East Asian Seminar on Economics

The NBER's conference on East Asian Seminar on Economics took place June 6-7 in Thailand. Research Associates Takatoshi Ito of Columbia University and Andrew K. Rose of University of California, Berkeley organized the meeting. These researchers' papers were presented and discussed:

Peter K. Schott, Yale University and NBER; Andrew Greenland, Elon University; Mihai Ion, University of Arizona; and John Lopresti, College of William & Mary

Using Equity Market Reactions to Infer Exposure to Trade Liberalization

Schott, Greenland, Ion, and Lopresti propose using average abnormal equity returns (AAR) to identify firm sensitivity to trade liberalization. This approach captures the net impact of all avenues of exposure and yields estimates for both goods-producing and service firms, provided they are publicly traded. Applying their method to a specific change in US trade policy, the researchers find that AARs vary substantially across firms within narrowly defined industries and that they are correlated with, but provide explanatory power beyond, standard measures of import competition in predicting firm outcomes.

Shujiro Urata, Waseda University and ERIA; Kazunobu Hayakawa, Institute of Developing Economies; and Tadashi Ito, Gakushuin University

Impacts of Increased Chinese Imports on Japan's Labor Market

Using the Japanese firm/establishment level census data, Urata, Hayakawa, and Ito investigate on the impact of the Chinese import penetration for employment in Japan. The researchers have found little or slightly negative impact in total employment level, but found that employment through exit has been reinforced by the Chinese import penetration and the impact on exit was stronger for the small and medium enterprises. Log level of employment and sales value for Japanese firms on average has little to do with the Chinese penetration ratio, but it is negatively associated for the SMEs.

Minho Kim, Korea Development Institute, and Iona Hyojung Lee, Singapore Management University

The Impact of Chinese Imports on Korean Manufacturing Plants

This paper provides empirical analysis on the impact of Chinese imports on Korean manufacturing plants, using Korea's plant-level data for the period of 1996-2013. While many studies find negative impacts of Chinese imports (especially on employment) in developed countries, Kim and Lee find the opposite in South Korea. They show that the rising Chinese import competition has a significantly positive impact on Korean plants' productivity and employment. Importantly, Kim and Lee separately define 'output' and 'input' import penetration rates, and examine their impacts on plants' productivity, markup, and employment. Interestingly, they find that the rising Chinese 'input' import competition has much larger and significantly positive impacts on Korean plant productivity and employment, compared to the 'output' one. Also, the researchers find that Chinese 'output' import penetration has a positive effect on Korean plant markups, while the 'input' one has no effect.

Yu-Yin Wu, Shih Hui-Tzu, Chu-Hsuan Su, and Chu-Nan Hu, Chung-Hua Institution for Economic Research

Impact of Regional Economic Integration on Taiwan's Industrial Supply Chain of Vehicles (slides)

Regional economic integration can help to increase the welfare of participating members, but they can also cause redistribution of income. According to the international trade theory, opening up the market will help to increase the employment and income level of an industrial sector with advantages in one country; while the employees in those sectors with no advantage would be negatively affected because the production resources would flow to the advantageous industries. However, from the perspective of the industrial supply chain, if an industry of a country is dominated by foreign investors and the country shows advantages in part of the supply chain, what will be the impact on industry under the situations of regional economic integration and MNEs' adjustment of global supply chain? Participating regional economic integrations has been a certain policy in Taiwan. That is, Taiwan will actively establish closer trade and economic relations with international partners after the participation to WTO few decades ago. It could be then expected that those industries with advantages in Taiwan would definitely gain the benefit after Taiwan became a member of some regional partnership. However, the industries, such as automobile, which has always been dominated by Japanese brands in Taiwan, may be negatively affected when Taiwan open markets and the Japanese automobile producers adjust their distribution of supply chain. If that happens, the upstream of automobiles would also be negatively affected due the decreasing demand for producing automobiles, even though Taiwan shows a relative advantage on the sectors of auto components. Therefore, by adopting the model proposed by Lewbel (2012), Wu, Hui-Tzu, Su, and Hu aim to estimate the price elasticity of imported vehicles, as well as the impact of eliminating imported vehicle tariffs on the sale of domestically produced automobiles and auto components, so as to figure out the policy implications for the development of the automobile industry in Taiwan.

