The 27th NBER-TCER-CEPR Conference

The 27th NBER-TCER-CEPR Conference, "Globalization and Welfare Impacts of International Trade," took place in Tokyo on July 27. This meeting was sponsored jointly by the Centre for Economic Policy Research in London, the NBER, the Tokyo Center for Economic Research, the Center for Advanced Research in Finance, and the Center for International Research on the Japanese Economy. Shin-ichi Fukuda of Tokyo University, Takeo Hoshi of Stanford University and NBER, and Fukunari Kimura of Keio University organized the meeting. These researchers' papers were presented and discussed:

Richard Baldwin, Graduate Institute, Geneva and NBER, and Toshihiro Okubo, Keio University

GVC Journeys when National and Territorial Comparative Advantage Differ

Offshoring and participation in Global Value Chains (GVCs) are critical to understanding the rapid deindustrialisation of G7 nations and the rapid industrialisation of a handful of developing nations. Baldwin and Okubo distinguish between trade in final goods and trade in parts to track the shifting pattern of the location of manufacturing. They introduce a simple empirical measure of comparative advantage in parts on one hand and in final goods on the other. They illustrate how this distinction can help organize thinking on the patters of industrialization and deindustrialization -- namely the "GVC journey's" of advanced and emerging economies. The researchers also provide a simple model that highlights the interactions among trade costs, and the knowledge transfers that accompany offshoring of parts production and assembly.

Ayako Obashi, Aoyama Gakuin University

Trade Agreement with Cross-Border Unbundling

Does offshoring of intermediate inputs introduce a new reason for trade policy intervention and changes the role and design of trade agreement? Obashi revisits the role and design of trade agreement in a theoretical framework that considers the firm's global production operations and input procurements subject to trade costs, inclusive of trade policy interventions by governments. Obashi highlights an interrelationship between market-clearing prices of the final goods and the associated domestic and foreign inputs through production linkage, which gives a novel feature to the role of trade agreement beyond the conventional market-access argument associated with the terms-of-trade theory. In particular, the local price externality arises in the sense that foreign government manipulates the local equilibrium price for home domestic inputs by unilaterally opening up the market access for final goods to its advantage. To achieve globally efficient outcomes through trade agreement, Obashi proposes to specify the market access using the trade-weighted terms of trade and to coordinate in changing the value-added created from trade between countries in a reciprocal manner.

Takeo Hoshi, and Kozo Kiyota, Keio University

Potentials for Inward Foreign Direct Investment in Japan

Promotion of inward foreign direct investment (FDI) into Japan has been an important policy in the Abenomics growth strategy. Hoshi and Kiyota examine if we can observe positive impacts of the policy in the data. They first estimate a gravity model of bilateral FDIs using data for inward FDI stocks for 35 OECD countries by origins. In estimating the model, they handle zero values for inward FDI stock explicitly. The model includes country-specific effects as well as destination-country specific time trends. The researchers take the predictions from the model as the reasonable counterfactuals and compare those to the actual inward FDI stock for Japan under the Abe administration. Although the actual inward FDI stock has been growing and is likely to achieve the goal of 35 trillion yen by 2020, the growth has been lower than the counterfactual suggested by the estimated model. Hoshi and Kiyota also estimate a model that allows time-varying destination-country specific effects. They find the part of Japan's destination-country specific effect that cannot be explained by Japan's size continues to be low even under Abenomics. These results cast a doubt on the effectiveness of the Abenomics policies to encourage inward FDI at least as of 2015.

Keith Head, University of British Columbia, and Thierry Mayer, Sciences-Po

Misfits in the Car Industry: Offshore Assembly Decisions at the Variety Level

Head and Mayer estimate the role of country/variety comparative advantage in the decision to offshore assembly of more than 2000 models of 197 car brands headquartered in 23 countries. While offshoring in the car industry has risen from 2000 to 2016, the top five offshoring brands account for half the car assembly relocated to low-wage countries. The researchers show that the decision to offshore a particular car model depends on two types of cost (dis)advantage of the home country relative to foreign locations. The first type, the assembly costs common to all models, is estimated via a structural triadic gravity equation. The second effect, model-level comparative advantage, is an interaction between proxies for the model's skill and capital intensity and headquarter country's abundance in these factors.

Gabriel Felbermayr, Ifo Center for International Economics; Fukunari Kimura and Toshihiro Okubo, Keio University; and Marina Steininger, Ifo Center for International Economics

Quantifying the EU-Japan Economic Partnership Agreement

Felbermayr, Kimura, Okubo, and Steininger provide a quantitative analysis of the new EU-Japan free trade agreement (FTA), the biggest bilateral deal that both the EU and Japan have concluded so far. It employs a generalized variant of the Eaton-Kortum (2002) model, featuring multiple sectors, input-output linkages, services trade, and non-tariff barriers (NTBs). It uses the results of an econometric ex post analysis of a related existing FTA, the one between the EU and Korea, to approximate the expected reductions in the costs of NTBs. This approach yields welfare effects for Japan of about 15 billion USD per year (0.32% of GDP) after eight years. The EU can expect gains worth about 19 billion USD per year. Long run gains are likely to be 50% larger. Trade diversion effects are small on average but pronounced for Japanese sourcing in the Asia-Pacific region. Sectoral value added impacts are very heterogeneous, even within the agri-food or manufacturing sectors.

