Findings

Interstate commerce

Kevin Lewis

October 29, 2018

NAFTA's Army: Free Trade and US Military Enlistment
Adam Dean
International Studies Quarterly, forthcoming

Abstract:

I argue that international trade increases military enlistment in the United States. Trade-related job losses reduce economic opportunities in local labor markets, and the government responds by increasing military recruitment efforts in those counties. This dynamic challenges conventional accounts of globalization, which tend to overlook the local impact of free trade and only examine the traditional welfare policies that governments offer to compensate “trade losers.” This study analyzes an original, county-level data set on army enlistment and trade-related job losses from 1996 to 2010. The results suggest that a trade shock of one thousand job losses is associated with a 33 percent increase in army enlistment in the median county. To illustrate the causal mechanisms that link free trade to army enlistment, this study also presents a case study based on original interviews in Catawba County, North Carolina, a county particularly impacted by trade liberalization.


The effects of import competition on health in the local economy
Matthew Lang, Clay McManus & Georg Schaur
Health Economics, forthcoming

Abstract:

We provide evidence that average mental, physical, and general health worsens for employed workers in local U.S. labor markets exposed to greater import competition from China. The effects are greatest for mental health. Moving a region from the 25th to 75th percentiles of import exposure corresponds to a 7.8% increase in the morbidity of poor mental health, adding about 3 days of poor mental health per year for the average adult. Concurrently, the ability to afford health care decreases. Our results complement documented consequences of import competition on labor markets and temporary business cycle shocks on health outcomes.


Unequal Gains, Prolonged Pain: A Model of Protectionist Overshooting and Escalation
Emily Blanchard & Gerald Willmann
Dartmouth College Working Paper, September 2018

Abstract:

We develop a model of democratic political responses to macroeconomic shocks in the short and long run. We show that when economic adjustment is slower than potential political change, exogenous changes in the global marketplace can trigger populist surges in favor of distortionary economic policies. Applied to trade policy, our model demonstrates that an exogenous terms-of-trade improvement or skill-biased technological change will lead to a spike in protectionism that blunts the younger generation's incentive to acquire education. In the long run, the initial surge in protectionism will gradually diminish if and only if education enables less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Evidence on key data markers suggested by the model exhibits patterns consistent with recent populist support for Brexit and Trump.


The Violent Consequences of Trade-Induced Worker Displacement in Mexico
Melissa Dell, Benjamin Feigenberg & Kensuke Teshima
American Economic Review: Insights, forthcoming

Abstract:

Mexican manufacturing job loss induced by competition with China increases cocaine trafficking and violence, particularly in municipalities with transnational criminal organizations. When it becomes more lucrative to traffic drugs because changes in local labor markets lower the opportunity cost of criminal employment, criminal organizations plausibly fight to gain control. The evidence supports a Becker-style model in which the elasticity between legitimate and criminal employment is particularly high where criminal organizations lower illicit job search costs, where the drug trade implies higher pecuniary returns to violent crime, and where unemployment disproportionately affects low-skilled men.


Does protectionism harm unskilled workers?
Hamid Beladi, Sugata Marjit & Reza Oladi
Economics & Politics, November 2018, Pages 444-450

Abstract:

In this paper we construct a general equilibrium model of trade and illustrate that return to unskilled labor may be negatively correlated with the price of product it produces. Specifically, we show that greater protection for the intermediate good that uses “unskilled” labor can reduce the unskilled wages. This result has interesting political‐economic implications.


New Technologies, Global Value Chains, and Developing Economies
Dani Rodrik
NBER Working Paper, October 2018

Abstract:

Many of the exports of developing countries are channeled through global value chains (GVCs), which also act as conduits for new technologies. However, new capabilities and productive employment remain limited so far to a tiny sliver of globally integrated firms. GVCs and new technologies exhibit features that limit the upside and may even undermine developing countries’ economic performance. In particular, new technologies present a double whammy to low-income countries. First, they are generally biased towards skills and other capabilities. This bias reduces the comparative advantage of developing countries in traditionally labor-intensive manufacturing (and other) activities, and decreases their gains from trade. Second, GVCs make it harder for low-income countries to use their labor cost advantage to offset their technological disadvantage, by reducing their ability to substitute unskilled labor for other production inputs. These are two independent shocks that compound each other. The evidence to date, on the employment and trade fronts, is that the disadvantages may have more than offset the advantages.


