Doing Business There
Globalization, Institutions, and Ethnic Inequality
Nils-Christian Bormann et al.
International Organization, forthcoming
Abstract:
Recent research has shown that inequality between ethnic groups is strongly driven by politics, where powerful groups and elites channel the state's resources toward their constituencies. Most of the existing literature assumes that these politically induced inequalities are static and rarely change over time. We challenge this claim and argue that economic globalization and domestic institutions interact in shaping inequality between groups. In weakly institutionalized states, gains from trade primarily accrue to political insiders and their co-ethnics. By contrast, politically excluded groups gain ground where a capable and meritocratic state apparatus governs trade liberalization. Using nighttime luminosity data from 1992 to 2012 and a global sample of ethnic groups, we show that the gap between politically marginalized groups and their included counterparts has narrowed over time while economic globalization progressed at a steady pace. Our quantitative analysis and four qualitative case narratives show, however, that increasing trade openness is associated with economic gains accruing to excluded groups in only institutionally strong states, as predicted by our theoretical argument. In contrast, the economic gap between ethnopolitical insiders and outsiders remains constant or even widens in weakly institutionalized countries.
Tariffs, Agricultural Subsidies, and the 2020 US Presidential Election: Unintended Consequences
Jaerim Choi & Sunghun Lim
Texas Tech University Working Paper, April 2021
Abstract:
This paper provides evidence on the unintended effects of US and Chinese trade policies on the 2020 US presidential election. In response to a series of US tariffs imposed on Chinese goods, China imposed retaliatory tariffs, especially on US agricultural products, which largely affected Republican-leaning counties. The US government then subsidized US farmers by providing direct payments through the Market Facilitation Program (MFP) to mitigate the Chinese retaliatory tariffs. Using the universe of actual county-level MFP disbursement data, we find that US agricultural subsidies outweighed Chinese retaliatory tariffs and led to an increase in the Republican vote share in the 2020 presidential election. The impact is more pronounced in solidly Republican states, implying that Trump allocated rents in exchange for political patronage. However, the MFP payments were not influential enough in swing states to win the election. Finally, we uncover evidence that China’s retaliatory trade policy and US agricultural policy unexpectedly exacerbated political polarization in the US, especially the rural-urban divide.
Trade Protection, Stock-Market Returns, and Welfare
Mary Amiti, Sang Hoon Kong & David Weinstein
NBER Working Paper, May 2021
Abstract:
We show that the specific factors model can be used to derive a rigorous link between movements in stock prices and productivity, wages, employment, output, and welfare. We also prove that the commonly used measure of the effective rate of protection equals the dual measure of revenue TFP, providing a theoretical foundation for why many studies have found that trade liberalization significantly increases firm-level productivity. Our method enables us to trace a tariff announcement's effect on TFP through its impact on macro variables (e.g., exchange rates) and through its effect on the relative prices of imports. We apply this framework to understanding the implications of the U.S.-China trade war. Our results show that the trade-war announcements caused large declines in U.S. stock prices, expected TFP, and expected inflation largely by moving macro variables, but also by causing declines in the returns of firms trading with China. We find that markets expect the trade war to lower U.S. welfare by 7.8 percentage points, which is much larger than the predictions of static models but in line with those of dynamic models.
Economic Statecraft by Other Means: The Use and Abuse of Anti-Bribery Prosecution
Andrey Tomashevskiy
International Studies Quarterly, forthcoming
Abstract:
The Foreign Corrupt Practices Act (FCPA) is frequently used by the US law enforcement authorities to prosecute both US and foreign firms for bribery in foreign host countries. Evidence increasingly shows that anti-bribery enforcement is associated with a reduction in foreign investment inflows to host countries associated with enforcement actions. The determinants of enforcement actions remain understudied, however. I argue that enforcement actions are often political in nature, operating as de-facto sanctions against targeted countries. FCPA prosecutions can thus be viewed as a tool of economic statecraft, designed to reduce foreign direct investment (FDI) inflows to targeted states and enforce US foreign policy objectives. Using data on FCPA enforcement actions along with data on UN voting patterns, alliances, and US foreign aid, I find that FCPA enforcement actions are more likely to target firms that bribe in host countries with foreign policy preferences that diverge from the United States. This paper is among the first to empirically study the determinants of anti-bribery enforcement and to explicitly consider the political nature of FCPA prosecutions. These findings have broad implication for political economy research on foreign investment, economic statecraft, and corruption.