Katheryn Russ, University of California at Davis and NBER; Kelly Stangl, University of California at Davis; and Deborah Swenson, University of California at Davis and NBER

Trade Diversion and Trade Deficits under the Korea-U.S. Free Trade Agreement

Russ and Swenson analyze disaggregate trade data to determine whether tariff preferences for South Korean goods imported by the U.S. after the Korea-U.S. Free Trade Agreement (KORUS) went into force drew U.S. import demand away from imports from other trading partners, a phenomenon called trade diversion. Adding up the effects across goods and third-country trading partners, total trade diversion is an estimated (preliminary) $16.8 billion in 2013 and $17.8 billion in 2014, more than half the size of the U.S. trade deficit during those years. Thus, trade diversion may have contributed to the increasing U.S. bilateral trade deficit with South Korea after 2012.

Akira Sasahara, University of Idaho

Explaining the Employment Effect of Exports: Value-Added Content Matters

Sasahara estimates and decomposes the impact of export opportunities on countries' employment by using a global input-output analysis, focusing on the U.S., China, and Japan. The greater they export, the greater employment in the exporting countries. However, Sasahara first documents that the number of jobs created per exports vary substantially across destination countries. Exports to some countries create more jobs than exports to other countries for the same value of exports. Results suggest that exports from sectors with higher domestic value-added contents such as natural resource, textile, and service sectors lead to a greater employment effect. As a result, cross-country differences in sectoral compositions of exports explain a large part of the variations in the employment effects across destination countries. Forward and backward linkages with other countries also affects the employment effects of exports but a direction of the impact depends on exporters and their trading partners.

Olena Ivus, Queen's University, and Walter Park, American University

Patent Reforms and Exporter Behaviour: Firm-Level Evidence from Developing Countries

Using product-level data from 1997 to 2014, Ivus and Park examine the impact of patent reforms on the microfoundations of developing countries' export growth. In a difference-in-difference setting, the researchers compare exporter characteristics in IP-intensive sectors relative to non-IP-intensive sectors. They find that high-IP exports expanded along the extensive (firmcount) margin around the time of the reforms, but with the passage of time expansions along the intensive (firm size) margin took on more importance. Changes in the exporting behavior of entrants were the key drivers, while incumbents were largely unaffected. Exporter entry and exit rates in IP-intensive sectors rose after reforms, shifting the distribution of exporters towards larger and more IP-intensive firms. Entrants' first year survival rate was unaffected, but the destination entry rate of survivors fell. The results are not driven by unobserved cross-country heterogeneity and obtain with equal strength when export changes are studied around the time of reforms. The findings signify that patent reforms did influence local productive and innovative capacity of developing countries.

Meredith Crowley, University of Cambridge, and Ning Meng and Huasheng Song, Zhejiang University

Policy Shocks and Stock Market Returns: Evidence from Chinese Solar Panels

Crowley, Meng, and Song examine the stock market performance of publicly-listed Chinese firms in the solar panel industry over 2012 and 2013 in response to announcements of new import restrictions by the European Union and domestic policy changes by the Chinese government. Using daily stock market prices from the Shanghai-Shenzhen, New York and Hong Kong markets, they calculate abnormal returns to several policy changes affecting solar panels produced in China. They find, consistent with the Melitz (2003) model, that larger, more export-oriented firms experienced larger stock market losses in the wake of European trade restriction announcements. The researchers further show that European trade policy had a larger negative effect on Chinese private sector firms relative to state owned enterprises. Finally, the researchers use a two stage least squares estimation technique to show that firms listed on U.S. markets are more responsive to news events than those listed in China and Hong Kong.

Heiwai Tang, Johns Hopkins University, and Hiroyuki Kasahara, University of British Columbia

Excessive Entry and Exit in Export Markets

Tang and Kasahara study the surprisingly high excessive entries and exits among Chinese firms in foreign markets. The researchers first use transaction-level data for the universe of Chinese exporting firms to document several stylized facts that were previously overlooked in the trade literature. In the sample that covers the period of 2000-2006, 62% of exporters are new exporters on average across countries. Among these new exporters, 81% on average did not continue serving the same country the following year. These rates are even higher for new markets facing Chinese firms, particularly those in Africa. The average firms' exit rates and entry rates are strongly positively correlated across destination countries. The entry (exit) rates are negatively correlated with the GDP of destination countries, but positively correlated with the distance from them. Tang and Kasahara build a simple two period model with imperfect information on foreign demand factors, in which firms have prior belief over their foreign demand and analyze how the mean and the variance of their prior distribution affects the firm's entry and exits. The researchers then use their micro data to empirically examine several model predictions, and find supporting evidence that firms' excessive entries and exits are outcomes of self-discovery of own demand in unfamiliar markets.

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