitative general equilibrium model that incorporates spatial linkages between locations in goods markets (trade) and factor markets (commuting and migration). The researchers find substantial heterogeneity across locations in local employment elasticities. They show that this heterogeneity can be well explained with theoretically motivated measures of commuting flows. Without taking into account this dependence, estimates of the local employment elasticity for one location are not generalizable to other locations. The researchers also find that commuting flows and their importance cannot be accounted for with standard measures of size or wages at the county or commuting zone levels.
Lee G. Branstetter, Carnegie Mellon University and NBER, and Matej Drev, Georgia Institute of Technology
In this paper, Branstetter and Drev use a rich panel of the universe of Slovenian manufacturing firms in the period 1994-2010 to explore how receiving foreign investment impacts the subsequent performance of recipient firms. The researchers motivate their empirical analysis with a theoretical model in which local firms endogenously chose their product mix and export destinations. Their model details several ways in which receiving foreign investment affects firms' ex-post behavior and performance. They show that predictions of the model align closely with their empirical results. Using a variety of estimation techniques that allow for foreign investors' strategic selection of local firms for investment, the researchers find that receiving investment significantly affects the product and export market choices of local firms, leading them to expand both the scale and scope of their activities. In addition, they find strong evidence that investor origin and the intensity of investment modulate the effects of foreign investment on target firms. Specifically, targets of advanced country investors and targets of high-intensity investment subsequently outperform their domestically owned peers along most measures of performance, indicative of the notion that foreign investors transfer their superior management and technology practices to recipient firms. Developing country investor targets, on the other hand, significantly narrow the scope of their product mix and foreign market presence. The findings in this paper suggest that not all foreign investments are created equal, and that we should account for investor heterogeneity and the multi-product, multi-destination nature of firms in order to better understand how foreign investment impacts recipient firms.
Pol Antràs, Harvard University and NBER; Alonso de Gortari Briseno, Harvard University; and Oleg Itskhoki, Princeton University and NBER
This paper studies the welfare implications of trade liberalization in a world in which trade increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. Antràs, de Gortari Briseno, and Itskhoki provide tools to characterize and quantify the actual amount of compensation that will take place following trade opening, as well as the efficiency costs of undertaking such redistribution. The researchers propose two types of adjustments to standard measures of the welfare gains from trade: a 'welfarist' correction inspired by the Atkinson (1970) index of inequality, and a 'costly-redistribution' correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. The researchers calibrate their model to the United States over the period 1979-2007 using data on the distribution of adjusted gross income in public samples of IRS tax returns, as well as CBO information on the tax liabilities and transfers received by agents at different percentiles of the U.S. income distribution. Their quantitative results suggest that these corrections are non-negligible and erode about one-fifth of the gains from trade.
Benjamin Faber and Thibault Fally, University of California at Berkeley and NBER
A growing literature has emphasized the role of Melitz-type firm heterogeneity within sectors in accounting for nominal income inequality. This paper explores the implications of firm heterogeneity for household price indices across the income distribution. Using detailed matched U.S. home and store scanner microdata that allow them to trace the firm size distribution into the consumption baskets of individual households, Faber and Fally present evidence that richer U.S. households source their consumption from on average significantly larger producers of brands within disaggregated product groups compared to poorer U.S. households. The researchers use the microdata to explore alternative explanations, write down a quantitative framework that rationalizes the observed moments, and estimate its parameters to quantify model-based counterfactuals. Their central findings are that larger, more productive firms endogenously sort into catering to the taste of wealthier households, and that this gives rise to asymmetric effects on household price indices. They find that these price index effects significantly amplify observed changes in nominal income inequality over time, and that they lead to a significantly more regressive distribution of the gains from international trade.
Lorenzo Caliendo, Yale University and NBER; Robert C. Feenstra and Alan M. Taylor, University of California at Davis and NBER;and John Romalis, The University of Sydney and NBER
Tariffs have fallen significantly around the globe over the last two decades. Yet very little is known about the trade, entry, and welfare effects generated by this unprecedented shift in trade policy. Caliendo, Feenstra, Romalis, and Taylor use a heterogeneous-firm quantitative trade model to study the effects of observed changes in trade policy. Importantly, in their model, tariffs affect the entry decision of firms across markets, a channel that has been unduly overlooked in the literature. The researchers first show how trade policy influences entry and selection of firms into markets. They then use a new tariff dataset, and apply a 189-country, 15-sector version of their model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 19902010. They find that the impact on firm entry was larger in advanced relative to emerging markets; that more than 90% of the gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round); that PTAs have not contributed much to the overall gains from trade; and that, with the exception of a few emerging and developing countries, most countries do not gain much (and some lose) from a move to complete free trade under zero tariffs.
Jean-Noel Barrot and Erik Loualiche, MIT, and Julien Sauvagnat, Bocconi University
Barrot, Loualiche, and Sauvagnat investigate how globalization is reflected in asset prices. The researchers use shipping costs to measure U.S. firms' exposure to globalization. Firms in low shipping cost industries carry a 7.8 percent risk premium, suggesting that their cash-flows covary negatively with U.S. investors' marginal utility. To understand the origins of this globalization risk premium, the authors develop a dynamic general equilibrium model of trade and asset prices. They find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. This suggest that foreign productivity shocks are associated with times when consumption is dear for U.S. investors.
Christoph Boehm, Aaron Flaaen, and Nitya Pandalai-Nayar, University of Michigan
Multinationals, Offshoring and the Decline of U.S. Manufacturing
Boehm, Flaaen, and Pandalai-Nayar provide three new stylized facts that characterize the role of multinationals in the U.S. manufacturing employment decline, using a novel microdata panel from 1993-2011 that augments U.S. Census data with firm ownership information and transaction-level trade. First, over this period, U.S. multinationals accounted for 41% of the aggregate manufacturing decline, disproportionate to their employment share in the sector. Second, U.S. multinational-owned establishments had lower employment growth rates than a narrowly-defined control group. Third, establishments that became part of a multinational experienced job losses, accompanied by increased foreign sourcing of intermediates by the parent firm. To establish whether imported intermediates are substitutes or complements for U.S. employment, the researchers develop a model of input sourcing and show that the employment impact of foreign sourcing depends on a key elasticity of firm size to production efficiency. Structural estimation of this elasticity finds that imported intermediates substitute for U.S. employment. In general equilibrium, the authors' estimates imply a sizable manufacturing employment decline of 13%.