This paper uses the regional redistribution of Peru’s government revenue—increased due to the mineral commodity price boom in the 2000s -- to estimate the effects of government spending. I begin by calculating local effects on households, workers, and firms, and a local open economy relative multiplier. Motivated by a general equilibrium framework, I then incorporate a Spatial Auto-Regressive (SAR) model to measure trade-related spatial spillovers. I find that increases in government spending stimulate larger relative output growth and positively impact relative wages, expenditures, and income. However, there is no corresponding relative rise in labor or value added. The spatial analysis helps interpret these results and measures the trade-related indirect effects of local spending on output.

Leveraging the unanticipated increases in US tariffs initiated in 2018, we examine how Chinese firms altered the composition and compensation of their executive team to manage adversity. Firms that faced more adverse US tariff shocks increased the proportion of executives with overseas experience, especially of those with marketing expertise and with a European background. Such executives received greater equity-based compensation, suggesting a higher return to their effort. We find suggestive evidence that these executives help maintain higher overseas revenue, and help create more and larger foreign subsidiaries. The stock market reacted more negatively to the unexpected departures of executives with foreign experience in the trade conflict period. The results suggest that executive human capital played an important role in coping with adverse trade shocks.

Yes. We state closed-form expressions for steady state gains from trade that apply in a class of dynamic trade models that includes dynamic versions of the Krugman (1980), Melitz (2003), and customer capital (e.g., Arkolakis, 2010) models. The gains are a function of the domestic trade share and the long-run elasticity of trade with respect to iceberg trade costs, similar to Arkolakis, Costinot, and Rodríguez-Clare (2012). In contrast to static settings, in a dynamic world this longrun elasticity cannot be estimated in one step by relying on tariff variation as shifters of trade costs. We show, instead, that this object can be recovered by combining two tariff elasticity estimates: the long- and the short-run. Thus, the short-run tariff elasticity indirectly enters the formula for the steady state gains from trade. Our main substantive finding is that the gains from trade are large. They depend crucially on the short-run tariff elasticity, and can be arbitrarily large even if the long-run tariff elasticity is high. Accounting for the transition path has a minor impact on the magnitude of the gains from trade, relative to simply comparing steady states.

This paper studies the cross-country patterns of risky innovation and growth through the lens of international trade. We use a simple theoretical framework of risky quality upgrading by firms under varying levels of financial development to derive two predictions. First, the mean rate of quality growth and the corresponding cross-sectional variance of quality growth in a country are positively correlated. Second, both the mean and variance of quality changes are positively correlated with the country's level of financial development. We then test these two hypotheses using data on disaggregated (HS10) bilateral exports to the United States. The patterns in the data are consistent with the theory. The mean and the variance of quality growth are strongly positively correlated with each other. Countries with greater financial depth are systematically characterized by higher mean and higher variance in the growth of product quality. Our findings suggest a mean-variance trade-off in product quality improvements along the development path. Increases in financial depth do not imply lower variability of changes in the product space.

We examine how cultural proximity shapes production networks, and how it affects aggregate welfare and productivity. We combine a new dataset of firm-to-firm trade for a large Indian state with information on cultural proximity between firms derived from India’s caste and religious classifications. We find that larger cultural proximity between a pair of firms reduces prices and fosters trade at both intensive and extensive margins. We argue that these results are driven by increasing trust between firms due to their cultural proximity, which in turn solves contracting frictions. Guided by these stylized facts, we propose a quantitative firm-level production network model, where cultural proximity influences trade and matching costs. We derive estimable equations from the model and estimate the model parameters leveraging variation in the cultural group composition of firm owners. We quantify the welfare and productivity consequences of implementing social inclusion policies that shape the formation of production networks. Our counterfactual exercises indicate that social inclusion policies can raise welfare by as much as 1.76%, while social isolation lowers welfare by 1.45%. Reducing contracting frictions increases welfare by 0.87% via the channel of trade becoming less reliant on cultural proximity.

This paper is motivated by a set of cross-country observations on growth, structural transformation, and investment rates in a large sample of countries. We observe a hump-shaped relationship between a country's investment rate and its level of development, both within countries over time and across countries. Advanced economies reach their investment peak at a higher level of income and at an earlier point in time relative to emerging markets. We also observe the familiar patterns of structural change (a decline in the agricultural share and an increase in the services share, both relative to manufacturing). The pace of change observed in the 1930 to 1980 period in advanced economies is remarkably similar to that in emerging markets since 1960. We develop a two-region model of the world economy in which regions are isolated from each other up to the point of capital market liberalization in the early 1990s. At that point, capital flows from advanced economies to emerging markets and accelerates the process of structural change in emerging markets. The majority of gains from financial liberalization accrue to emerging economies. We consider the impact of a “second wave” of liberalization when China fully opens its economy to capital inflows.

We conducted a randomized experiment of the impact of remittance labeling among Filipino migrant workers in the UAE. The ability to label remittances with the migrant’s intended uses leads migrants with low levels of baseline (pre-treatment) remittances to increase their remittance levels. There is no effect of labeling for migrants with initially higher remittance levels. We also examined impacts of remittance labeling on household expenditures in treated migrants’ remittance-recipient households in the Philippines. The labeling treatment does not lead to higher expenditures on uses that migrants report as priority items (in the full sample or in subsamples split by baseline remittances). There is only weak or mixed evidence that labeling leads to actual changes in household expenditures towards the purposes preferred by migrants.

We study the role of global supply chains in the impact of the Covid-19 pandemic on GDP growth using a multi-sector quantitative framework implemented on 64 countries. We discipline the labor supply shock across sectors and countries using the fraction of work in the sector that can be done from home, interacted with the stringency with which countries imposed lockdown measures. One quarter of the total model-implied real GDP decline is due to transmission through global supply chains. However, “renationalization” of global supply chains does not in general make countries more resilient to pandemic-induced contractions in labor supply. This is because eliminating reliance on foreign inputs increases reliance on the domestic inputs, which are also disrupted due to nationwide lockdowns. In fact, trade can insulate a country imposing a stringent lockdown from the pandemic-shock, as its foreign inputs are less disrupted than its domestic ones. Finally, unilateral lifting of the lockdowns in the largest economies can contribute as much as 2.5% to GDP growth in some of their smaller trade partners.

We present new facts about the geography of work using online job ads and introduce new measures of job tasks, technology requirements, and the degree of specialization within firms or occupations. We show that the (i) intensity of interactive and analytic tasks, (ii) technological requirements, and (iii) task specialization all increase with city size. The gradient for tasks and technologies is steeper for jobs requiring a college degree. We show that these facts help account for the urban wage premium, both in aggregate and across skill groups.

Exploiting a large migration of farmers to the West of Brazil between 1950 and 2010, we study how migration shapes aggregate and regional comparative advantage. We document that farmers emigrating from regions with high employment in an activity are more likely to work in that activity and have higher income than other migrants doing so. We incorporate this heterogeneity into a quantitative model and find that, by reshaping comparative advantage, declines in migration costs contributed substantially to Brazil's rise as a leading commodity exporter. Opportunities to migrate, moreover, account for a substantial share of the gains from trade.

We propose a novel approach to estimate the trade elasticity at various horizons. When countries change Most Favored Nation (MFN) tariffs, partners that trade on MFN terms experience plausibly exogenous tariff changes. The differential effects on imports from these to a control group – countries not subject to the MFN tariff scheme – can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2018, and estimate the trade elasticity at short and long horizons using local projections (Jordà, 2005). Our main findings are that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about -0.76, and the long-run elasticity ranges from -1.75 to -2.25. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial convexities in the costs of adjusting export participation.

This paper estimates the impact of external demand shocks on real income. Our empirical strategy is based on a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows. The framework allows us to measure foreign shocks and characterize their impact on income in terms of reduced-form elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. We find clear evidence of heterogeneity in the income responses to different foreign shocks. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. The estimates imply that the pattern of sectoral specialization plays a quantitatively large role in how foreign shocks affect real income, while geographic position plays a smaller role. Finally, a calibrated multi-sector production and trade model can rationalize both the average and the heterogeneity in real income elasticities to foreign shocks under reasonable values of structural parameters.

This paper uses a dataset covering the universe of French firm-level sales, imports, and exports over the period 1993-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. The largest firms are both important enough to generate aggregate fluctuations (Gabaix, 2011), and most likely to be internationally connected. This implies that foreign shocks are transmitted to the domestic economy primarily through the largest firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 40 to 85% of the impact of foreign fluctuations on French GDP is accounted for by the “foreign granular residual” – the term capturing the fact that larger firms are more affected by the foreign shocks. At the macro level, firm heterogeneity dampens the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model.

We provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, commodity prices, and the VIX all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large -- often comparable in size to the response of the S&P 500. Further, these effects are persistent. US macroeconomic news explain up to 22% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic monetary policy responses to news play a limited role for explaining the behavior of international stock markets. Instead, the evidence is consistent with a direct effect on investors' risk-taking capacity. Overall, our findings show that a byproduct of the United States' central position in the global financial system is that news about its business cycle have large effects on global financial conditions.

We examine the impacts of the 2018-2019 U.S. import tariff increases on U.S. export growth through the lens of supply chain linkages. Using 2016 confidential firm-trade linked data, we identify firms that eventually faced tariff increases. They accounted for 84% of all exports and represented 65% of manufacturing employment. For the average affected firm, the implied cost is $900 per worker in new duties. We construct product-level measures of exporters' exposure to import tariff increases and estimate the impact on U.S. export growth. The most exposed products had relatively lower export growth in 2018-2019, with larger effects in 2019. The decline in export growth in 2019Q3, for example, is equivalent to an ad valorem tariff on U.S. exports of 2% for the typical product and up to 4% for products with higher than average exposure.

The textbook case for industrial policy is well understood. If some sectors are subject to external economies of scale, whereas others are not, a government should subsidize the first group of sectors at the expense of the second. The empirical relevance of this argument, however, remains unclear. In this paper we develop a strategy to estimate sector-level economies of scale and evaluate the gains from such policy interventions in an open economy. Our benchmark results point towards significant and heterogeneous economies of scale across manufacturing sectors, but only modest gains from industrial policy, below 1% of GDP on average. Though these gains can be larger in some of the alternative environments that we consider, they are always smaller than the gains from optimal trade policy.

We propose and quantify a novel mechanism behind the structural transformation process: older individuals devote a larger share of their expenditures to services, so the relative size of the service sector grows as the population ages. We document that for a large sample of countries, increases in population age are accompanied by the rise in the relative size of the service sector. We use household-level data from the US Consumer Expenditure Survey to show that the fraction of expenditures devoted to services increases with household age. We use a shift-share decomposition and a quantitative model to show that changes in the US population age distribution accounted for about a fifth of the increase in the share of services in consumption expenditures observed between 1982 and 2016. In our quantitative model, population aging plays a much larger role than changes in real income in accounting for the structural change observed in the US during this period.

We exploit differences across U.S. states in terms of their exposure to trade to study the effects of changes in the exchange rate on economic activity at the business cycle frequency. We find that a depreciation in the state-specific trade-weighted real exchange rate is associated with an increase in exports, a decline in unemployment and an increase in hours worked. The effect is particularly strong in periods of economic slack. We develop a multi-region model with inter-state trade and labor flows and calibrate it to match the state-level orientation of exports and the extent of labor migration and trade between states. The model replicates the relationship between exchange rates and unemployment. Counterfactuals show that the high degree of interstate trade plays a dominant role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in following years. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

Cross-country differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.

Unemployment differentials are bigger in Europe than in the United States. Migration responds to unemployment differentials, though the response is smaller in Europe. Mundell (1961) argued that factor mobility is a precondition for a successful currency union. We use a multi-country DSGE model with cross-border migration and search frictions to quantify the benefits of increased labor mobility in Europe and compare this outcome to a case of fully flexible exchange rates. Labor mobility and flexible exchange rates both work to reduce unemployment and per capita GDP differentials across countries provided that monetary policy is sufficiently responsive to national output.

This paper conducts analysis of a free trade agreement within a simple model of partial equilibrium, linear supply and demand, and circumstances such that trade flows are positive in all equilibria considered. The results illustrate the close connection, on the one hand, between trade creation and the benefit to the FTA-forming countries and to the world, and, on the other hand, the equally close connection between trade diversion and the harm to outside countries and potentially both the participating countries and the world. In addition, by considering a second case in which a country that already has one FTA adds another, we show that the new FTA causes trade to be diverted from its prior partner, an effect that we call trade reversion. It turns out that trade reversion causes neither harm nor benefit to the importing country, and when we look at world welfare, if trade reversion is equal to trade diversion their two effects cancel out, leading the effect on world welfare to be a simple function of the amount of trade creation and the size of the tariff.

This paper uses sector-level data for 30 countries and up to 28 years to provide a quantitative account of the sources of international GDP comovement. We propose an accounting framework to decompose comovement into the components due to correlated shocks, and to the transmission of shocks across countries. We apply this decomposition in a multi-country multi-sector DSGE model. We provide an analytical solution to the global influence matrix that characterizes every country’s general equilibrium GDP elasticities with respect to various shocks anywhere in the world. We then provide novel estimates of country-sector-level technology and non-technology shocks to assess their correlation and quantify their contribution to comovement. We find that TFP shocks are virtually uncorrelated across countries, whereas non-technology shocks are positively correlated. These positively correlated shocks account for two thirds of the observed GDP comovement, with international transmission through trade accounting for the remaining one third. However, trade opening does not necessarily increase GDP correlations relative to autarky, because the contribution of trade openness to comovement depends on whether sectors with more or less correlated shocks grow in influence as countries increase input linkages. Finally, while the dynamic model features rich intertemporal propagation of shocks, quantitatively these components contribute little to the overall GDP comovement as impact effects dominate.

