Foreign exchange
The End of Cheap Chinese Labor
Hongbin Li et al.
Journal of Economic Perspectives, Fall 2012, Pages 57-74
Abstract:
In recent decades, cheap labor has played a central role in the Chinese model, which has relied on expanded participation in world trade as a main driver of growth. At the beginning of China's economic reforms in 1978, the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars. The Chinese wage was only 3 percent of the average U.S. wage at that time, and it was also significantly lower than the wages in neighboring Asian countries such as the Philippines and Thailand. The Chinese wage was also low relative to productivity. However, wages are now rising in China. In 2010, the annual wage of a Chinese urban worker reached $5,487 in U.S. dollars, which is similar to wages earned by workers in the Philippines and Thailand and significantly higher than those earned by workers in India and Indonesia. China's wages also increased faster than productivity since the late 1990s, suggesting that Chinese labor is becoming more expensive in this sense as well. The increase in China's wages is not confined to any sector, as wages have increased for both skilled and unskilled workers, for both coastal and inland areas, and for both exporting and nonexporting firms. We benchmark wage growth to productivity growth using both national- and industry-level data, showing that Chinese labor was kept cheap until the late 1990s but the relative cost of labor has increased since then. Finally, we discuss the main forces that are pushing wages up.
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The Social Construction of Policy Reform: Economists and Trade Liberalization Around the World
Stephen Weymouth & Muir Macpherson
International Interactions, Fall 2012, Pages 670-702
Abstract:
We argue that the global spread of ideas contributes to trade liberalization. Building on insights from a rich case-based literature, we suggest an explicit mechanism of trade policy diffusion: U.S.-trained Ph.D. economists, who share a common belief in the benefits of free trade, and who operate with varying degrees of political influence around the world. We offer the first cross-national test of the impact of economists on trade liberalization using a unique dataset recording the country of residence of all 6,493 foreign-based, U.S.-trained American Economic Association (AEA) members over the period 1981-1997. Specifically, we measure the influence of economists on the timing and extent of trade liberalization. First, we endogenize the date of trade liberalization using hazard and probit models. Controlling for alternative diffusion mechanisms and other confounding variables, our results suggest that economists significantly speed up the reform process. Second, we find that countries with greater numbers of economists are more open to trade at the end of the period. All of our results are robust to an instrumental variables strategy that employs the number of Fulbright grants allocated by the United States as an instrument for the number of U.S.-trained economists.
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Globalization and individual gains from trade
Kristian Behrens & Yasusada Murata
Journal of Monetary Economics, December 2012, Pages 703-720
Abstract:
We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. Although trade reduces markups in both countries in our framework, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. Using data on GDP per capita and population, as well as on the U.S. income distribution, our theoretical results are illustrated in two different contexts: the hypothetical bilateral trade liberalization between the U.S. and 188 countries; and the historical sequence of U.S. free trade agreements since 1985.
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The speed of ships and shipping productivity in the age of sail
Klas Rönnbäck
European Review of Economic History, November 2012, Pages 469-489
Abstract:
A sample of vessels from the transatlantic slave trade is used as source for a quantitative analysis of the transit speed of ocean-going ships during the early modern period. In contrast to influential previous studies, the results show that the speed of ships in my sample increased significantly during this period, potentially contributing to increasing productivity of ocean shipping. The pattern is homogeneous geographically. This might have been one of the factors behind falling freight rates in the transatlantic trade, which in turn contributed to a process of market integration already during the early modern period.
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Welfare versus Subsidies: Governmental Spending Decisions in an Era of Globalization
Stephanie Rickard
Journal of Politics, October 2012, Pages 1171-1183
Abstract:
To what extent does globalization reduce the autonomy of national governments over spending decisions? Recent theories suggest that international trade puts pressure on governments to cut spending. Empirical studies find evidence of this with respect to social welfare spending in developing countries. However, existing studies leave open the possibility that trade has varied effects on different types of spending programs. Governments may cut spending on some programs, such as social welfare, in order to fund greater spending on other budget items. Using data on central government spending in 44 developing countries, trade is found to decrease spending on social welfare programs but increase spending on subsidies. The implication is that governments in developing countries have the capacity to offset the costs of globalization; however, they do so via subsidies rather than social welfare programs.
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Foreign labor costs and domestic employment: What are the spillovers?
