Trade you

Kevin Lewis

March 20, 2017

Trade Shocks and the Provision of Local Public Goods

Leo Feler & Mine Senses

American Economic Journal: Economic Policy, forthcoming

We analyze the impact of trade-induced income shocks on the size of local government and the provision of public services. Areas in the US with declining labor demand and incomes due to increasing import competition from China experience relative declines in housing prices and business activity. Since local governments are disproportionately funded through property and sales taxation, declining property values and a decrease in economic activity translate into less revenue, which constrains the ability of local governments to provide public services. State and federal governments have limited ability to smooth local shocks, and the impact on the provision of public services is compounded when local income shocks are highly correlated with shocks in the rest of the state. The outcome is a relative decline not only in incomes but also in the quality of public services and amenities in trade exposed localities.


Trade, Politics, and the Poor: Is Sen Right and Bhagwati Wrong?

Nita Rudra & Daniel Tirone

Studies in Comparative International Development, March 2017, Pages 1-22

The current debate between two of the world's finest economists - Amartya Sen and Jagdish Bhagwati -has not only roiled India but also attracted global attention. Is trade liberalization associated with improved welfare outcomes for the poor, as Bhagwati contends? Or is Sen correct that policymakers in liberalizing economies need to change their governance priorities to focus on redistribution? This analysis draws on existing literature to develop testable hypotheses that attempt to resolve the Sen-Bhagwati divide. Using fixed effect panel regressions and simultaneous equation models, we find that although there is empirical support for both arguments, the results on balance favor Sen: The positive relationship between trade and improved poverty is conditional upon more equitable distributions of income. In effect, Bhagwati's predictions about the beneficial impacts of openness on social welfare occur only in a subset of developing nations, findings which have very different implications for the poor in developing countries.


The Impact of Brexit on Foreign Investment and Production

Ellen McGrattan & Andrea Waddle

NBER Working Paper, March 2017

In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly.


Dying for Globalization? The Impact of Economic Globalization on Industrial Accidents

Robert Blanton & Dursun Peksen

Social Science Quarterly, forthcoming

Methods: We combine data on economic globalization with data on major industrial accidents, and examine the relationship between these variables across 137 countries for the period 1971-2012.

Results: We find a significant positive relationship between economic globalization and the probability of industrial accidents. Results further suggest that the impact of state policies encouraging globalization, such as the removal of barriers to trade and capital flows, is stronger than that of trade and investment flows themselves.


Foreign Risk, Domestic Problem: Capital Allocation and Firm Performance Under Political Instability

Burcin Col, Art Durnev & Alexander Molchanov

Management Science, forthcoming

We argue in this paper that firms with foreign operations misallocate capital and underperform when they face political instability abroad. We develop and test a dynamic model of firm capital allocation under foreign political instability. The model shows that as a political regime becomes less stable, independent of whether the regime becomes less business-friendly or more business-friendly, firms invest suboptimally (i.e., they either overinvest or underinvest), and their marginal q's diverge further from an optimal level. Using elections and textual analysis of local media during national elections, we construct a novel index of political instability. We find that U.S. firms and industries with a greater exposure to election-induced political instability experience disruptions of investment efficiency that lead to lower valuations and lower total factor productivity. Therefore, international trade is a significant conduit of foreign political instability into U.S. markets.


Trade Policy and Redistribution when Preferences are Non-Homothetic

Quy-Toan Do & Andrei Levchenko

NBER Working Paper, March 2017

We compare redistribution through trade restrictions vs. domestic lump-sum transfers. When preferences are non-homothetic, even domestic lump-sum transfers affect relative prices. Thus, contrary to the conventional wisdom, domestic lump-sum transfers are not necessarily superior to distortionary trade policy. We develop this argument in the context of food export bans imposed by many developing countries in the late 2000s.


Capacity Constrained Exporters: Identifying Increasing Marginal Cost

JaeBin Ahn & Alexander McQuoid

Economic Inquiry, forthcoming

This study revisits a central assumption of standard trade models: constant marginal cost technology. The presence of increasing marginal costs for exporters introduces significant market interdependence across borders missing from traditional models of international trade that rely on constant marginal cost technology. Such market interdependence represents an additional channel through which local shocks are transmitted globally. To identify increasing marginal cost at the level of the firm, we build in flexible production assumptions that nest increasing, decreasing, and constant marginal cost technology to an otherwise standard international trade model. We derive an estimating equation that can be taken directly to the data. Our structural equation explicitly guides our inference on the shape of the marginal cost curve from estimated coefficients. The results suggest that increasing marginal cost is predominant at the firm level. Moreover, utilizing plant-level information on physical and financial capacity constraints, we find that the degree of increasing marginal cost is significantly exacerbated by both types of constraints. The evidence suggests that access to larger markets through greater international integration may not have the expected welfare gains typically predicted in standard models.


When Britain turned inward: Protection and the shift towards Empire in Interwar Britain

Alan de Bromhead et al.

NBER Working Paper, February 2017

International trade became much less multilateral during the 1930s. Previous studies, looking at aggregate trade flows, have argued that discriminatory trade policies had comparatively little to do with this. Using highly disaggregated information on the UK's imports and trade policies, we find that policy can explain the majority of Britain's shift towards Imperial imports in the 1930s. Trade policy mattered, a lot.


Network structure impacts global commodity trade growth and resilience

Ali Kharrazi, Elena Rovenskaya & Brian Fath

PLoS ONE, February 2017

Global commodity trade networks are critical to our collective sustainable development. Their increasing interconnectedness pose two practical questions: (i) Do the current network configurations support their further growth? (ii) How resilient are these networks to economic shocks? We analyze the data of global commodity trade flows from 1996 to 2012 to evaluate the relationship between structural properties of the global commodity trade networks and (a) their dynamic growth, as well as (b) the resilience of their growth with respect to the 2009 global economic shock. Specifically, we explore the role of network efficiency and redundancy using the information theory-based network flow analysis. We find that, while network efficiency is positively correlated with growth, highly efficient systems appear to be less resilient, losing more and gaining less growth following an economic shock. While all examined networks are rather redundant, we find that network redundancy does not hinder their growth. Moreover, systems exhibiting higher levels of redundancy lose less and gain more growth following an economic shock. We suggest that a strategy to support making global trade networks more efficient via, e.g., preferential trade agreements and higher specialization, can promote their further growth; while a strategy to increase the global trade networks' redundancy via e.g., more abundant free-trade agreements, can improve their resilience to global economic shocks.


Discriminatory Product Differentiation: The Case of Israel's Omission from Airline Route Maps

Joel Waldfogel & Paul Vaaler

University of Minnesota Working Paper, February 2017

While product differentiation is generally benign, it can be employed to discriminate against customer groups, either to enhance profitability by appealing to discriminatory customers or in unprofitable ways that indulge owners' tastes for discrimination. We explore discriminatory product differentiation in the airline market through airlines' depiction of Israel on their online route maps and whether their online menus include kosher meal options. We first show that several international airlines omit Israel from their online route maps. Three of these airlines are members of the major international airline alliances. With data on over 100 airlines, we then document that Israel map denial is more likely for airlines with passengers from countries exhibiting greater anti-Semitism. Owner tastes also matter: denial is more likely for state-owned airlines in countries that do not recognize Israel. Kosher meal options on online menus follow similar patterns, suggesting anti-Semitic rather than anti-Zionist motivations. Israel denial does not reduce the probability of alliance membership with alliance leaders having few airline alternatives to choose from in the Middle East.

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