Internet connectivity and exports of services are positively correlated. This paper presents a gravity model with bilateral measures of Internet connectivity to formalize this correlation. To establish bilateral connectivity, I construct a novel dataset based on the undersea fiber-optic cable network responsible for 99% of international data traffic. I measure the degree of bilateral connectivity using information on the capacities of these cables in order to estimate the effect of that connection on export growth between pairs of digitally connected countries. I estimate a positive relationship between Internet connectivity and bilateral exports in data-intensive industries with an elasticity of 0.25 to 2.25 over a variety of possible settings.

Who testifies on US trade agreements before Congress and what do they say? We examine the content of Congressional testimony on US trade agreements, and the selection process which determines who testifies in the first place. We find that testimony is systematically tilted towards a sunny view of trade’s positive economic effects, while import competition and offshoring are generally downplayed. We argue that trade’s supporters strategically frame their motives for supporting trade agreements, and that pro-trade committee chairs’ decisions on who testifies further skew testimony away from the distributive consequences of globalization within the United States. Congressional hearings on trade agreements therefore represent a key site where the influence of dominant pro-trade interests is both revealed and reinforced.

We provide a quantitative assessment of both the aggregate and the distributional effects of revoking NAFTA using a multi-country, multi-sector, multi-factor model of world production and trade with global input-output linkages. Revoking NAFTA would reduce US welfare by about 0.2%, and Canadian and Mexican welfare by about 2%. The distributional impacts of revoking NAFTA across workers in different sectors are an order of magnitude larger in all three countries, ranging from -2.7 to 2.26% in the United States. We combine the quantitative results with information on the geographic distribution of sectoral employment, and compute average real wage changes in each US congressional district, Mexican state, and Canadian province. We then examine the political correlates of the economic effects. Congressional district-level real wage changes are negatively correlated with the Trump vote share in 2016: districts that voted more for Trump would on average experience greater real wage reductions if NAFTA is revoked.

Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an FTA are often the highest tariffs that the countries apply on an MFN basis. It seems plausible that such exclusions may be chosen because the domestic producers of these products are viewed as especially vulnerable to competition from imports from the partner country. In brief, they are especially “sensitive sectors.” We develop this idea theoretically and then test it empirically on data from 37 countries in 240 importer-exporter pairs within FTAs. We find support for the sensitive-sector hypothesis only in the high-income countries. We find low-income countries, in contrast, to exempt sectors where bilateral tariff removal would be more likely trade diverting and therefore harmful. Our explanation for this, supported empirically, is not that they are following the advice of trade economists, but rather that they are avoiding loss of tariff revenue and also being influenced by the greater bargaining power of richer and/or larger partners in their FTAs.

Digital trade takes a variety of forms, several of which are examined here with regard to whether they can be explained by comparative advantage. The five forms of digital trade considered are 1) physical products that are advertised, ordered, and/or paid for digitally, but transported by normal trade means; 2) digital products (music, movies, books, software) that are transmitted to purchasers via the internet and are most likely to be marketed and paid for via that as well; 3) services that are provided remotely by digital means; 4) data storage and computer applications accessible in the “cloud”; and 5) web platforms that serve an international audience and are supported by advertising. I argue that the first three of these can be well explained by comparative advantage, but there are problems with the last two.

This paper documents the presence of “sensitive sectors” in Free Trade Agreements, defined as sectors for which the within-FTA tariffs remain positive. The paper includes some brief theoretical discussion of the welfare implications of these, but the main emphasis is on reporting two measures of this phenomenon for countries in FTAs that entered into force between 1994 and 2003. One measure is the percentage of tariff lines that remain dutiable, and the second is the change, from before the FTA to after, in the average maximum (across 6-digit products) positive tariffs. Both measures are derived from data in the UNCTAD TRAINS database, and are then related to measures of country characteristics that might explain them. Low per capita GDP countries tend to have larger fractions of dutiable tariff lines, while higher income countries tend to post larger increases in average maximum positive tariffs. Both suggest that the favored treatment of sensitive sectors is undermining the potential gains from trade that FTAs provide.

I show that a large and conventional class of macroeconomic models predicts that short-lived government investment shocks have a much smaller fiscal multiplier than government consumption shocks. I test this prediction in a panel of OECD countries using real-time forecasts of government consumption and investment to purify changes in purchases of their predicted components. Consistent with theory, I estimate a government investment multiplier near zero and a government consumption multiplier of approximately 0.8. These findings suggest that fiscal stimulus packages which contain large government investment components may not be as effective at stimulating aggregate demand as commonly thought.

We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This suggests that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income households’ consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.

This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially under-developed/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brown field FDI.

Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate productivity and income grow, so do wages relative to intermediate input prices, which increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity of the aggregate price level with respect to GDP per capita. The mechanism has stark implications for industry-level real exchange rates that are strongly supported by the data.

We study how international trade affects manufacturing employment and the relative wage of unskilled workers when goods and services are traded with different intensities. Manufacturing trade reduces manufacturing prices worldwide, which reduces manufacturing employment if manufactures and services are complements. We document that manufacturing production is unskilled-labor intensive, so that these changes increase the skill-premium. We incorporate this mechanism in a quantitative trade model and show that trade has had a negative impact on manufacturing employment and the relative wage of unskilled workers. The impact on the skill premium was larger in developing countries where manufacturing is particularly unskilled-labor intensive.

The price comparability provision of China’s accession protocol recognizes that WTO members may face special difficulty in determining subsidies and dumping from China, due to its government’s pervasive intervention in the economy. The provision permits importing members to disregard domestic prices or costs in China and to use alternative benchmarks in determining the normal value of Chinese exports. Consequently, this so-called nonmarket economy methodology tends to inflate antidumping and countervailing duty rates.

Certain paragraphs of the provision determining dumping expire on 11 December 2016, and yet the heated debate on China’s economic status post-December 2016 remains ongoing. This paper studies the history of U.S. trade remedy actions against nonmarket economies and traces recent developments and findings at the WTO dispute settlement body. Congressional history shows that antidumping regulations in the U.S. have been constantly amended to catch up with agency practices that discriminate against nonmarket economies. Meanwhile, the Department of Commerce recently started to apply countervailing duties on Chinese imports and has finally codified such practices into law. The paper offers many reasons to believe that the U.S. is equipped with various trade remedy measures to continue ‘special treatment’ against China, even if the country graduates from a nonmarket economy status.

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.

We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation.

Using a large firm-level dataset, this paper studies multinational firms’ performance during the Great Recession. Foreign multinationals grew faster than local firms outside of the crisis, but slower during the crisis. Industry and size differences between domestic and foreign-owned firms account for much of this slowdown. However, multinationals from different countries performed differently during the crisis. The paper then assesses the role of multinationals in the global recession using a quantitative model. Had multinationals’ relative performance remained unchanged during the crisis, the median country’s aggregate growth would have been 0.12% higher, with a range of -0.13 to 0.5% across countries.

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.

As of August 2015, Greece’s loan repayments due to external creditors through 2057 summed to €319.5 billion, requiring an average debt payment on a flow basis of 4.1 percent of 2014 Greek GDP. This paper examines the economic impact of increases in distortionary taxes on consumption, capital and labor income as well as reductions in government expenditures sufficient to increase Greece’s primary balance by one percent of 2014 GDP – roughly a quarter of Greece’s total debt obligations. In the baseline case calibrated to the Greek economy, all of the tax and expenditure policies we consider produce declines in output in both the short- and long-run. Projections of the primary surplus based on static revenue scoring grossly overestimate the amount of actual revenue that Greece would raise due to the endogenous adjustment of capital and labor. Meeting the debt repayment schedule is substantially more costly because Greece is a small economy that is integrated with the larger European economy. Failure to incorporate the impact of capital and labor mobility results in a significant overestimate of future revenue. Delaying the implementation of tax increases or government expenditure cuts can help mitigate the short-run fall in output, but such delays require greater economic hardship in the long run.

I explore how the concept of “the terms of trade” has been used since it was coined by Marshall. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and was followed in this choice by almost all writers for the next several decades. Then, around 1980, Taussig’s choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to Viner’s argument for preferring that the terms of trade of a country be defined as the relative price of its exports.

We examine the impact of policy uncertainty on trade, prices and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China's export boom to the U.S. following its 2001 WTO accession. We find the accession reduced the U.S. threat of a trade war, which can account for over 1/3 of that export growth in 2000-2005. Reduced policy uncertainty lowered U.S. prices and increased its consumers' income by the equivalent of a 13 percentage point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.

This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added, bilateral imports and exports, and cross-border ownership over the period 1993-2007. At the micro level, controlling for firm and country effects, trade in goods with a particular foreign country is associated with a significantly higher correlation between a firm and that foreign country. In addition, foreign multinational affliates operating in France are significantly more correlated with the source economy. The impact of direct trade and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than noninternationally connected firms, the firms directly linked to foreign countries represent only 8% of all firms, but 56% of all value added, and account for 75% of the observed aggregate comovement. Without those linkages the correlation between France and foreign countries would fall by about 0.091, or one-third of the observed average business cycle correlation of 0.29 in our sample of partner countries. These results are evidence of transmission of business cycle shocks through direct trade and multinational ownership linkages at the firm level.

We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.

The relationships between exchange rates, capital controls and foreign reserves during the financial crisis suggest that reserve management plays a much more central role than has typically been emphasized in international finance models. Reserves seem to be especially important for non‐EZ European countries, not only for those with currencies in the ERM II, but also for those European countries in intermediate regimes that hope to deter currency market pressure, and in so doing help to mitigate trilemma trade‐offs.

We develop a model of foreign direct investment (FDI) in which financially liquid foreign firms acquire liquidity-constrained target firms. Using a large dataset of emerging-market acquisitions, we find evidence supporting three central predictions of the model: (i) firms in external finance dependent and intangible sectors are more likely to be targets of foreign acquisitions; (ii) these targets have ownership structures with larger foreign stakes; (iii) these effects are most prominent in countries with low levels of financial development. The regression evidence indicates that liquidity is at least as economically important as technology- or trade-related motives for FDI in emerging-market economies.

Motivated by a set of stylized facts, we develop a model of cross-border mergers and acquisitions (M&As) to study foreign direct investment (FDI) in emerging markets. We compare acquisitions undertaken during financial crises – so called fire-sale FDI – with acquisitions made during non-crisis periods to examine whether the outcomes differ in the ways predicted by the model. Foreign acquisitions are driven by two sources of value creation. First, acquisitions by a foreign firm relax the target's credit constraint (i.e., a liquidity motive). Second, acquisitions exploit operational synergies between the target and the acquirer (i.e., a synergistic motive). During crises credit conditions tighten in the target economy and the liquidity motive dominates. The model predicts that during crisis relative to non-crisis periods, (1) the likelihood of foreign acquisitions is higher; (2) the proportion of foreign acquisitions in the same industry is lower; (3) the average size of ownership stakes is lower; and (4) the duration of acquisitions is lower (i.e., acquisition stakes are more likely to be flipped). We find support for (1) but not for the other three predictions. The results thus suggest that foreign acquisitions in emerging markets do not differ in these important ways between crisis and normal periods.

What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong crosscountry externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.

We investigate how multinational firms contribute to the transmission of shocks across countries using a large firm-level dataset that contains ownership information for 8 million firms in 34 countries. We use these data to document two novel empirical patterns. First, foreign affiliate and headquarter sales exhibit strong positive comovement: a 10% growth in the sales of the headquarter is associated with a 2% growth in the sales of the affiliate. Second, shocks to the source country account for a significant fraction of the variation in sales growth at the source-destination level. We propose a parsimonious quantitative model to interpret these findings and to evaluate the role of multinational firms for international business cycle transmission. For the typical country, the impact of foreign shocks transmitted by all foreign multinationals combined is non-negligible, accounting for about 10% of aggregate productivity shocks. On the other hand, since bilateral multinational production shares are small, interdependence between most individual country pairs is minimal. Our results do reveal substantial heterogeneity in the strength of this mechanism, with the most integrated countries significantly more affected by foreign shocks.

This paper uses the historical episode of the near-elimination of commuting from the West Bank into Israel, which caused a large and rapid expansion of the local labor force in the West Bank, to test the predictions of the Heckscher-Ohlin-Vanek (HOV) model of trade. I use variation between districts in the West Bank to test these predictions, and find strong support for them: Wage changes were not correlated with the size of the shock to the district labor force (Factor Price Insensitivity); Districts that received larger influx of returning commuters shifted production more towards labor intensive industries (Rybczynski effect); and on the consumption side, the data are consistent with the assumption of identical homothetic preferences, which, combined with the production results, supports the Heckscher-Ohlin-Vanek theorem on the factor content of trade.

Trade costs are a major barrier to efficient farming in developing countries. I study land use patterns and input demand in Peru, a country where goods are traded at a high cost, both domestically and with the rest of the world. I then quantify the equilibrium effect of paving existing roads on productivity and real incomes. To do so, I develop a model of agricultural specialization and trade, and quantify it using a new dataset on Peruvian agriculture, which includes disaggregated information on crop prices, yields and land allocations. While typically raising productivity, paving roads on a large scale creates both winners and losers, depending on whether prices are set in domestic markets, or whether workers are net food buyers. In the simulations, an average farmer gains 14% in productivity and 5% in welfare.