Mai Chi Dao
Journal of International Economics, January 2013, Pages 154-171
Abstract:
This paper studies the international spillover effects of country-specific labor cost changes in the presence of labor market frictions. A two-country model with search frictions predicts that a cut in foreign labor costs leads to an increase in domestic employment, driven by a positive terms of trade effect on job creation. I find empirical evidence in support of this positive spillover effect, the terms of trade channel, and the dependence on the degree of labor market rigidity. This is done by a panel regression that estimates the effect of exogenous variation in foreign unit labor costs, instrumented by changes in foreign statutory social security contribution rates, on domestic employment and output.
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Gains from Trade: Lessons from the Gaza Blockade 2007-2010
Assaf Zimring
Stanford Working Paper, November 2012
Abstract:
This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).
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Val Burris & Clifford Staples
International Journal of Comparative Sociology, August 2012, Pages 323-342
Abstract:
Theorists of globalization have hypothesized the emergence of a transnational capitalist class that is becoming increasingly integrated across national borders. One method of evaluating this hypothesis has been to apply network analysis to study the frequency and pattern of transnational ties within global interlocking directorates. The results of such studies are mixed, both as regards the extent of transnational interlocking and its regional distribution. In an effort to resolve this ambiguity and advance the state of research in this area we undertake two main tasks. First, we submit the prevailing methodology used in such studies to a critical evaluation in which we identify and address some of its theoretical and methodological limitations. Second, we introduce and illustrate three alternative methods for assessing the extent and pattern of global interlocking directorates. Each method conceptualizes transnational interlocking in a slightly different manner and brings different aspects of the process into focus. Despite these differences, all four methods point to the conclusion that a transnational capitalist class is very far from being realized on a global scale. On the other hand, the combined evidence is much stronger and relatively consistent for the emergence of a more circumscribed transnational capitalist class, centered in the North Atlantic region, which has made significant strides in transcending national divisions within and between Europe and North America.
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Do national borders matter? Intranational trade, international trade, and the environment
Carol McAusland & Daniel Millimety
Journal of Environmental Economics and Management, forthcoming
Abstract:
We develop a theoretical model identifying channels through which trade impacts the environment. First, trade decouples some of regulation's costs from its benefits, prompting demand for stringent environmental regulations. Second, trade provides consumers with access to new varieties of goods; the associated income (substitution) effect raises (lowers) demand for strict regulation. The model predicts (i) international trade to be more environmentally beneficial than intranational trade due to a stronger decoupling effect, and (ii) both intra- and international trade to be pro-environment unless substitution effects are sufficiently strong. Using data on intra- and international trade for the US and Canada, along with several environmental outcomes, we find robust evidence that international trade has a statistically and economically beneficial causal effect on environmental quality, while intranational trade has a harmful impact. This pattern is consistent with a moderate-sized substitution effect along with a stronger decoupling effect of international trade.
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Ex Ante Due Diligence: Formation of PTAs and Protection of Labor Rights
Moonhawk Kim
International Studies Quarterly, forthcoming
Abstract:
Do fair trade PTAs - trade agreements that contain provisions for protection of labor rights - lead to improvements in labor protection in PTA partner states? If so, how do the PTAs bring about such improvements? I argue that trade partner states are likely to engage in ex ante due diligence and improve the protection of labor rights at home before they sign or even enter into negotiations for a PTA. Given that large developed economies have increasingly placed value on strong labor protection, trade partners of these economies act on the belief that, holding other factors constant, having stronger labor protection will increase their attractiveness as a potential or a prospective PTA partner. I test this argument in the context of the United States and its trade partners between 1982 and 2005. The evidence shows that trade partner states indeed are much more likely to improve labor protection (i) prior to the 2002 Trade Act publicizing the importance of labor protection and (ii) prior to signing a PTA with the United States.
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Indiaʼs mysterious manufacturing miracle
Albert Bollard, Peter Klenow & Gunjan Sharma
Review of Economic Dynamics, forthcoming
Abstract:
Using data on formal manufacturing plants in India, we report a large but imprecise speedup in productivity growth starting in the early 1990s (e.g., 1993-2007 compared to 1980-1992). We trace it to productivity growth within large plants (200 workers or more), as opposed to reallocation across such plants. As many economists believe Indian reforms during this era improved resource allocation, the absence of a growth pickup from reallocation is surprising. Moreover, when we look across industries we fail to robustly relate productivity growth to prominent reforms such as industrial de-licensing, tariff reductions, FDI liberalization, or lifting of small-scale industry reservations. Even under a generous reading of their effects, these reforms (at least as we measure them) account for less than one-third of the rapid productivity growth in Indian manufacturing from 1980-2007.