Bingjing Li, National University of Singapore, and Loren Brandt and Peter Morrow, University of Toronto

Is Processing Good? Theory and Evidence from China

Policies encouraging processing trade are common in developing countries and are thought to encourage integration into global markets. Agents engaged in processing production import intermediate inputs and capital equipment duty free but are often not allowed to sell these goods or the resulting output on the domestic market. For ordinary production, the reverse holds: imports are subject to tariffs but domestic sales are allowed. This paper studies the welfare effects of these policies using Chinese data for 109 industries for 2000-2007. Counterfactual policy experiments imply large welfare losses (≈ 3 − 7%) to Chinese agents from not being allowed to buy processing output on the domestic market. There are small welfare gains (< 1%) from the duty free status of processing imports. Li, Brandt, and Morrow also develop a new method to estimate correlation parameters for multivariate Fréchet distributions with trade models that deliver multiplicative gravity equations.

Hong Ma, Tsinghua University, and Peter Eppinger, Tubingen University

Optimal Ownership and Firm Performance: Theory and Evidence from China's FDI Liberalization

Does ownership matter for firm performance? Canonical theories of the firm argue that firms allocate ownership over production facilities to minimize the inefficiencies arising from contractual frictions. But the size of these inefficiencies is unknown. This paper provides a first quantification of the gains from optimal ownership by exploiting a major liberalization of China's policy restrictions on foreign ownership. The reform allowed multinationals to reoptimize their control over Chinese firms. Ma and Eppinger find that optimal ownership restructuring induced firm-level output gains of up to 34% within only two years. These effects are stronger and accompanied by productivity gains over the medium term. Ma and Eppinger rationalize their findings by an extended property-rights theory of the multinational firm.

Teresa C. Fort and Andrew B. Bernard, Dartmouth College and NBER, and Frederic Warzynski and Valerie Smeets, Aarhus University

Heterogeneous Globalization: Offshoring and Reorganization

This paper exploits a direct measure of offshoring to study how the movement of production abroad affects the composition of firms' domestic employment and production, as well as their innovative activities. After offshoring begins, firms increase their imports of domestically produced goods, and retain -- rather than abandon -- domestic production of those goods. Fort, Warzynski, Bernard, and Smeets define a new measure of offshoring based on this relationship that enables them both to distinguish it from import competition and to identify new production cost saving opportunities in foreign countries. In response to such new offshoring opportunities, firms reallocate labor from production work to technology and innovation-related occupations. This reallocation of workers is accompanied by increases in offshoring firms' product development and R&D spending. The results suggest a link between offshoring and domestic innovation.

Edwin Lai, Hong Kong University of Science and Technology; Steffan Qi , Hong Kong Baptist University; and Heiwai Tang, Johns Hopkins University

Global Sourcing and Domestic Value-added in Gross Exports (slides)

This paper employs data from the World Input-Output Database (WIOD) to document the evolution of the domestic content in exports, as measured by the domestic value added to gross exports ratio (DVAR), across countries and sectors over the period 1995-2008. Lai, Qi, and Tang develop a multiple-sector general equilibrium model of Eaton and Kortum (2002) with domestic and global input-output linkages (a la Caliendo and Parro (2015)) to provide structural interpretations of individual countries’ DVAR. The researchers use the calibrated version of the model to fully decompose the time-series changes of the global DVAR and selected countries’ DVAR into separate parts that are due to changes in technology, bilateral trade frictions, unilateral export fixed costs, and other exogenous factors such as changes in factor endowments and trade balances. They find that while the partial effects of both technology and trade costs are negative, there is a positive and significant interactive effect from the two. Taking into account the interactive effects, Lai, Qi, and Tang find that the total effect of technology, which has been either overlooked or misinterpreted in the existing analyses of the evolution of global value chains, is significantly positive, while the total effect of trade frictions is far from capable of explaining the changes in DVAR over the sample period. The contributions of other determinants are quantitatively very small.