We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks -- surprise TFP, news of future TFP, and “sentiment” -- from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of short-run business cycle fluctuations in the US. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for up to 50% of the forecast error variance of Canadian GDP and about one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization.

Two common views are that a country cannot develop without a strong manufacturing base and that trade restrictions are essential to facilitate the development of that strong manufacturing base and thus spur economic growth. We ask:
• Does a strong manufacturing share of GDP facilitate economic growth?
• Do trade restrictions ensure the development of a strong manufacturing base?
• How can governance affect manufacturing share?
• And are the relationships we find robust across regions?
We find the manufacturing share is not significantly correlated with a higher standard of living. Nor is it related significantly and consistently to economic growth. We also find that trade restrictions both at home and abroad shrink the manufacturing base and smother economic growth. A better way than protectionism and subsidies specific to industry to enhance economic growth is to improve governance effectiveness and the quality of regulation.

The Trans-Pacific Partnership (TPP) aspires to become a state-of-the-art trade agreement linking 12 countries on both sides of the Pacific. In addition to establishing a Free Trade Agreement (FTA) among these countries, negotiators are pursuing a long list of other issues, both trade-related and non-trade related. This paper examines the likely effects of the TPP on trade alone, taking into account the fact that all of the potential members of the TPP are already participants in other FTAs. Using information from the World Trade Organization on the existence of these FTAs, plus data on the identities of countries’ major trading partners for both exports and imports, I discuss the likely effects on a list of countries in terms of trade creation, trade diversion, and the reversal of trade diversion that has already occurred due to existing FTAs. The list of countries includes all of the members of the TPP as well as of ASEAN. In addition it includes ten additional Asian economies that are not part of either.

This paper investigates both aggregate and distributional impacts of the trade integration of China, India, and Central and Eastern Europe in a quantitative multi-country multi-sector model, comparing outcomes with and without factor market frictions. Under perfect within-country factor mobility, the gains to the rest of the world from trade integration of emerging giants are 0.37%, ranging from -0.37% for Honduras to 2.28% for Sri Lanka. Reallocation of factors across sectors contributes relatively little to the aggregate gains, but has large distributional effects. The aggregate gains to the rest of the world are only 0.065 percentage points lower when neither capital nor labor can move across sectors within a country. On the other hand, the distributional effects of the emerging giants' trade integration are an order of magnitude larger, with changes in real factor returns ranging from -5% to 5% across sectors in most countries. The workers and capital owners in emerging giants' comparative advantage sectors such as Textiles and Wearing Apparel experience greatest losses, while factor owners in Printing and Medical, Precision and Optical Instruments normally gain the most.

Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers' utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. Extended versions of the model can account for the high prices of services in rich countries, as well as for several stylized facts regarding investment rates and relative prices of investment and consumption across countries. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices.

We construct a new linked data set with over one thousand offshoring events by matching Trade Adjustment Assistance program petition data to micro-data from the U.S. Census Bureau. We exploit this data to assess how offshoring impacts domestic firm-level aggregate employment, output, wages and productivity. A class of models predicts that more productive firms engage in offshoring, and that this leads to gains in output and (measured) productivity, and potential gains in employment and wages, in the remaining domestic activities of the offshoring firm. Consistent with these models, we find that offshoring firms are on average larger and more productive compared to non-offshorers. However, we find that offshorers suffer from a large decline in employment (32 per cent) and output (28 per cent) relative to their peers even in the long run. Further, we find no signicant change in average wages or in total factor productivity measures at affected firms. We find these results robust to a variety of checks. Thus we find no evidence for positive spillovers to the remaining domestic activity of firms in this large sample of offshoring events.

I provide novel evidence for the impact of trade policy uncertainty on exporters. In a dynamic, heterogeneous firms model, trade policy uncertainty will delay the entry of exporters into new markets and make them less responsive to applied tariff reductions. Policy instruments that reduce or eliminate uncertainty, such as binding trade policy commitments at the WTO, increase entry. The predictions are tested on disaggregated, product-level Australian imports with model-consistent measures of uncertainty. Reducing policy uncertainty generates more product entry than unilateral liberalization. The results illuminate and quantify an important new channel for trade creation.

This paper evaluates the role of sectoral heterogeneity in determining the gains from trade. We first show analytically that in the presence of sectoral Ricardian comparative advantage, a one -sector sufficient statistic formula that uses total trade volumes as a share of total absorption systematically understates the true gains from trade. Greater relative sectoral productivity differences lead to larger disparities between the gains implied by the one-sector formula and the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries and 19 sectors we show that the multi-sector formula implies on average 30% higher gains from trade than the one-sector formula, and as much as 100% higher gains for some countries. We then set up and estimate a quantitative Ricardian-Heckscher-Ohlin model in which no version of the formula applies exactly, and compare a range of sufficient statistic formulas to the true gains in this model. Confirming the earlier results, formulas that do not take into account sectoral heterogeneity understate the true gains from trade in the model by as much as two-thirds. The one-sector formulas understate the gains by more in countries with greater dispersion in sectoral productivities.

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. Specically, 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.

This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of lowtax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.

This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded set of estimating equations that decompose firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (the "granularity" hypothesis of Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.

A common presumption in macroeconomics and development economics is that increased growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if the underlying growth is a productivity increase in the sector consumed primarily by one group, the welfare of a second group may fall. I demonstrate this effect in two cases. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. This result stands in contrast to the standard model of skillbiased technological change. The second case examines trade between two countries, and demonstrates circumstances under which an increase in productivity in the nontradable sector of one country causes a welfare decline for the other country. The paper discusses evidence in support of the effects in both cases. This analysis demonstrates that a rising tide need not lift all boats and that the precise nature of consumption patterns is important for welfare.

We develop a model of international trade with two dimensions of firm heterogeneity and export quality constraints that manifest as higher variable trade costs for lower quality firms. In addition to "productivity", firms are also heterogeneous in their "caliber" -- the ability to develop high-quality products with lower fixed outlays. The model predicts various conditional exporter premia. Conditional on size, exporters sell higher quality products, charge higher prices, pay higher input prices and higher wages, and use capital more intensively. Some of these predictions have already been documented in the empirical literature. However, although they are apparently an intuitive implication of single-attribute models, conditional exporter premia cannot be rationalized through these models as they imply no variation in export status once size is controlled for. We test these predictions using manufacturing establishment data for India, the U.S., Chile, and Colombia, and find strong support for the model. We also investigate the sources of export quality constraints using firm-level trade shipment data for the U.S. and India. Destination per-capita income plays a key role for firms in India. For firms in the U.S., both distance and destination per-capita income play a role, though the effect of per-capita income is about a third of its magnitude for India.

This paper evaluates the welfare impact of observed levels of migration and remittances in both origins and destinations, using a quantitative multi-sector model of the global economy calibrated to aggregate and firm-level data on 60 developed and developing countries. Our framework accounts jointly for origin and destination characteristics, as well as the inherently multi-country nature of both migration and other forms of integration, such as international trade and remittance flows. In the presence of firm heterogeneity and imperfect competition larger countries enjoy a greater number of varieties and thus higher welfare, all else equal. Because of this effect, natives in countries that received a lot of migration -- such as Canada or Australia -- are better off. The remaining natives in countries with large emigration flows -- such as Jamaica or El Salvador -- are also better off due to migration, but for a different reason: remittances. The quantitative results show that the welfare impact of observed levels of migration is substantial, at about 5 to 10% for the main receiving countries and about 10% for the main sending countries.

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.

This paper evaluates the global welfare impact of China's trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. We simulate two alternative productivity growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson 2004), the large majority of countries in the sample, including the developed ones, experience an order of magnitude larger welfare gains when China's productivity growth is biased towards its comparative disadvantage sectors. We demonstrate both analytically and quantitatively that this finding is driven by the inherently multilateral nature of world trade. As a separate but related exercise we quantify the worldwide welfare gains from China's trade integration.

We analyze theoretically and empirically the impact of comparative advantage in international trade on fertility. We build a model in which industries differ in the extent to which they use female relative to male labor, and countries are characterized by Ricardian comparative advantage in either female- or male-intensive goods. The main prediction of the model is that countries with comparative advantage in female-intensive goods are characterized by lower fertility. This is because female wages, and therefore the opportunity cost of child-rearing are higher in those countries. We demonstrate empirically that countries with comparative advantage in industries employing primarily women exhibit lower fertility. We use a geography-based instrument for trade patterns to isolate the causal effect of comparative advantage on fertility.

The main goal of this paper is to analyze the impact of the 2008 global financial crisis on the Ukrainian financial system, and on Ukrainian bank performance. Our analysis is based on key bank performance indicators from 2003-2011. Bank assets, liabilities and capital are analyzed, and changes in bank management are taken into consideration. Special attention is paid to changes in bank stock prices of two of the largest banks, following the crisis.

The establishment of international labor standards linked to market access within the WTO is among the proposals intended to remedy the gross violations of labor and human rights that accompany international trade and investment. Yet, the WTO Charter and, previously, the GATT are virtually silent on the potential inhumanity of globally integrated goods and services markets. Despite intense pressure from the United States and the European Union, the Singapore Ministerial Declaration (December 1996), while acknowledging the importance of international labor standards, identified the International Labor Organization (ILO) as the competent body to establish and monitor labor standards. However, advocates for international labor standards ultimately gained access to the process of rules-setting in the WTO indirectly through Article XXIV governing the creation of customs unions and free trade agreements and, more importantly, the 1971 GSP Decision permitting special and differential treatment of developing country exports.

Thus, contrary to the WTO Ministerial dictates, labor standards are now routinely enforced by the prospective loss of preferential tariff concessions and market access. We discuss in this context a mechanism for linking ILO-established labor standards, monitoring by the ILO, and enforcement through the threat of lost trade concessions that emerged fully operational in the 1999 U.S.-Cambodia Bilateral Textile Trade Agreement. Under this agreement, the United States provided Cambodia access to US markets by giving expanded apparel and textile quotas conditional on improved working conditions in the garment sector.

We also discuss the labor and human-rights issues that emerge in a globalizing world economy, the market failures that produce labor and human-rights violations, and the role of labor standards in mitigating the most grievous of consequences. We then discuss the evidence on the impact that labor standards have on trade, firm behavior and investment, and on workers, and whether or not there is a race to the bottom, which we conclude not to be the case.

I first review some of the major influences that shaped my early years. I then relate the subsequent developments in my professional career, including my research orientation, chief publications, collaborative relationships, and longstanding involvement in undergraduate and graduate teaching and supervision.

Using Korean firm-level data on publicly-listed and privately-held firms together with firm exit data, we find strong evidence of the balance-sheet effect for small firms at both the intensive and extensive margins. During the crisis, small firms with more short-term foreign debt are more likely to go bankrupt, and experience larger sales declines conditional on survival. The extensive margin accounts for a large fraction of small firms’ adjustment during the crisis. Consistent with many studies in the literature, large firms with larger exposure to foreign debt paradoxically have better performance during the crisis at both the intensive and extensive margin.

Using confidential microdata from the US Census, we find that the fraction of manufacturing plants that export rose from 21% in 1987 to 39% in 2006. It has been suggested that similar trends in other countries may have been caused by declining costs of entering foreign markets. Our study tests this hypothesis for the first time. Both reduced form and structural estimation approaches find little evidence that the entry costs declined significantly in the US over this period. We instead argue that changes in other factors that determine export status are sufficient to explain these trends.

This paper examines the relationship between foreign equity participation and average wages at the plant level. I show that using a binary measure for foreign ownership, as is the traditional practice in the literature, leads to biased estimates of the foreign ownership wage premium, compared to the use of a continuous mea- sure if the true relationship is linear. Using nonparametric and semi-parametric techniques I find this is the case: the relationship between the level of foreign ownership and average wages is better approximated as linear rather than binary. I find that a ten percentage point increase in foreign equity participation is asso- ciated with an approximately 4% increase in the average wage of non-production workers. These results are the first to show that the wage premium due to foreign ownership varies with the level of foreign ownership in a continuous manner.

This paper studies the integration strategies of multinational firms in a multiperiod model under incomplete contracts and uncertainty. I incorporate continuous levels of integration to the study of organizational choice in an existing model of foreign direct investment (Antras and Helpman, 2004) and extend the model to a multi-period framework of learning. The joint productivity of the two partners in an integrated firm is unknown initially to both sides and is revealed only after continued joint production. The model gives rise to a nondegenerate distribution of foreign ownership at the firm level and shows that the optimal level of integration rises with the age of the firm. These patterns are supported by detailed plant-level data on share of foreign ownership. The model predicts that the degree of foreign ownership is an increasing function of joint productivity and intra-firm trade should rise over time as a result of increased control by multinationals. I test the implications of my theory with plant-level data from Turkey and find support for the predictions of the model.

This paper explores the role of financial factors in the 2008-9 collapse of U.S. imports and exports. Using highly disaggregated international trade data, we examine whether the cross-sectoral variation in how much imports or exports fell during this episode can be explained by financial variables. To do this, we employ a wide variety of possible indicators, such as standard measures of trade credit and external finance dependence, proxies for shipping lags at the sector level, and shares of intra-firm trade in each sector. Overall, there is very little evidence that financial factors played a role in the collapse of U.S. trade.