Government Policies in a Granular Global Economy
Cecile Gaubert, Oleg Itskhoki & Maximilian Vogler
Journal of Monetary Economics, forthcoming
Abstract:
Using a granular model of international trade, we study the rationale and implications of various government interventions targeted at large individual firms. In antitrust regulation, governments face an incentive to be overly lenient towards domestic mergers in comparative advantage sectors. In trade policy, targeting individual foreign exporters rather than entire sectors minimizes the pass-through of import tariffs into domestic consumer prices, shifting the burden towards foreign producers. In industrial policy, subsidizing ‘national champions’ is generally suboptimal in closed economies as it leads to an excessive build-up of market power, yet it may become unilaterally welfare improving in open economies at the cost of the foreign consumers.
Chinese official finance and political participation in Africa
Francesco Iacoella et al.
European Economic Review, forthcoming
Abstract:
Media outlets globally have been reporting about civil protests against Chinese investments in Africa. We provide new evidence on this controversial topic and investigate the influence of Chinese official projects on political participation in 54 African countries between 2000 and 2014. Using 50 × 50 kilometer cells as the unit of analysis, we match data on the occurrence of protests and other forms of political participation to georeferenced data on projects financed by the Chinese government. We find that cells which receive a larger number of projects are more likely to experience protests. Further, our analysis suggests that citizens’ heightened perception of China's rising influence on the domestic economy and lowered trust in the local government are two channels through which projects might motivate local protests.
Multinational Banks and IMF Conditionality
Trung Dang & Randall Stone
International Studies Quarterly, forthcoming
Abstract:
We find firm-level evidence that US banks receive preferential treatment in countries under IMF conditionality. We rely on investment location decisions to infer firms’ expectations about future profits and find that US firms are approximately 53 percent more likely to acquire financial firms in countries under financial conditionality. IMF programs without financial conditionality and FDI in other sectors serve as placebo tests. Financial conditionality has weak effects on investment decisions by non-US firms, which implies a political-economy interpretation. Firm-level data indicate that the distinctive behavior of US firms is not due to advantages of scale or to a US-firm fixed effect, but to US influence in the IMF. Firms from other major IMF shareholders benefit as well, but the effects are much weaker. The effects are concentrated in the politically relevant firms that have local affiliates, which is consistent with the interpretation that firms lobby for preferential treatment.
Do “Made in USA” Claims Matter?
Xinyao Kong & Anita Rao
Marketing Science, forthcoming
Abstract:
Firms often display product information on their front-of-package labels with some firms going as far as to make deceptive claims. We study the impact of the “Made in USA” claim -- a disclosure not legally required on consumer-packaged goods and yet a claim highlighted by many firms, sometimes deceptively -- on consumer demand. Leveraging the Federal Trade Commission’s investigation of four brands that resulted in removal of the claim from product packages, we study the impact such removal had on sales. We find a decline in demand following the removal of the “Made in USA” claim. Second, to ensure complete exogenous variation, we conduct a field experiment on eBay, on which we run more than 900 auctions, varying only whether a product contains this country-of-origin information. We find that, although products with the “Made in USA” claim have a slightly higher chance of drawing a zero valuation, such products obtain a 44% higher willingness-to-pay conditional on a positive valuation. However, this increased valuation is insufficient to economically justify firm relocation efforts. Auction transaction prices, on the other hand, are significantly and 28% higher with the claim, suggesting resellers and auctioneers have incentives to display the claim. The experiments alongside observational data allow us to rationalize firms’ incentives in making deceptive country-of-origin claims.
When Pep comes calling, the oil market answers: The effect of football player transfer movements on abnormal fluctuations in oil price futures
Hung Xuan Do et al.
Energy Economics, forthcoming
Abstract:
We examine the effect of player-transfers entered into by football clubs owned, or financed, by individuals who are key players in the oil market on abnormal returns in oil futures. In oil-financed football clubs, the sums expended buying players frequently far exceeds the amount received from selling players in the player-transfer market. We find that in order to finance these deficits in the player-transfer market, the owners act opportunistically by withholding the oil supply, resulting in higher abnormal oil spot returns. We also find that these spot price adjustments are reflected in abnormal returns in the futures market. The exception is when the deficit in the player-transfer market is above a very high threshold, which is typically only the case when the highest profile players in football are transferred. The high-profile transfers attract widespread media attention, making oil futures investors aware of the potential transmission from the player-transfer market to the oil market on a wide-scale, which dissipates the effect of a deficit in the player transfer market on abnormal returns in oil futures.