Yong Wang, Peking University, and Shang-Jin Wei, Columbia University and NBER

The Sandwich Effect: Challenges for Middle-Income Countries (slides)

Wang and Wei develop a tractable growth model to show how a middle-income country (M) can be sandwiched by an innovating north country (N) and an imitating south country (S) through international trade. An increase in labor productivity of existing varieties (intensive margin) or in the number of varieties (extensive margin) produced in S may result in non-convergence of M to N, but this chasing effect from S disappears when S is sufficiently unproductive. Meanwhile, an increase in innovation in N not only enlarges the income gap between N and M (pressing effect from N) but also makes M more vulnerable to the chasing effect from S. The researchers characterize how M should optimally allocate its resources between production and R&D to respond to the chasing effect from S and pressing effect from N.

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

GVC Journeys: Industrialisation and Deindustrialisation in the Age of the Second Unbundling

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. This paper distinguishes between trade in final goods and trade in parts to track the shifting pattern of the location of manufacturing. Okubo and Baldwin 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 organise thinking on the patterns of industrialisation and deindustrialisation—namely the "GVC journeys" of advanced and emerging economies. The researchers also provide one simple model. The model highlights the interactions of trade costs and the knowledge transfers to accompany offshoring of parts production and assembly, which they call trade-led versus knowledge-led globalisation.

Ayako Obashi, Aoyama Gakuin University, and Fukunari Kimura, Keio University

New Developments in International Production Networks: Impact of Digital Technologies

This paper tries to identify the impact of digital technologies on network trade, particularly in East Asia. A standard gravity exercise is conducted with the worldwide disaggregated data of network trade, which consists of trade in manufactured parts and components, capital goods, and consumable goods, in order to find possible influence of the introduction of digital technologies represented by the by-industry use of industrial robots, individual's internet use, and imported digitally deliverable services. Obashi and Kimura find that the introduction of robots, together with imported digitally deliverable services, seems to enhance trade in manufactured parts and components as well as consumable goods in East Asia, but not necessarily in other parts of the world. This suggests that the exploration of complementarity between machines and human resources in production blocks supported by better connectivity may allow newly developed economies to retain and expand the division of labor, rather than suffering from massive "reshoring" in which factories would go back to advanced economies.

Rodney Tyers, Australian National University, and Yixiao Zhou , Curtin University

US-China Rivalry: The Macro Policy Choices (slides)

Stylized representations of recent U.S. and Chinese tax reforms, tariffs against imports and alternative Chinese monetary targeting are examined using a calibrated global macro model that embodies both trade and financial interdependencies. For both countries, unilateral capital tax relief and bilateral tariffs are shown to be "beggar thy neighbor" in consequence with tariffs most advantageous for the U.S. if revenue finances consumption tax relief. China is nonetheless a net loser when these policies are implemented unilaterally by the U.S., irrespective of its policy response, though a currency float is shown to cushion the effects on its GDP in the short run. Equilibria in normal form non-cooperative tariff games exhibit spill-overs that are substantial but insufficient to deter dominant strategies. The U.S. imposes tariffs while China liberalizes, sustaining fiscal balance via consumption tax relief in the U.S. and expenditure restraint in China.

Arnaud Costinot and Iván Werning, MIT and NBER

Robots, Trade, and Luddism: A Sufficient Statistic Approach to Optimal Technology Regulation (NBER Working Paper No. 25103)

Technological change, from the advent of robots to expanded trade opportunities, tends to create winners and losers. How should government policy respond? And how should the overall welfare impact of technological change on society be valued? Costinot and Werning provide a general theory of optimal technology regulation in a second best world, with rich heterogeneity across households, linear taxes on the subset of firms affected by technological change, and a nonlinear tax on labor income. Costinot and Werning's first results consist of three optimal tax formulas, with minimal structural assumptions, involving sufficient statistics that can be implemented using evidence on the distributional impact of new technologies, such as robots and trade. Costinot and Werning's second result is a comparative static exercise illustrating that while distributional concerns create a rationale for non-zero taxes on robots and trade, the magnitude of these taxes may decrease as the process of automation and globalization deepens and inequality increases. Their final result shows that, despite limited tax instruments, technological progress is always welcome and valued in the same way as in a first best world.

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