In this paper, we trace the jurisprudential history of the applicability of US countervailing duty (CVD) law to non-market economies (NMEs). We describe how, since the United States reversed its long standing policy of not imposing CVDs on NMEs, concurrent application of antidumping (AD) and countervailing duties has become the country's major trade remedy action against China. Although the WTO panel rejected China's claim of WTO-inconsistency regarding the current US practices, the US Court of International Trade firmly ruled that the Department of Commerce's double counting of AD and CVD against China violates domestic regulation. Finally, the WTO Appellate Body ruled that this 'double remedy' violates the rule to levy CVDs 'in the appropriate amounts' under Article 19.3 of the SCM Agreement. We will argue that, although the Appellate Body's ruling is praiseworthy in preventing an illogical practice, its legal reasoning may give rise to some doubts and controversy when the negotiating history of Article 19 is examined. We will also analyze key features of current double remedy practices in the United States and Canada.

This paper explores how far free trade agreements (FTAs) have strengthened or weakened global governance of the trading system. We open with an analysis of the altered political and economic context within which countries have come, in recent years, to assign a new importance to regional and bilateral trade agreements in their trade policies. We then consider each of the main provisions included in FTAs and comment on how these may separately affect the management of trade relations. We conclude with some observations of the broader trends affecting global governance that are associated with the spread of trade agreements as a whole.

This paper considers the key policy issues related to liberalization of trade in financial services that the IMF should be concerned with, and the role the IMF has played in advising on policies related to trade in financial services in its bilateral and multilateral surveillance and conditionality attached to lending programs. IMF staff were generally aware of the literature and country experiences showing the benefits of financial liberalization. But Fund advice in support of liberalization can be best interpreted to be in support of country unilateral policy actions and the dynamics of the WTO accession process.

We first provide a brief critique of the utilitarian principle as a guide to fairness in the world trading system. We then turn to the alternative conception of fairness in terms of economic equity, exploring the meaning of its two components: equality of opportunity and distributive justice. We thereafter proceed to discuss the conditions of autonomy and reciprocity that have to be met in order to realize greater fairness in multilateral trade negotiations. Next, we comment on aspects of procedural justice that are necessary for the functioning of a fair trading system. Finally, we conclude with an overall assessment of the considerations of the fairness achieved in the Uruguay Round multilateral negotiations.

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of U.S.-Japan trade policies. The menu of policies encompasses the various preferential U.S. and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers by the two countries, and global (multilateral) free trade. The U.S. preferential agreements include the FTAs approved by the U.S. Congress with Chile and Singapore in 2003, those signed with Central America, Australia, and Morocco and receiving Congressional approval in 2004, and prospective FTAs with the Southern African Customs Union (SACU), Thailand, and the Free Trade Area of the Americas (FTAA). The Japanese preferential agreements include the bilateral FTA with Singapore signed in 2002 and prospective FTAs with Chile, Indonesia, Korea, Malaysia, Mexico, Philippines, and Thailand. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small in the United States and Japan, but vary across the individual sectors depending on the patterns of the bilateral liberalization. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. Data limitations precluded analysis of the welfare effects of the different FTA rules of origin and other discriminatory arrangements.

In comparison to the welfare gains from the U.S. and Japan bilateral FTAs, the gains from both unilateral trade liberalization by the United States, Japan, and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. and Japan FTAs are based on "hub" and "spoke" arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.

Using an industry-level dataset of production and trade spanning 75 countries and 5 decades, and a fully specified multi-sector Ricardian model, we estimate productivities at sector level and examine how they evolve over time in both developed and developing countries. We find that in both country groups, comparative advantage has become weaker: productivity grew systematically faster in sectors that were initially at the greater comparative disadvantage. The global welfare implications of this phenomenon are significant. Relative to the counterfactual scenario in which an individual country’s comparative advantage remained the same as in the 1960s, and technology in all sectors grew at the same country-specific average rate, welfare today is 1.9% lower at the median. The welfare impact varies greatly across countries, ranging from -0.5% to 6% among OECD countries, and from -9% to 27% among non-OECD countries. Remarkably, for the OECD countries, nearly all of the welfare impact is driven by changes in technology in OECD countries, and for the non-OECD countries, nearly all of the welfare impact is driven by changes in technology in non-OECD countries.

This paper uses a partial equilibrium model of two small countries, within a large world economy, implementing reciprocal tariff cuts on each other’s exports in a regional trade agreement (RTA) and compares the effects with unilateral most-favored-nation (MFN) tariff cuts. The reciprocal cuts are shown to be more likely beneficial to a country the larger is the partner country’s trade. The welfare effects of a country’s own tariff cut on imports are also compared to the effects on its welfare of the partner-country’s tariff cut on its exports. If tariff levels are low, the latter is seen to be larger than the former. Implications of the analysis are that, if multilateral trade liberalization is unlikely, then small countries should seek to form RTAs with countries larger than themselves. In addition, to assure that they have something to offer in such arrangements, they should not go too far in unilaterally reducing their MFN tariffs.

We offer a simple variant of the standard Heckscher-Ohlin Model that explains how a developing country, by opening to trade with a large capital abundant economy, can be induced to shift resources into more capital-intensive production than what it was producing in autarky. As a result it experiences a rise in its return to capital and, if capital is internationally mobile, both an increase in its capital stock and an increase in trade. These results arise in a model in which both a traditional and a modern sector can produce final goods that are perfect substitutes. The modern sector uses intermediate inputs that differ in their relative capital intensities, while being both more capital intensive than the traditional sector. The results of this model accord well with the experience of the Asian Tiger economies during the early decades of their export-oriented industrialization.

Gary R Saxonhouse was one of the leading world scholars on Japanese economy. Born in New York City in 1943, he attended Yale University, where he received his PhD in Economics in 1971. He joined the Faculty of Economics at the University of Michigan beginning in 1970, where he taught throughout his career. The selection of his published papers that comprises this two-volume publication is a testimony and tribute to his remarkable accomplishments and influence that were cut short by his untimely death in November 2006, following a battle with leukemia.

This paper quantifies the effects of trade liberalization on local labor market outcomes and workers' migration patterns. I extend the classic specific-factors model to examine the impact of national price changes on local labor markets. The model describes how tariff changes across industries affect wages in local labor markets within the liberalizing country. In particular, wages will fall in regions whose workers are concentrated in industries facing the largest tariff cuts, and workers will then migrate away from these regions in favor of areas facing smaller tariff cuts. This result provides a theoretical foundation for a prevalent empirical approach in previous studies of local labor markets and lends economic interpretations to estimates that allow the researcher to evaluate the magnitude of results along with their direction.

I then use these theoretical results to measure how Brazil's 1987-1995 trade liberalization affected wages and interstate migration within the country. I find that regions whose output faced a 10% larger liberalization-induced price decline experienced a 7% larger wage decline. In addition, liberalization resulted in a substantial shift in migration patterns. The most affected Brazilian states gained or lost approximately 2% of their populations as a result of liberalization- induced shifts in migration patterns. These results demonstrate the empirical value of the specific-factors framework developed here and represent the first systematic evaluation of the effects of liberalization on internal migration.

International trade in services also provides an assessment of how policy makers can further bolster their service industries by leveraging the changes prompted by technological advancements. The book provides policy recommendations that include the reduction of barriers to services trade across all sectors and the promotion of health- and environment-related development policies that should be promoted in parallel with a burgeoning services market. The first recommendation is considered the most important, because it focuses on the need to ensure trade openness, which helps ensure the access to services and promotes the quality of services provision through foreign and domestic competition. Moreover, the issue of temporary movement of labor is another focus of this book, given that it is one of the most important means of service exports for developing countries. This is an issue that is considered technically complex and politically sensitive because of its political and security implications. The book examines mechanisms that have been used by various countries to liberalize the temporary movement of persons and concludes that regardless of the negotiating forum- multilateral, regional, or bilateral-the policy making results on temporary movement of labor are, so far, modest and limited to a small range of categories. However, it proposes alternative ways to move forward that require further analysis by countries and relevant international organizations, including the World Bank.

This book serves two purposes. It provides a straightforward exposition of the complex issues pertaining to the WTO agreements and negotiations, and it presents rigorous analyses of the impact of the WTO-induced reforms on the Indian economy. The book addresses a number of salient issues, including: why trade liberalization might be beneficial for both developed and developing countries and in their long-run economic interests; what India's interests are in a multilateral forum like the WTO and how best India could utilize this forum to realize maximum advantage; whether India has a clear cut and well-defined set of negotiating strategies; how the economic reforms have affected different segments of the economy since the inception of the WTO in 1995; whether the reform measures conform to India's long-term economic interests; whether the benefits from the WTO-induced reforms are fairly and evenly distributed across the regions and across the population; and whether there is evidence to support that economic reforms have led to a decrease in income inequality and poverty in India. Our hope accordingly is that this book will contribute towards the understanding of the causality between the actual economic events and the WTO induced reforms.

How do changes in competitive intensity affect trade patterns? In this paper, we exploit a quasinatural experiment associated with increased anti-trust enforcement activity over the last two decades. A large number of international markets underwent a change in competitive intensity as they shifted from explicit collusion to oligopolistic competition. We draw on models of collusive arrangements in spatially separated markets to generate testable predictions of the effects of collusion on price, trade patterns and concentration. One set of models (Pinto 1986, Fung 1991, building on Brander and Krugman 1983) suggests that colluding firms in commodity markets are likely to specialize geographically, while competing oligopolists are more likely to invade each others’ markets. More recent models (Baake and Normann 2002, Bond and Syropoulos 2008) suggest that efficient cartel arrangements may necessitate marketsharing and cross-hauling of goods, as these entail lower defection profits. We analyze detailed trade data linked to descriptive information from ten international cartels to test these predictions. Consistent with both sets of models, we confirm significant declines in prices following the breakup of each of the ten cartels. Contrary to conventional wisdom, and consistent with the more recent oligopoly trade models, we find no significant change in spatial patterns of trade; there is no significant change in the effect of distance on trade. Neither do we find evidence of significant changes in concentration or rearrangement of market shares.

Many developing countries have increased their foreign reserve stocks dramatically in recent years, in large part motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.

This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend towards “capital flowing uphill” with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data we evaluate the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2007. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and employment decline while profitability rises, suggesting significant restructuring of the target firms.

International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite – net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the government’s accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls.

This paper uses simple trade theory to interpret global imbalance. A world equilibrium in which one country runs a trade surplus and the other a deficit can be interpreted as the welfare improving outcome of free inter-temporal trade. However, comparative advantage would predict that the surplus would arise in the more slowly growing economy, unless consumer preferences differ sufficiently to reverse that. In order to explain the apparent situation of the United States and China in the world today without resorting to such differences in preferences, the paper suggests that both countries may be using policies that, in effect, subsidize the export of the goods in which they have comparative inter-temporal disadvantage. If this is the case, the resulting trade reduces world welfare compared to autarky, and it can easily make both countries worse off.

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.

This collection provides the reader access to the economics literature analyzing the accommodation of labor interests within the WTO. We first develop an understanding of the interaction between global goods, capital and labor markets and the national government institutions that regulate their function. In selecting papers for this volume, we have attempted to identify the most important contributions to the debate. Additional related readings are also discussed and listed in the bibliography.

In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. Recently, private firms and individuals in developing countries borrow substantially from foreign lenders. It is not clear whether the observed increase in private sector borrowing leads to overborrowing and frequent defaults by governments in developing countries. In this paper, we develop a tractable quantitative model in which private agents decide how much to borrow but the government decides whether to default. The model with decentralized borrowing increases aggregate credit costs and sovereign default risk, and reduces aggregate welfare, relative to a model with centralized borrowing. Private agents do not internalize the effect of their borrowing on economy-wide credit costs and thus would like to borrow more than the socially efficient level. Depending on the severity of default penalties, decentralized borrowing may lead to either too much or too little debt in equilibrium. The introduction of decentralized borrowing substantially improves the model's empirical fit in terms of matching observed debt levels and default rates.

We develop a tractable, three-sector model to study structural change in an open economy. The model features an endogenous pattern of trade dictated by comparative advantage. We derive an intuitive expression linking sectoral employment shares to sectoral expenditure shares and to sectoral net export shares of total GDP. Changes in productivity and in trade barriers affect expenditure and net export shares, and thus, employment shares, across sectors. We show how these driving forces can generate the "hump" pattern that characterizes the manufacturing employment share as a country develops, even when manufacturing is the sector with the highest productivity growth.

Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite recent widespread financial liberalization. This work shows that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual international financial markets are far from frictionless. In particular, financial contracts are incomplete and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance the most. Thus, default risk of debt contracts hinders international risk sharing. When countries remove their official capital controls, default risk is still present as an implicit barrier to capital flows; the observed increase in capital flows under financial liberalization is in fact too limited to improve risk sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.

The structure of sovereign debt has evolved over time from illiquid bank loans toward liquid bonds that are traded on the secondary market in the past two decades. This change in the debt structure is accompanied with a reduction in the duration of sovereign debt renegotiation; it takes on average 9 years to restructure bank loans, but only 1 year to restructure bonds. In this work, we argue that the secondary market plays an important role -- information revelation -- in reducing the renegotiation length. We construct a dynamic bargaining game between the government and the creditors with private information on the creditors' reservation value. The government uses costly delays as a screening device for the creditors' type, and so the delays arise in equilibrium. Moreover, the more severe is the private information, the longer the delays are. When we introduce the secondary market, the equilibrium delays are greatly reduced. This is because the secondary market price conveys information about the creditors' reservation and lessens the information friction. We also find that bond financing is more friendly to the debtor country; it increases ex-ante borrowing and investment and ex-post renegotiation welfare of the government.