Democratization, contracts and comparative advantage
Felix Samy Soliman & Jan Schymik
Economics Letters, December 2018, Pages 73-77

Abstract:

We study how the international spread of democracy shaped the comparative advantage of countries. Using data on the “Third Wave of Democratization” between 1976 and 2000 we find that democratizing countries shifted their exports towards more contract intensive goods that require a larger portion of relationship-specific inputs. This shift is observed on the intensive margin (volumes of industry-level exports) as well as the extensive margin of trade (number of goods a country exports). Using an instrumental variable strategy based on democracy waves, alternative proxy variables and subsamples suggests that the effects of democratization on trade specialization are causal.


International Competition and Adjustment: Evidence from the First Great Liberalization
Stéphane Becuwe, Bertrand Blancheton & Christopher Meissner
NBER Working Paper, October 2018

Abstract:

France and Great Britain signed the Cobden Chevalier treaty in 1860 eliminating import prohibitions and lowering tariffs with Britain. This policy change was unexpected by French industry and entirely free from lobbying efforts. A series of commercial treaties with other nations followed in the 1860s lowering tariffs with France’s largest trade partners. We study the dynamics of French trade patterns using product level exports and imports for France with all partners and at the bilateral level before and after these tectonic trade policy shocks. We find a significant rise in intra-industry trade in leading manufactured products. Cotton, woolen and silk cloth “held their ground,” rising imports being met with rising exports. Rather than shifting or destabilizing French patterns of specialization, liberalization allowed for an expansion of exports in differentiated products. The findings are consistent with the “smooth adjustment” hypothesis. The return to discussion of higher tariffs from 1878 should not be regarded as a backlash to international competition, but rather the outcome of anti-competitive protectionist lobbying.


Protecting Trade by Legalizing Political Disputes: Why Countries Bring Cases to the International Court of Justice
Christina Davis & Julia Morse
International Studies Quarterly, forthcoming

Abstract:

How does economic interdependence shape political relations? We show a new pathway to support a commercial peace in which economic interdependence changes strategies for conflict management. The uncertainty arising from political disputes between countries can depress trade flows. As states seek to protect trade from such negative effects, they are more likely to bring their disputes to legal venues. We assess this argument by analyzing why countries bring cases to the International Court of Justice (ICJ). Using data on 190 countries from 1960 to 2013, we find that countries are more likely to file ICJ cases against important trading partners than against states with low levels of shared trade. We conclude that economic interdependence changes the incentives for how states resolve their disputes.


Electrification, the Smoot-Hawley tariff bill and the stock market boom and crash of 1929: Evidence from longitudinal data
Bernard Beaudreau
Journal of Economics and Finance, October 2018, Pages 631–650

Abstract:

Electrification and the introduction of high-throughput, continuous-flow production tech- niques in the 1920s vastly increased America’s capacity to produce wealth. Getting in the way, according to many, were weak product markets, prompting ranking Republicans Reed Smoot and Ellis Hawley, in the Party’s 1928 presidential platform, to advocate yet another generalized upward tariff revision—the Smoot-Hawley Tariff Bill (SHTB). The stock market responded favorably, as prices increased throughout 1928 and most of 1929. They crashed, however, in October 1929 when it became evident that the proposed Smoot-Hawley Tariff Bill which called for across-the-board tariff would be defeated by an Insurgent-Republican Democrat coalition and replaced with substantially lower tariffs on manufactures. Using longitudinal analysis, this paper shows how stock prices of firms in industries most affected by electrification tracked these developments, rising in response to good tariff news, and falling in response to bad tariff news. Operationally, a tariff news proxy variable is developed and included in the three-factor Fama-French model of stock prices. Our hypothesis is then tested using daily stock returns for a subsample of nineteen DJIA firms. The results show a positive and significant effect of tariff news on all nineteen stock prices. Lastly, we show that good tariff news explains up to 76% of stock price appreciation in the 1928–1929 period of firms in industries most affected by electrification. These results suggest that the stock market boom and crash of 1929 can be understood in terms of political developments set against a background of improved fundamentals.


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