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Ann Harrison, Leslie Martin & Shanthi Nataraj
World Bank Economic Review, forthcoming
Abstract:
Recent trade theory emphasizes the role of market-share reallocations across firms ("stealing") in driving productivity growth, whereas previous literature focused on average productivity improvements ("learning"). We use comprehensive, firm-level data from India's organized manufacturing sector to show that market-share reallocations were briefly relevant to explain aggregate productivity gains following the beginning of India's trade reforms in 1991. However, aggregate productivity gains during the period from 1985 to 2004 were largely driven by improvements in average productivity. We show that India's trade, FDI, and licensing reforms are not associated with productivity gains stemming from market share reallocations. Instead, we find that most of the productivity improvements in Indian manufacturing occurred through "learning" and that this learning was linked to the reforms. In the Indian case, the evidence rejects the notion that market share reallocations are the mechanism through which trade reform increases aggregate productivity. Although a plausible response would be that India's labor laws do not easily permit market share reallocations, we show that restrictions on labor mobility cannot explain our results.
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The currency union effect on trade is decreasing over time
José de Sousa
Economics Letters, December 2012, Pages 917-920
Abstract:
Estimating a theoretical gravity model over a sixty-year period, from 1948 to 2009, I found an unexpected trend: the currency union impact on trade is decreasing over time. This result suggests that with trade and financial globalization, currency unions become less and less important for promoting trade.
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Kelly Austin
International Journal of Comparative Sociology, June 2012, Pages 155-180
Abstract:
This study employs an unequal exchange perspective to assess if dependency on coffee exports in less-developed nations significantly impacts rates of deforestation, secondary schooling, and malnutrition, capturing specific dimensions of environmental, social, and physical well-being. OLS regression analyses reveal that dependency on coffee exports is positively associated with deforestation, malnutrition, and low participation in secondary level education in coffee-producing nations, net of other relevant factors. The findings thus demonstrate that specialization in coffee cultivation is likely to produce limited developmental benefits in poor nations.
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Aflatoxin Regulations in a Network of Global Maize Trade
Felicia Wu & Hasan Guclu
PLoS ONE, September 2012
Abstract:
Worldwide, food supplies often contain unavoidable contaminants, many of which adversely affect health and hence are subject to regulations of maximum tolerable levels in food. These regulations differ from nation to nation, and may affect patterns of food trade. We soughtto determine whether there is an association between nations' food safety regulations and global food trade patterns, with implications for public health and policymaking. We developed a network model of maize trade around the world. From maize import/export data for 217 nations from 2000-2009, we calculated basic statistics on volumes of trade; then examined how regulations of aflatoxin, a common contaminant of maize, are similar or different between pairs of nations engaging in significant amounts of maize trade. Globally, market segregation appears to occur among clusters of nations. The United States is at the center of one cluster; European countries make up another cluster with hardly any maize trade with the US; and Argentina, Brazil, and China export maize all over the world. Pairs of nations trading large amounts of maize have very similar aflatoxin regulations: nations with strict standards tend to trade maize with each other, while nations with more relaxed standards tend to trade maize with each other. Rarely among the top pairs of maize-trading nations do total aflatoxin standards (standards based on the sum of the levels of aflatoxins B1, B2, G1, and G2) differ by more than 5 µg/kg. These results suggest that, globally, separate maize trading communities emerge; and nations tend to trade with other nations that have very similar food safety standards.
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Misallocation and productivity effects of the Smoot-Hawley tariff
Eric Bond et al.
Review of Economic Dynamics, forthcoming
Abstract:
Using a newly created microeconomic archive of US imports at the tariff-line level for 1930-1933, we construct industry-level tariff wedges incorporating the input-output structure of US economy and the heterogenous role of imports across sectors of the economy. We use these wedges to show that the average tariff rate of 46% in 1933 substantially understated the true impact of the Smoot-Hawley (SH) tariff structure, which we estimate to be equivalent to a uniform tariff rate of 70%. We use these wedges to calculate the impact of the Smoot-Hawley tariffs on total factor productivity and welfare. In our benchmark parameterization, we find that tariff protection reduced TFP by 1.2% relative to free trade prior to the Smoot-Hawley legislation. TFP fell by an additional 0.5% between 1930 and 1933 due to Smoot-Hawley. We also conduct counterfactual policy exercises and examine the sensitivity of our results to changes in the elasticity of substitution and the import share. A doubling of the substitution elasticities yields a TFP decline of almost 5% relative to free trade, with an additional reduction due to SH of 0.4%.