One of the most striking aspects of the recent recession is the collapse in international trade. This paper uses disaggregated quarterly and monthly data on U.S. imports and exports to shed light on the anatomy of this collapse. We find that the recent reduction in trade relative to overall economic activity is far larger than in previous downturns. Information on quantities and prices of both domestic absorption and imports reveals a more than 50% shortfall in imports, relative to what would be predicted by a simple import demand relationship. In a sample of imports and exports disaggregated at the 6-digit NAICS level, we find that sectors used as intermediate inputs experienced significantly higher percentage reductions in both imports and exports. We also find support for compositional effects: sectors with larger reductions in domestic output had larger drops in trade. By contrast, we find no support for the hypothesis that trade credit played a role in the recent trade collapse.

Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of macroeconomic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade in which the parameters are calibrated to match the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- vanishes. The extensive margin of imports accounts for only about 3.5% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, inframarginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in entry barriers are an order of magnitude larger, while the gains from trade liberalization are an order of magnitude smaller.

This paper examines the recent upsurge in foreign acquisitions of U.S. firms, specifically focusing on acquisitions made by firms located in emerging markets. Neoclassical theory predicts that, on net, capital should flow from countries that are capital-abundant to countries that are capital-scarce. Yet increasingly emerging market firms are acquiring assets in developed countries. Using transaction-specific acquisition data and firm-level accounting data we evaluate the post-acquisition performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2007. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and employment decline while profitability rises, suggesting significant restructuring of the target firms.

This paper uses simple economic theory to examine the effects of various policies that are intended to level the playing field in international trade. That is, when foreign producers are given advantages over domestic producers by government subsidies or other interventions that lower their costs, domestic firms may argue that their own governments should either provide comparable assistance or should protect them from competing with the foreign firms on grounds of fairness. Economic analysis easily shows that granting these requests is usually harmful for the domestic economy as a whole, but that may not prevent such policies from being implemented. Therefore this paper examines what the further effects of such policies may be. The main conclusion that emerges is that policies to level the playing field most often overcompensate those who request them, making them better off than if the playing field had not be tilted against them in the first place.

During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland’s Great Depression. We also show that Finland’s Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade.

This paper considers the key policy issues related to liberalization of trade in financial services that the IMF should be concerned with, and the role the IMF has played in advising on policies related to trade in financial services in its bilateral and multilateral surveillance and conditionality attached to lending programs. IMF staff were generally aware of the literature and country experiences showing the benefits of financial liberalization. But Fund advice in support of liberalization can be best interpreted to be in support of country unilateral policy actions and the dynamics of the WTO accession process.

Gary R. Saxonhouse died November 30, 2006 in Seattle, WA, where he was being treated for leukemia. To honor his many accomplishments and writings on the Japanese economy and given our longstanding relationships with him, Hugh Patrick of Columbia University, Gavin Wright of Stanford University, and I decided to assemble the best of his many writings for publication. The selection of his published papers that comprises these two volumes is a testimony and tribute to his lifetime of work and influence that were cut short by his untimely death.

This paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large firms have an impact on aggregate volatility. Opening to trade increases the importance of large firms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate fluctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.

Previous studies of trade and the environment overwhelmingly focus on how trade affects where goods are produced. However, trade also affects where goods are consumed. In this paper we describe a model of trade with durable goods and non‚Äêhomothetic preferences. In autarky, used goods are relatively inexpensive in high‚Äêincome countries and free trade causes these goods to be exported to low‚Äêincome countries. We then evaluate the environmental consequences of this pattern of trade using evidence from the North American Free Trade Agreement. Since trade restrictions were eliminated in 2005, over 2.5 million used cars have been exported from the United States to Mexico. Using a unique, vehicle‚Äêlevel dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so trade leads average vehicle emissions to decrease in both countries. Total greenhouse gas emissions increase, primarily because trade gives new life to vehicles that otherwise would have been scrapped.

Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, we test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms’ efforts to raise their capability (innovate) by upgrading their technology or the quality of their product/service, taking into account firm heterogeneity. We find competition has a negative effect on innovation, especially for firms further from the frontier, and that the supply chain of multinational enterprises and international trade are important channels for domestic firm innovation. We do not find support for the inverted U effect of competition on innovation. There is weak evidence that firms in a more pro-business environment invest more in innovation and are more likely to display the inverted U relationship between competition and innovation.

In this study we analyze the welfare and sectoral effects of a variety of options for the formation of free trade agreements by several major emerging market economies. The economies covered include: Brazil, Russia, India, Indonesia, China, and South Africa (BRIICS). The analysis is carried out using the Michigan Model of World Production and Trade, which is a multi-country, multi-sectoral computational general equilibrium (CGE) model of the global trading system. The version of the model that we use includes 31 countries/regions plus the rest-of-world and 27 sectors in each country/region. The unique feature of our study is that we have analyzed the simultaneous removal of trade barriers for the BRIICS countries with a variety of FTA partners. The computational results presented thus reflect both the direct effects of the bilateral FTAs and the effects of the other FTAs assumed to be undertaken. The computational results suggest that the welfare effects of the different FTA options are for the most part fairly small in absolute terms and as a percentage of GDP. We compare the FTA results with assumed adoption of unilateral free trade by the individual BRIICS nations and global (multilateral) free trade by all of the countries/regions covered in the Michigan Model. These calculations suggest that the welfare benefits of global (multilateral) free trade are much greater than the benefits to be derived from the various FTAs for the BRIICS countries that we have analyzed and from the assumed unilateral free trade for these countries.

It has been suggested that countries whose exports are in especially risky sectors will experience higher output volatility. This paper develops a measure of the riskiness of a country's pattern of export specialization, and illustrates its features across countries and over time. The exercise reveals large cross-country dierences in the risk content of exports. This measure is strongly correlated with the volatility of terms-of-trade, total exports, and output, but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. We then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplied by Turnovsky (1974). Countries with a comparative advantage in safe sectors or a strong enough comparative advantage in risky sectors will specialize, whereas countries whose comparative advantage in risky sectors is not too strong will diversify their export structure to insure against export income risk. We use both non-parametric and semiparametric techniques to demonstrate that these theoretical predictions are strongly supported by the data.

A well established empirical result is that countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this rela- tionship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that higher bilateral trade in an individual sector increases both the co- movement within the sector between trading countries, as well as the comovement between that sector and the rest of the economy of the trading partner. We also demonstrate that vertical linkages in production are an important force behind the overall impact of trade on business cycle synchronization. The elasticity of comovement with respect to bilateral trade is signi- cantly higher in industry pairs that use each other as intermediate inputs in production. Our estimates imply that vertical production linkages account for some 30% of the total impact of bilateral trade on business cycle correlation for our full country sample. Finally, the positive im- pact of trade on industry-level comovement is far more pronounced in the North-North country pairs compared to either the South-South or North-South country pairs. However, the relative contribution of vertical linkages to aggregate comovement is roughly three times greater for North-South trade than North-North trade.

This paper analyzes the impact of international trade on the quality of institu- tions, such as contract enforcement, property rights, or investor protection. It presents a model in which institutional dierences play two roles: they create rents for some parties within the economy, and they are a source of comparative advantage in trade. Institutional quality is determined in a Grossman-Helpman type lobbying game. When countries share the same technology, there is a \race to the top" in institutional qual- ity: irrespective of country characteristics, both trade partners are forced to improve institutions after opening. On the other hand, domestic institutions will not improve in either trading partner when one of the countries has a strong enough technological com- parative advantage in the good that relies on institutions. We test these predictions in a sample of 141 countries, by extending the geography-based methodology of Frankel and Romer (1999). Countries whose exogenous geographical characteristics predispose them to exporting in institutionally intensive sectors enjoy signicantly higher institutional quality.

In this study, we use the Michigan Model of World Production and Trade to analyze the economic welfare effects of APEC free trade, unilateral free trade for individual APEC members, and global free trade for all countries/regions covered in the Michigan Model. The Michigan Model is a multi-country, multi-sectoral computational general equilibrium (CGE) model of the global trading system. The version of the model used includes 31 countries/regions plus the rest-of-world and 27 sectors in each country/region. Nineteen APEC members are covered. The computational results suggest that APEC free trade would result in sizable increases in the economic welfare of the individual APEC members in both absolute terms and as a percentage of GDP. There would be trade diversion effects for non-APEC countries, except for the Rest of Middle East. Unilateral free trade for the APEC members would result in larger welfare gains as compared to APEC free trade for 7 of the 19 APEC members. The welfare benefits of APEC free trade are thus larger for more APEC members than unilateral free trade. Finally, global (multilateral) free trade by all of the countries/regions covered in the Michigan Model suggests much larger benefits for all APEC members compared to APEC free trade and APEC unilateral free trade. While global free trade is a limiting case, the computational results presented are testimony to the significant welfare benefits that could be realized from successful pursuit of future multilateral trade liberalization.

We first discuss what fairness may mean in the context of the dispute settlement process, noting the crucial relation between fairness in dispute settlement and the functioning of the trading system as a whole. We explore this relation further through an analysis of three main groups of dispute settlement cases. These are: cases that turn around the question of defining fair competition; cases that arise from the use of contingency measures; and cases that draw the boundaries between domestic regulatory measures and the trade-related norms and rules of the WTO. There follows an analysis of experience with compliance and with the use of counter measures in various cases. Finally, taking together the rulings of the Dispute Settlement Body and the procedures for compliance and the use of counter measures, we conclude that while the present dispute settlement process serves to protect the fairness of the trading system as a whole, there are some aspects of dispute settlement that remain problematic from the standpoint of fairness.

Are U.S. exports different from Chinaís exports? If so, how? This paper attempts to answer this question, focusing on the quality, variety, and overlap of their products. Using product-level manufacturing import data from Japan, I find that the exports of China and the United States are similar in terms of variety. More than 85 percent of U.S. export products to Japan are commonly exported from China. However, U.S. exports are different from Chinaís exports in terms of quality. A comparison with the European Union (EU) shows that U.S. exports are similar to EU exports in terms of both quality and variety when compared to Chinaís exports. These results suggest that quality matters. Both the EU and the United States are better endowed with the factors needed to produce quality or are relatively more productive in producing quality products than China.

Models of comparative advantage are usually based either on differences in factor abundance or differences in total factor productivity within a country despite considerable empirical evidence that both matter. This paper articulates a unified and tractable model in which comparative advantage exists due to differences in factor abundance and relative productivity differences across a continuum of industries with monopolistic competition and increasing returns to scale. I provide evidence that both sources of comparative advantage shape international production patterns. In addition, I find that relative productivity differences across industries are uncorrelated with the factor intensities of these industries. Therefore, each of the two forces for comparative advantage offers valid partial descriptions of the data. Consequently, simply aggregating the predictions of the factor abundance-based and relative productivity-based models can be used to obtain a full description of industry-by-industry production patterns.

In this paper we review the theory of trade and development that Ragnar Nurkse suggested in his Wicksell Lectures of 1959, interpreting it in the light of subsequent advances in the theories and empirics of trade and growth. We then examine the extent to which developing countriesí growth experiences during the second half of the 20th century have matched Nurkseís expectations, and also the extent to which his policy advice was followed and, where followed, successful. Perhaps not surprisingly, given the limited information he had available when he wrote, the growth performance of countries following various development strategies has turned out to differ rather markedly from Nurkseís expectations. But his expectations for the policies that would be used, both by the majority of developing countries in the first decades after he wrote, and also by developed countries in response to those few who followed a more export oriented path, were remarkably prescient.

This paper studies how the degree of contract enforcement in a country influences firmsí financing decisions. We first document empirical facts on debt financing for two new firm-level datasets in the United Kingdom and Ecuador. In the United Kingdom, small firms borrow more relative to their assets than large firms, whereas in Ecuador small firms borrow less. We build a dynamic model of firmsí debt financing where debt is constrained by the likelihood of default, which varies across firms and economies with different degrees of enforcement. Because of their low firm values, small firms are mostly affected by abundance or scarcity of economy-wide loans generated by weak or strong contract enforcement. We calibrate our model to the datasets in the two countries and find that our mechanism can quantitatively account for the patterns observed in the data.

In analyzing the relationship between factor endowments and sectoral percapita output (the path of development), Schott (2003) showed empirically that the number of cones was neither one nor three but two, and that all countries fall into one of these two cones. This is a puzzle because it is inconsistent with large wage variations across economies. This paper attempts to solve this puzzle, introducing complete and incomplete specialization into a multiplecone model. Empirical results reveal that factor endowments can explain Heckscher-Ohlin specialization and the wage variations across economies at the same time once the multiple-cone model allows the complete specialization.

I first discuss the Doha Round impasse and how this impasse has been created. I next discuss the trade interests of the industrialized and developing countries and thereafter the structure of WTO negotiations. I conclude with a discussion of the policy options for the industrialized and developing countries and the implications for future WTO multilateral negotiations.

This paper builds on the analysis of Kiyota and Stern (2007) of the economic effects of a Korea- U.S. free trade agreement (KORUSFTA). We review the objectives and main features of the KORUSFTA as perceived prior to the negotiation of the agreement and then outline the main features of the actual KORUSFTA that was concluded at the end of June 2007 and is now awaiting legislative approval by the authorities in both nations. We summarize the results of a modeling study by the USITC (2007) that is based on the changes in bilateral tariffs and tariff rate quotas (TRQs) that were actually negotiated in the KORUSFTA. We also present for comparative purposes our earlier results from Kiyota and Stern (2007) that used the pre-negotiations data and some specially constructed estimates of services barriers. Finally, we presents some calculations of the effects of alternative negotiating options that may be considered especially if it turns out that the KORUSFTA is not approved by either or both Korea and the United States.

This paper traces the evolution of the global trading system from the 19th century to the present-day GATT/WTO arrangements, calling attention to the key roles of reciprocity and non-discrimination and taking note of how the system is now challenged by the new paradigm of global market integration. The main features of the WTO are described, the boundaries of the WTO identified, and how the expansion of these boundaries may result in the over-extension and weakening of the effectiveness of the WTO.

The Doha Round of Multilateral Trade Negotiations within the World Trade Organization has reached an impasse from which it may never recover. Policymakers in Korea, as in other countries, must decide how to deal with this failure and what policies to pursue in its stead. Here I discuss some of the options, ranging from abandoning the WTO disciplines and raising tariffs, to unilateral reduction of tariffs to zero. Much of the discussion concerns the formation of bilateral or regional free trade agreements, which should be structured to avoid some of their less desirable features.

This paper examines the impact of multinational firmsí increasingly blurred geographical and institutional boundaries on the nature and definition of Corporate Social Responsibility (CSR). It begins with a brief history of CSR, describes changes in the global corporation and the pressures impinging on it over the past 25 years, and analyzes the resulting mismatch between the contemporary corporation and traditional concepts of CSR. It then dissects some of the issues raised by this new concept of CSR, and speculates on future trajectories for CSR in multinational corporations as globalization continues to exert pressure for convergence of national standards into a more universal definition of Global CSR.

Case Studies in US Trade Negotiation: Making the Rules, Vol. 1, and Resolving Disputes, Vol 2, by Charan Devereaux, Robert Lawrence, and Michael D. Watkins (Peter G. Peterson Institute for International Economics 2006), are outstanding contributions that provide a magnificent depth of understanding of how U.S. trade policies and related initiatives are designed, negotiated, and implemented and how issues of dispute settlement of concern to the United States in the World Trade Organization (WTO) have been addressed and the efforts that have been made in seeking their resolution.

This paper focuses on issues of financial sector liberalization in Ethiopia, with reference in particular to the Ethiopian banking sector. We identify two factors that may constrain Ethiopiaís financial development. One is the closed nature of the Ethiopian financial sector in which there are no foreign banks, a non-competitive market structure, and strong capital controls in place. The other is the dominant role of state-owned banks. Our observations suggest that the Ethiopian economy would benefit from financial sector liberalization, especially from the entry of foreign banks and the associated privatization of state-owned banks.

The Ricardian Model describes a world in which goods are competitively produced from a single factor of production, labor, using constant-returns-to-scale technologies that differ across countries and goods. With only two goods and two countries, the standard textbook model shows that countries will export the good in which they have comparative advantage. Equilibrium takes two forms, one with both countries completely specialized and gaining from trade, the other with one country producing both goods and neither gaining nor losing from trade. The model is easily extended to more than two goods or more than two countries, but not both. Important extensions have been provided by Dornbusch, Fischer, and Samuelson (1977) to a continuum of goods with two countries, and by Eaton and Kortum (2002) to a continuum of goods with many countries and random technologies.

This paper examines the determinants of the backward vertical linkages of Japanese foreign affiliates in manufacturing for the period 1994-2000, focusing on the local backward linkages, or local procurements in the host country. Our major findings are twofold. First, the unobserved affiliate-specific characteristics explain the large part of the variation of the backward linkages among foreign affiliates. Second, the experience of the affiliate has positive and sometimes non-linear impacts on local procurements for the affiliates, especially in Southeast Asia and China.

This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countriesí external balance, including the oil trade balance, the non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975ñ 2004. We explicitly take a multilateral and global perspective. In addition to the United States, the Euro area and Japan, we consider a number of regional aggregates including oil-exporting economies and middle-income oil-importing economies. Our first result is that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the non-oil trade balance, and differs systematically between the United States and other oil importing countries. Second, using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the United States, but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and for the United States, but may amplify it for other oil importers.

Intervention operations are used by governments to manage their exchange rates but officials rarely confirm their presence in the market, leading inevitably to erroneous reports in the financial press. There are also reports of what we term, unrequited interventions, interventions that the market expects but do not materialize. In this paper we examine the effects of various types of intervention news on intra-day exchange rate behavior. We find that unrequited interventions have a statistically significant influence on returns, volatility and order flow, suggesting that the expectation of intervention, even when governments do not intervene, can affect currency values.

This paper examines the role of multinational firms in international trade using firm-level panel data for Japanese firms between 1994 and 2000. Our results indicate that multinational firms dominate Japanese trade. In 2000, only 12.4 percent of Japanese firms were multinationals but they accounted for 93.6 and 81.2 percent of Japanese exports and imports, respectively. We found that multinational firms emerged from being exporters/importers. These results imply that firms do not make the choice of either exporting or undertaking FDI, contrary to the findings of previous studies. Rather, exporters make a decision on whether or not to undertake FDI.

If the Doha Round of multilateral trade negotiations fails, the biggest losers will be developing countries. In this paper we argue why this is the case and examine various options that may be available to developing countries either to avert or to deal with this failure.

This paper addresses the issues of whether the linking of core labor standards with multilateral or bilateral trade agreements is an effective way of promoting the improvement of labor standards. We review the determinants of core labor standards over time and conclude that efforts to improve these standards have to be tailored to the economic and social circumstances prevailing in a country at a specific time. Legalistic means to prod governments into revising their domestic laws or enforcing them will therefore be unsuccessful unless economic incentives can be changed to erode prevailing social norms and ease the way for the acceptance of new norms that will meet with public approval and be consonant with the distribution of political power. Moral suasion from both domestic and external sources may work more slowly than more legalistic means but is preferred because it contributes to altering the social norms that underlie and will reinforce the acceptance and effectiveness of labor standards.

This study presents an analysis of the bilateral free trade agreement (FTA) that is being negotiated between Korea and the United States. The bilateral FTA negotiations were notified to the U.S. Congress by the United States Trade Representative in February 2006, and formal negotiations began in May 2006.1 It is anticipated that the negotiations may be completed and the agreement signed before mid-2007, which is when the current U.S. presidential negotiating authority expires. Once signed, the implementing legislation can be introduced in the U.S. Congress at any time.

In Chapter 1, we set out what appear to be the primary objectives of the United States and Korea in their pursuit of an FTA. In Chapter 2, we review the existing studies of a Korea-U.S. FTA that have been done to date. Chapter 3 is devoted to comparative static and dynamic analyses of the FTA. We first provide an overview of the features and benchmark data of the Michigan Model of World Production and Trade, which is the computational general equilibrium (CGE) modeling framework that we use to analyze the economic effects of a Korea-U.S. FTA. Thereafter, we present the comparative static modeling results for the bilateral removal of tariffs and other trade barriers for agricultural products, manufactures, services, and all of these combined. This is followed by presentation of results of some dynamic computational scenarios that are specially constructed to take into account possible changes in capital formation that may be generated by the Korea-U.S. FTA. We then draw together the main conclusions from the review of previous studies and our own computational work.

In Chapter 4, we provide a broader perspective on a Korea-U.S. FTA that takes into account alternative negotiating options for the two nations. These options include computational analyses of the other FTAs that each nation has concluded in recent years and that are currently in process. We also calculate the potential effects of the unilateral removal of trade barriers by the United States and Korea and the effects of global free trade in which all countries or regions covered in the model are assumed to remove their existing trade barriers on a multilateral basis. In Chapter 5, we present conclusions and implications for further research and policy.

This paper reconsiders the law of comparative advantage (Deardorff, 1980, 1994) from an empirical point of view. I show that not only net exports valued at autarky prices but also those valued at free trade prices are needed to test the law of comparative advantage when trade is not balanced. This result brings into question the empirical success of the test of comparative advantage that Bernhofen and Brown (2004) have applied to Japan. I propose a more general test that is consistent with both balanced and unbalanced trade and apply it to Japan. The law of comparative advantage does not necessarily hold in Japan once trade imbalance is taken into account.

Previous studies of job creation and job destruction (JCJD) have found that the gross job reallocation rate greatly exceeded the net job creation rate even in a narrowly defined industry or the same international trade orientation. This paper asks whether multinational enterprises (MNEs) reflect different patterns of JCJD compared to domestic firms. We distinguish two types of MNEs (i.e., Japanese MNEs and foreign-owned firms) and utilize firm-level data in Japan for 1995-2002. We find that the gross job reallocation rate may be equal to the net job creation rate once we control for the entry/exit, industry, worker type, and multinational status. Multinational status is important in explaining the heterogeneity of employment patterns among firms.

In this paper, we first describe the characteristics of the World Trade Organization (WTO) that are the basis of the framework of the multilateral trading system. We then provide an overview of concepts of fairness in trade agreements. Thereafter, we offer a critique of the efficiency criterion in assessing multilateral trade agreements, taking issue with T.N. Srinivasanís (2006) analysis and then elaborate on our conception of fairness as reflected in agreements covering market access. We also address considerations of distributive justice, in contrast with Srinivasanís contention that distributive justice has no role to play in the design and negotiation of multilateral trade agreements. Finally, we question bilateral trade agreements from the standpoint of fairness, drawing on the example of the U.S. bilateral FTA negotiated in 2005 with Central America and the Dominican Republic.

The spread of the HIV/AIDS epidemic is still fueled by ignorance in many parts of the world. Filling in knowledge gaps, particularly between men and women, is considered key to preventing future infections and to reducing female vulnerabilities to the disease. However, such knowledge is arguably only a necessary condition for targeting these objectives. In this paper, we describe the extent to which HIV/AIDS knowledge is correlated with less risky sexual behavior. We ask: even when there are no substantial knowledge gaps between men and women, do we still observe sex-specific differentials in sexual behavior that would increase vulnerability to infection? We use data from two recent household surveys in Botswana to address this question. We show that even when men and women have very similar types of knowledge, they have different probabilities of reporting safe sex. Our findings are consistent with the existence of non-informational barriers to behavioral change, some of which appear to be sex-specific. The descriptive exercise in this paper suggests that it may be overly optimistic to hope for reductions in risky behavior through the channel of HIV-information provision alone.

We define productivity growth as the change in welfare that arises from additional output holding primary inputs constant. Using this traditional growth-accounting definition, we show that gains may arise because of plant-level technology shocks, and, in imperfectly competitive settings, from the reallocation of inputs across plants with differing markups and/or shadow values of primary inputs. With plant-level data, the alternative and most popular definition of productivity growth looks at the difference in the first moments of the productivity distribution. We show that this definition adds an additional term to the growth-accounting measure, which has been called ìreallocation.î We show there is a very weak relationship between the two indexes in almost every 3-digit manufacturing industry in both Chile from 1987-1996 and Colombia from 1981-1991 - 49 in total - primarily because this ìreallocationî term is large and volatile. We explore the theoretical reasons for this sharp divergence, in the process uncovering a number of previously unnoticed and unattractive features of the first-moment definition. For example, it is not tethered to any theoretical model, it is sensitive to measured units, and it can report positive productivity growth when welfare has fallen.

Introduction and Overview of the Symposium.

Empirical studies find substantial differences in demand elasticities and associated markups among products of different quality. This paper analyzes the theoretical determinants of such variation. We present a simple model that allows for horizontal and vertical differentiation and accounts for endogenous entry. We find that most economic forces in our model, such as consumersí price sensitivity, the scope for product differentiation, and sunk costs of entry, are likely to induce lower equilibrium demand elasticities for higher quality products. In contrast, other economic forces, such as marginal cost of production and the distribution (across consumers) of the willingness to pay for quality, may induce the opposite pattern. These results provide an organizing framework through which empirical findings may be interpreted, and may also help to predict variation in demand elasticities for markets in which empirical estimates of elasticities are unavailable or infeasible to obtain.

This paper analyzes firm panel data to examine how export demand shocks associated with the 1997 Asian financial crisis affected Chinese exporters. We construct firm-specific exchange rate shocks based on the pre-crisis destinations of firmsí exports. Because the shocks were unanticipated and large in magnitude, they are an ideal instrument for identifying the impact of exporting on firm productivity and other aspects of firm performance. We find that firms whose export destinations experience greater currency depreciation have slower growth in exports and that export growth increases firm productivity as well as other measures of firm performance. Consistent with the ìlearning-by-exportingî hypothesis, greater exports increase the productivity of firms exporting to developed countries but not of firms exporting via Hong Kong or directly to poorer destinations.

This paper provides an introduction and overview for a symposium.

This paper examines whether the traditional sets of macro surprises, that most of the literature considers, are the only sorts of news that can explain exchange rate movements. We examine the intra-daily influence of a broad set of news reports, including variables which are not typically considered "fundamentals" in the context of standard models of exchange rate determination, and ask whether they too help predict exchange rate behavior. We also examine whether "news" not only impacts exchange rates directly, but also influences exchange rates via order flow (signed trade volume). Our results indicate that along with the standard fundamentals, both non-fundamental news and order flow matter, suggesting that future models of exchange rate determination ought to include all three types of explanatory variables.