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Comparative Advantage, Complexity, and Volatility
Pravin Krishna & Andrei Levchenko
Journal of Economic Behavior & Organization, forthcoming
Abstract:
Less developed countries tend to experience higher output volatility, a fact that is in part explained by their specialization in more volatile sectors. This paper proposes theoretical explanations for this pattern of specialization - with the complexity of the goods playing a central role. Specifically, less developed countries with lower institutional ability to enforce contracts, or alternately, with low levels of human capital will specialize in less complex goods which are also characterized by higher levels of output volatility. We provide novel empirical evidence that less complex industries are indeed more volatile.
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Coercive Assets? Foreign Direct Investment and the Use of Economic Sanctions
Dong-Hun Kim
International Interactions, forthcoming
Abstract:
How does foreign direct investment (FDI) affect the use of economic coercion? This article argues that while FDI matters, the effect depends on the entry mode of the FDI. The economic interdependence created by FDI does not have a monotonic effect on economic statecraft because the relative costs incurred by economic disruption differ depending on the forms of foreign investment. In particular, the FDI that creates wholly-owned subsidiaries (for example, cross-border mergers and aquisitions) imposes greater costs to the sender's firms than cross-border joint ventures with local partners, while FDI through joint ventures incurs greater costs for the host than the home country and its firms. By utilizing US sanction episodes from the Threat and Imposition of Economic Sanctions (TIES) dataset, the empirical analysis supports the argument. The results show that economic sanctions are less likely to occur as the share of FDI through cross-border mergers and acquisitions increases.
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Strategic Side Payments: Preferential Trading Agreements, Economic Reform, and Foreign Aid
Leonardo Baccini & Johannes Urpelainen
Journal of Politics, October 2012, Pages 932-949
Abstract:
We propose that major powers give foreign aid to developing countries to facilitate politically costly economic reforms that preferential trading agreements prescribe. Democratic developing countries (1) need adjustment assistance more than autocracies and (2) can credibly commit to using fungible revenue to compensate the domestic losers, so a side payment for deeper reforms should only be available for democracies. A quantitative test lends support to the theory. Fully democratic developing countries that form a preferential trading agreement with the European Union or the United States obtain a large increase in foreign aid in the short run. These results imply that donors have used foreign aid to strengthen the effect of preferential trading agreements on economic reforms.
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Sarita Jackson
Cambridge Review of International Affairs, Summer 2012, Pages 367-385
Abstract:
In recent years, studies have challenged the conventional power-based literature to show that a deficiency in resources does not limit a small state's bargaining leverage in international negotiations. However, few studies examine small state influence during compliance bargaining, the post-agreement bargaining to ensure that all signatories comply with the terms of an agreement. Using an interview with a key advisor to the small twin-island state of Antigua and Barbuda during compliance bargaining with the United States (US), and World Trade Organization (WTO) documents, this article examines how a small state can successfully attain bargaining leverage and win against a behemoth state. In this case, Antigua successfully challenged the US ban on cross-border internet gambling and betting services. The article argues that the strategies and tactics that Antigua used within the WTO dispute settlement framework contributed to the country's bargaining leverage and enabled it to punch above its weight.
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Trade and the allocation of talent with capital market imperfections
Roberto Bonfatti & Maitreesh Ghatak
Journal of International Economics, January 2013, Pages 187-201
Abstract:
Trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in apparent conflict with neoclassical theory, according to which trade should decrease the relative return on the relatively scarce factor, and thus decrease the skill premium in skill-scarce developing countries. We develop a simple model of trade with talent heterogeneity and capital market imperfections, and show that trade can increase the skill premium in a skill-scarce South that opens up to a skill-abundant North, both in the short run as well as in the long run. We show that trade has two effects: it reduces the skilled wage, and therefore drives non talented agents out of the skilled labor force. It also reduces the cost of subsistence, thereby allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, potentially strong enough to outweigh the decrease in the skilled wage. In our framework, trade liberalization may trigger an increase in the skill-premium in both the North and the South.
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Comparative advantage and the welfare impact of European integration
Andrei Levchenko & Jing Zhang
Economic Policy, October 2012, Pages 567-602
Abstract:
This paper investigates the welfare gains from European trade integration, and the role of comparative advantage in determining the magnitude of those gains. We use a multi-sector Ricardian model implemented on 79 countries, and compare welfare in the 2000s to a counterfactual scenario in which East European countries are closed to trade. For West European countries, the mean welfare gain from trade integration with Eastern Europe is 0.16%, ranging from zero for Portugal to 0.4% for Austria. For East European countries, gains from trade are 9.23% at the mean, ranging from 2.85% for Russia to 20% for Estonia. For Eastern Europe, comparative advantage is a key determinant of the variation in the welfare gains: countries whose comparative advantage is most similar to Western Europe tend to gain less, while countries with technology most different from Western Europe gain the most.