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that the border effect can be inflated by the volatility and persistence of the nominal exchange rate and by the cross-country heterogeneity in the distribution of within-country price differentials. We develop a simple framework to separate the border effect from these confounding factors. Using price data from Engel and Rogers (1996) and Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect between the U.S. and Canada and the U.S. and Japan is negligible.

This paper analyzes the potential economic effects of bilateral negotiations for an FTA between the United States and the Southern African Customs Union (SACU). The U.S.-SACU FTA bilateral negotiations were initiated in June 2003. But following a number of official meetings, the negotiations were deadlocked over a series of issues of concern to the SACU. The bilateral FTA negotiations have now been replaced by an effort to negotiate a framework agreement covering trade and investment issues and possibly a bilateral FTA at some future time.

To determine whether a bilateral FTA might be in the SACU membersí interests, we use the Michigan Model of World Production and Trade to assess the welfare and other economic effects of a bilateral FTA. For modeling purposes, the focus is on the effects of the bilateral removal of trade barriers, which lend themselves most readily to quantification. The conclusion is that the welfare benefits of a bilateral FTA are rather small in both absolute and relative terms, and that the non-trade and dynamic benefits of the SACU FTA are unlikely to alter these results significantly.

To provide a broader perspective on the potential economic effects of a U.S.-SACU FTA, the model is also used to calculate the effects of unilateral tariff removal and global free trade. It is shown that unilateral free trade would result in much larger increases in economic welfare for the United States and SACU as compared to the FTA bilateral trade liberalization. The effects of global (multilateral) free trade are shown to be greater for the United States and SACU as compared to both the bilateral FTA liberalization and unilateral tariff removal. The results suggest accordingly that the interests of the global trading community, including the United States and SACU, could be better served by unilateral and especially multilateral liberalization rather than a bilateral FTA.

How are we to assess the fairness of the global trading system as embodied in the GATT/WTO? Opinions about what constitutes fairness differ widely, and there is surely no incontrovertible yardstick. But can we be clearer about the criteria that are appropriate and what they mean in more operational terms?

In this paper, we first discuss why fairness is a condition of the agreements among governments that form the global trading system. We then suggest that fairness can best be considered within the framework of two concepts: equality of opportunity and distributive equity. We observe that the efficiency criterion is not a primary yardstick of fairness, and though it is relevant in choosing among alternative ways of realizing fairness, it is not without its own limitations. We thereafter discuss what equality of opportunity and distributive equity mean when applied to the commitments that governments make in the global trading system. For this purpose, we divide these commitments into four categories: those relating directly to market access; those concerning supporting rules designed to prevent cheating in market access commitments or to facilitate trade flows; those relating to procedures for the settlement of disputes or the use of trade remedy measures; and those relating to governance of the system. (We say nothing in this paper about the issue of fairness in the context of the last category.) Finally, we make some comments about fairness in the Doha Development Round, first reviewing some proposals made by Stiglitz and Charlton, and then making some observations about the central issue of market access.

This paper discusses the welfare effects, on groups, countries, and the world, of fragmentation. Fragmentation here is defined as the introduction of a technology that permits a production process to be split into separate parts, with the fragments able to be done in different locations. Standard results of trade theory and the gains from trade are then examined to see what they suggest about the gains from fragmentation. The main points made are, first, that it is easy to find examples in which fragmentation hurts particular groups and countries, and even in some circumstances the world. But I also argue that fragmentation is likely to increase world income overall, and therefore that it is likely to be beneficial on average. Based on that, together with our general ignorance of what the more specific effects of fragmentation are likely to be, we should resist attempts to use policies to interfere with it.

541. Deardorff, Alan V. and Indira Rajaraman, "Can Export Taxation Counter Monopsony Power?," June, 2005; published as "Buyer Concentration in Markets for Developing Country Exports," Review of Development Economics, 13(2), May 2009, pp. 190-199. ABS PDF

This paper explores the implications for trade policy of buyer concentration in markets for primary commodity exports of developing countries. Simple partial equilibrium models of monopsony and oligopsony show that the best available policy for the exporting country may be to tax exports so as to extract some of the profits of the monopsonist, even though doing so actually worsens the distortion caused by the buyerís market power. The paper also explores the general equilibrium implications of these results for factor markets and for patterns of trade.

Throughout the 1990s, the social-market capitalism that prevailed in most of the larger countries of continental Western Europe and the producer-oriented or mercantilist capitalism characteristic of Japan and a number of other large Asian economies were under strong pressures to migrate their economies toward U.S. (or Anglo-Saxon)-style investor capitalism. This paper explores whether the pressures for convergence exerted by globalization persisted into the first decade of the 21st century, after the American "bubble" burst and the United States fell from grace in a number of economic, social, and political dimensions.

American-style investor capitalism indeed continues to be the dominant model where capital markets and corporate governance are concerned. Various pressures continue to push the labor markets of industrial nations in that direction as well, despite strong political and social backlash. Where relations with customers are concerned, however, it is the requirements imposed on products, services and production processes by the stringent regulations of the EU's social market capitalism, and its adherence to the precautionary principle, that dominate. At the same time, U.S.-style capitalism is itself evolving as its participants struggle to restore public trust and to integrate the adaptability and market-responsiveness of its institutions with a broadened focus on corporate responsibility to multiple stakeholders.

As tariffs and quotas have fallen substantially during successive rounds of multilateral trade negotiations, attention has increasingly focused on harmonizing a variety of "domestic" policies that limit or distort international trade and investment, such as intellectual property protection, environmental rules, labor standards, and competition (antitrust) policies. An increase in such "deep integration" or "system convergence" would indeed maximize global welfare as regards transactions in private goods, but it also undermines the ability of sovereign states to respond to their own voters' preferences as regards such public goods as inflation and unemployment rates, national defense, income distribution, environmental quality, and worker protection. The resulting tensions have made the negotiation of multilateral trade agreements and regional integration arrangements more complex and difficult and the resistance to them more pronounced.

A century has passed since the Government of Canada adopted the first recorded antidumping law in 1904. The Canadian legislation was soon followed by similar legislation in most of the major trading nations in the industrialized world prior to and after World War I. Antidumping provisions were later incorporated into the General Agreement on Tariffs and Trade (GATT) following World War II. Nowadays, virtually all of the industrialized and developing countries in the world economy have adopted antidumping legislation. In view of the long and increasingly widespread use of antidumping measures, we marked the centennial of Canadaís 1904 legislation with a symposium at the University of Michigan on March 12, 2004. The symposium papers document the experiences with antidumping and then ask whether and how antidumping can be reformed. Although we all would probably agree that the best solution would be to retract all antidumping legislation, this is unlikely to happen in the foreseeable future. Antidumping laws serve a variety of purposes, and powerful political forces stand in the way of eliminating these laws. Antidumping provides a stronger and more focused means of safeguards protection against surges of imports than GATT-legal safeguards laws permit. Antidumping also formalizes a meaning for ìunfair tradeî that, though essentially meaningless from an economic standpoint, strikes a chord in public perception. And finally, in spite of its appearance of being constrained by objective administrative rules, antidumping in practice is a potent political tool that governments are able to manipulate in order to satisfy powerful constituents. With all this going for it, antidumping is unlikely ever to be relinquished as an economic policy tool by governments.

This paper reviews the theoretical development of the concept of comparative advantage, starting with the two-good model of Ricardo and the two-good extension and reinterpretation by Haberler. In both, the presence of comparative advantage provides the scope for countries to gain from trade by specializing, and the pattern of that trade is explained by the pattern of comparative advantage. These strong results of the two-good model can be extended under certain circumstances to multiple goods and countries, but under more general assumptions such strong results no longer are assured. Instead one can derive much weaker results, usually in the form of correlations between comparative advantage and trade, and these weaker results hold in a much wider variety of circumstances. The paper examines those assumptions that permit such generalizations, but then also examines when those assumptions are most likely to fail, and what happens as a result.

This paper examines changes in individual real incomes in South Africa between 1995 and 2000. We document substantial declinesóon the order of 40%óin real incomes for both men and women. The brunt of the income decline appears to have been shouldered by the young and the non-White. We argue that changes in respondent attributes are insufficient to explain this decline. For most groups, a (conservative) correction for selection into income recipiency explains some, but not all, of the income decline. For other groups, selection is a potential explanation for the income decline. Perhaps the most persuasive explanation of the evidence is substantial economic restructuring of the South African economy in which wages are not bid up to keep pace with price changes due to a differentially slack labor market.

Do remittances sent by overseas migrants serve as insurance for recipient households? This paper examines how remittances sent by overseas migrants respond to income shocks experienced by Philippine households. Because household income and remittances are jointly determined, we exploit rainfall shocks as instrumental variables for income changes. In households with overseas migrants, we find that exogenous changes in income lead to changes in remittances of the opposite sign, consistent with an insurance motivation for remittances. In such households, we cannot reject the null hypothesis of full insurance: on average, essentially all of exogenous declines in income are replaced by remittance inflows from overseas. By contrast, changes in household income have no effect on remittance receipts in households without overseas migrants. Remittance receipts may also be partly shared with others: in migrant households, net gifts to other households move in the same direction as remittance receipts in response to income shocks.

How well do countries cope with the aftermath of natural disasters? In particular, how well do international financial flows buffer economic losses from disasters? This paper focuses on hurricanes (one of the most common and destructive types of disasters), and examines the impact of hurricane damages on resource flows to affected countries. Due to the potential endogeneity of disaster damage, I exploit instrumental variables constructed from meteorological data on hurricanes. Instrumental variables estimates indicate that disaster damages lead to increases in national-level net inflows of migrantsí remittances, foreign lending, and foreign direct investment. These types of flows respond rapidly, within the first year after damages. Official development assistance (ODA) also responds positively to hurricane damage, but with a lag of roughly two years. On average, total inflows from these sources within the following four years amount to roughly four-fifths of estimated damages. The null hypothesis of full insurance of hurricane disaster damages cannot be rejected. By contrast, ordinary least squares estimates find essentially no response of international flows to disaster damages, highlighting the importance of an instrumental variables approach in this context.

Cross-listed shares may confound government efforts to control capital outflows by providing a legal means through which investors can transfer their wealth outside the country. We study the recent experience of investors in Argentina and Venezuela who while subject to capital controls, were able to purchase cross-listed shares using local currency, convert the shares into dollar-denominated shares, re-sell them in New York and deposit the dollar proceeds in U.S. bank accounts. We show that capital controls drive a wedge between the price of local shares and their corresponding cross-listed shares. This anomalous wedge provides a measure of the marketís implicit devaluation forecast and the value of capital control circumvention. We also find that the imposition of controls in Argentina led to changes in the underlying pricing structure of cross-listed shares in Buenos Aires and New York.

This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets ñ one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regimeís credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus ñeither a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales.

Millions of households in developing countries receive financial support from family members working overseas. How do the economic prospects of overseas migrants affect origin-household investmentsóin particular, in child human capital and household enterprises? This paper examines Philippine householdsí responses to overseas membersí economic shocks. Overseas Filipinos work in dozens of foreign countries, which experienced sudden (and heterogeneous) changes in exchange rates due to the 1997 Asian financial crisis. Appreciation of a migrantís currency against the Philippine peso leads to increases in household remittances received from overseas. The estimated elasticity of Philippine-peso remittances with respect to the Philippine/foreign exchange rate is 0.60. In addition, these positive income shocks lead to enhanced human capital accumulation and entrepreneurship in origin households. Favorable migrant shocks lead to greater child schooling, reduced child labor, and increased educational expenditure in origin households. More favorable exchange rate shocks also raise hours worked in selfemployment, and lead to greater entry into relatively capital-intensive enterprises by migrantsí origin households.

This paper emphasizes the key roles that services play domestically and internationally in terms of accounting for rising shares of domestic output and employment as well as cross-border trade and foreign direct investment that provide enhanced export opportunities and lower-cost imports. Services are commonly subject to a variety of regulatory policies, such that liberalization requires both the removal of explicit barriers combined with regulatory reform. There is substantial evidence indicating that services liberalization and regulatory reform may result in increased economic growth and greater efficiency in the use of labor and capital, increased product innovation, and increased consumer welfare.

The role of services is put in context by a review of selected economic data on the trade and macroeconomic structure and performance especially of the five Andean economies ñ Bolivia, Colombia, Ecuador, Peru, and Venezuela. The implications of regulatory reform and services liberalization are analyzed in some depth, after which there is a focus on methods of measurement of international services barriers and quantification of the economic significance of reducing or removing these barriers. The potential economic benefits of services liberalization are illustrated computationally. The paper concludes with a discussion of priorities for multilateral services negotiations.

This paper uses trade theory to examine the effects of trade liberalization on countries that do not participate in it. These include both countries that fail to participate in multilateral trade negotiations, and also countries that lie outside of preferential trading arrangements such as free trade areas. The analysis suggests that, while it is theoretically possible for excluded countries to gain, through improved terms of trade, from trade liberalization, several reasons suggest that they are more likely to lose.

We use the Michigan Model of World Production and Trade to assess the economic effects of the Free Trade Area of the Americas (FTAA) that is currently being negotiated among the 34 countries in the region. The model covers 18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates some aspects of trade with imperfect competition in the manufacturing and services sectors, including monopolistic competition, increasing returns, and product variety. The modeling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non-trade aspects of the FTAA are not taken into account due to data constraints. The computational results indicate that the FTAA would increase the economic welfare of the FTAA member countries by $118.8 billion, with the largest increases accruing to the United States, $67.6 billion, and to South America, $31.0 billion. The FTAA is trade diverting for most of the rest-of-world, with a welfare reduction of $9.3 billion. In comparison, if the FTAA countries were to adopt unilateral free trade, total FTAA member welfare would increase by $476.8 billion and global welfare by $812.7 billion. If multilateral free trade were adopted by all countries/regions in the global trading system, the welfare effects would be considerably larger, $751.2 billion for the FTAA members and $2.7 trillion globally.

We use the Michigan Model of World Production and Trade to assess the economic effects of the U.S. bilateral FTAs negotiated with Central America, Australia, and Morocco. The model covers 18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates monopolistic competition in the manufacturing and services sectors, including increasing returns and product variety. The modeling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non-trade aspects of the FTAs are not taken into account due to data constraints. The computational results indicate that the benefits of bilateral FTAs for the United States and partner countries are rather small in both absolute and relative terms, and that far greater benefits could be realized if the United States and its FTA partners adopted unilateral free trade and especially if multilateral free trade was adopted by all countries/regions in the global trading system.

This paper uses household-level data from Ethiopia to investigate the impact of food aid on the poor. We find that food aid in Ethiopia is "pro-poor." Our results indicate that (i) net buyers of wheat are poorer than net sellers of wheat, (ii) there are more buyers of wheat than sellers of wheat at all levels of income, (iii) the proportion of net sellers is increasing in living standards and (iv) net benefit ratios are higher for poorer households indicating that poorer households benefit proportionately more from a drop in the price of wheat. In light of this evidence, it appears that households at all levels of income benefit from food aid and that - somewhat surprisingly - the benefits go disproportionately to the poorest households.

Can governments successfully combat bureaucratic corruption by ìhiring integrityî from the private sector? This paper examines the impact of hiring private firms to collect information for government anti-corruption efforts. In the past two decades, a number of developing countries have hired private firms to conduct preshipment inspections of imports, generating data that governments can use to fight corruption in customs agencies. I find that countries implementing such inspection programs subsequently experience large increases in the growth rate of import duties, by 6 to 8 percentage points annually. By contrast, the growth rate of other tax revenues does not change appreciably. Additional evidence suggests that declines in customs corruption are behind the import duty improvements: the programs also lead to increases in imports (potentially reflecting lower bribe payments) and to declines in mis-reporting of goods classifications. Historically, this hired integrity appears to have been cost-effective: accumulated improvements in import duty collections in the fifth year of a typical inspection program were roughly 5 times accumulated costs.

In the absence of distortionary tax and spending policies, freer immigration and trade for a country would often be supported by similar groups thanks to similar impacts on labor income. But government policies that redistribute income may alter the distributional politics. In particular, immigrants may pay taxes and receive public services. Imports, obviously, can do neither of these. This suggests quite different political coalitions may organize around trade and immigration. In this paper we develop a framework for examining how pre-tax and post-tax cleavages may differ across globalization strategies and also fiscal jurisdictions. We then apply this framework to the case of individual immigration and trade preferences across U.S. states. We have two main findings. First, high exposure to immigrant fiscal pressures reduces support for freer immigration among natives, especially the more-skilled. Second, there is no public-finance variation in opinion over trade policy, consistent with the data that U.S. trade policy has negligible fiscal-policy impacts. Public-finance concerns appear to be crucial in shaping opinions towards alternative globalization strategies.

This paper takes a novel approach to trying to disentangle the impact of globalization on wages by focusing on how the return to speaking English, the international language of commerce, changed as South Africa re-integrated with the global economy after 1993. The paper finds that the return to speaking English increased overall and that within racial groups the return increased primarily for Whites but not for Blacks.

This paper is motivated by three observations about the link between international trade and international business cycle synchronization: (1) a large increase in trade in manufactures over the last 30 years, (2) a larger fraction of trade between core and periphery regions relative to core regions is in the form of production sharing, (3) crosscountry output correlations have increased between core and periphery regions relative to core regions. We examine to what extent these observations can be reconciled in a multi-country version of a standard model of international business cycles. Production sharing is captured in a simple way as trade in intermediate inputs that are complements in production. We find that the model is successful qualitatively in account for these observations. Quantitatively, we find that the direct effects from trade do not generate large divergence in output correlations across countries. We extend the model to allow for cost reduction spillovers from MNEs in the core country to their affiliates in the periphery. This mechanism increases the impact that product sharing has on output correlations between core and peripheral countries.

In this paper, we first summarize the framework that has been agreed upon as the basis for the WTO Doha Development Agenda (DDA) negotiations. We then discuss briefly the design and mission of the WTO and the economic effects of multilateral trade liberalization. Thereafter, we discuss the conditions for Indiaís realization of the maximum benefits from the DDA negotiations and the implications for broader Indian domestic policy reforms. We then set out our recommendations for Indiaís pro-active involvement and negotiating strategies in the DDA negotiations for multilateral trade liberalization in agricultural products, manufactures, and services, and for improvements in WTO rules governing trade and related issues. We conclude with a brief discussion of the policy agenda adopted by Indiaís newly elected coalition parties, the implications of the emphasis on social reform and equity for Indiaís negotiating strategies in the DDA negotiations, and a vision of the role that India might play in the global trading system and in world politics.

Increased enforcement can lead crime to be displaced to alternative lawbreaking methods. In theory, crime displacement should respond positively to the size of profits threatened by enforcement. If enforcement displaces crime towards lawbreaking methods with lower variable costs, the overall crime rate need not fall. This paper examines a customs reform in the Philippines that raised enforcement against a specific method of avoiding import duties. The reform constituted a quasi-experiment: the increased enforcement applied only to shipments from a subset of countries, so that corresponding shipments from all other countries serve as a comparison group. Increased enforcement reduced the targeted method of duty avoidance, but led to substantial displacement to an alternative duty-avoidance method (shipping via duty-exempt export processing zones), amounting to 2.7 percent of total imports from treatment countries. The hypothesis that the reform led to zero change in total duty avoidance cannot be rejected. Displacement was greater for products with higher tariff rates and import volumes, consistent with the existence of fixed costs of switching to alternative duty-avoidance methods.

Recent concern has attended the phenomenon of skilled-labor outsourcing, in which firms in the U.S. and other advanced countries have drawn upon the services of skilled workers in developing countries for activities that they used to do at home. Motivated by this and the fact that such outsourcing would be hard to explain without technological differences, this paper explores theoretically a simple story of outsourcing in which factor proportions and technology interact across activities performed within industries or firms. The model has a single sector in which a final output is produced from two activities that differ in their intensity of use of skilled and unskilled labor. In one activity, the developed world (North) has a technical advantage. In the other it does not, but a new regime makes it possible to outsource it to the developing world (South). The paper shows that this outsourcing, if the countries continue to diversify, causes the wage of unskilled labor in North to fall below that in South. However, if factor endowments differ enough to lead to specialization, then it becomes possible for both factors in North to gain.

518. Brown, Andrew G. and Robert M. Stern, "Global Market Integration and National Sovereignty," September 25, 2004; The World Economy, March 2006 (Vol. 29, No. 3). ABS PDF

In this paper, we first trace the evolution of the global trading system from the 19th century to the present-day GATT/WTO arrangements, calling attention to the key roles of reciprocity and non-discrimination, and we note how the system is now challenged by the new paradigm of global market integration. We then consider the recent plethora of free trade agreements (FTAs), including those between industrial and developing countries, and their uneasy relationship with a multilateral system based on non-discrimination.. Thereafter, we seek to identify the boundaries of the WTO and examine how the potential expansion of these boundaries may result in the over-extension and weakening of the effectiveness and influence of the WTO.

In this paper I argue that profit maximizing firms, even though they contribute to social welfare when they compete in the market, may not do so when they influence the political process. In particular, I suggest, through several examples from both the real world and from economic theory, that corporations have played a significant role in the formulation of the rules of the international trading system. They did this in the formation of the WTO, where they were responsible for the expansion to cover both intellectual property and services. And they do this in preferential trading arrangements such as the NAFTA, where they inserted the notorious Chapter 11 and specified rules of origin for automotive products. All of this is quite consistent with economic theory, including the literature on the political economy of trade policy. I also use a simple duopoly model to illustrate a domestic firmís interest in setting rules of origin. The corporate influence on rules need not be bad, but there is no reason why it should be good either, as these examples illustrate.

If trade costs matter for trade, and if distance matters for at least some trade costs, then location matters for trade. This may be especially important for Japan, given its distance from other developed countries and proximity to a number of developing countries. In this paper I explore the relationship between location and trade in a simple partial equilibrium model of a single homogeneous good that may be produced and traded by three countries located on a plane. Six equilibrium regimes arise in this model, depending on trade costs compared to differences in autarky prices. These range from complete autarky in which no country trades, through partial autarky in which only two of the three countries trade, to either of two integrated equilibria in which either two countries export to the third, or (a different) two countries import from the third. I first identify these regimes in terms of the parameter values, including trade costs, that are needed for their occurrence. I then map them on the plane where the three countries are located.

Results include the following: For a country whose autarky price lies between those of the other countries, whether it will export or import the good depends on its proximity to the other countries. It will export the good if it is close to the high-cost country, import it if it is close to the low-cost country, and not trade it at all if it is too far from both. The location of such a country is also important for the trade of the other countries. For example, the lowest cost country may not be able to trade at all if the intermediate-cost country, by virtue of its location, takes away the market of the high-cost country. Finally, although a fall in trade costs increases, up to a point, the geographic scope for a country to trade, beyond that point it cannot make trade possible for an intermediate-cost country that is too remote to trade.

I apply this model in a very stylized way to the position of Japan, noted above. It suggests that Japan, with factor endowments similar to other developed countries but located closer to many developing countries, should dominate trade with its developing-country neighbors.

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of U.S.-Japan trade policies. The menu of policies encompasses the various preferential U.S. and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers by the two countries, and global (multilateral) free trade. The U.S. preferential agreements include the FTAs approved by the U.S. Congress with Chile and Singapore in 2003, those signed with Central America, Australia, and Morocco and awaiting Congressional approval in 2004, and prospective FTAs with the Southern African Customs Union (SACU), Thailand, and the Free Trade Area of the Americas (FTAA). The Japanese preferential agreements include the bilateral FTA with Singapore signed in 2002 and prospective FTAs with Chile, Indonesia, Korea, Malaysia, Mexico, Philippines, and Thailand. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small in the United States and Japan, but vary across the individual sectors depending on the patterns of the bilateral liberalization. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. Data limitations precluded analysis of the welfare effects of the different FTA rules of origin and other discriminatory arrangements.

In comparison to the welfare gains from the U.S. and Japan bilateral FTAs, the gains from both unilateral trade liberalization by the United States, Japan, and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. and Japan FTAs are based on "hub" and "spoke" arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.

We use the Michigan Model of World Production and Trade to assess the economic effects of the U.S. FTA being negotiated with the Southern African Customs Union (SACU). The model covers 18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates monopolistic competition in the manufacturing and services sectors, including increasing returns and product variety. The modeling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non-trade aspects of the U.S.-SACU FTA are not taken into account due to data constraints. The computational results indicate that the benefits of the bilateral FTA for the United States and the SACU are rather small in both absolute and relative terms. Far greater benefits could be realized if the United States and the SACU adopted unilateral free trade and especially if multilateral free trade was adopted by all countries/regions in the global trading system.

Why would migrant workers in rich countries ever return to poorer countries of origin? In a model of migration and household investment, with borrowing constraints and minimum investment thresholds, return migration occurs for either target-earnings or life-cycle reasons. This paper exploits a unique quasi-experiment to distinguish between these potential explanations for return migration. I examine how the return decisions of Philippine migrants respond to major and unexpected exchange rate shocks (due to the 1997 Asian financial crisis). Overall, the evidence favors the life-cycle explanation: more favorable exchange rate shocks lead to fewer migrant returns. A 10% improvement in the exchange rate reduces the 12-month return rate by 1.4 percentage points. However, there is evidence that some migrants are motivated by target-earnings considerations: for households with intermediate levels of foreign earnings, more favorable exchange rate shocks have the least effect on return migration, but lead to increases in entrepreneurial income, real property purchases, and vehicle ownership. Overall, the findings are at odds with a model with relaxed constraints on borrowing for household investment.

The Doha Round of multilateral trade negotiations in the World Trade Organization (WTO) has been billed from the start as the ìDoha Development Agenda,î with the promise in the Doha Ministerial Declaration to ìplace [developing countriesí] needs and interests at the heart of the Work Programme adopted in this Declaration.î The reason for this emphasis was in part the perception that previous rounds had neglected the interests of developing countries or, in the case of the Uruguay Round, had brought developing countries on board with promises that were misleading or not likely to be kept. The collapse of the September 2003 Cancun Ministerial Meeting reinforced the need to address the interests of developing countries, and recent agreements reached at the WTO in Geneva suggest that the Doha negotiations may now be on track. What is now important to emphasize, as the negotiations get under way, is to follow through with actions that are designed to fulfill the special needs of developing countries and to address their problems in implementing these actions.

In our paper we lay out what we believe to be the most important actions that could be taken in the Doha Round for the benefit of developing countries, including India. We base these suggestions primarily on the understanding of the economics of international trade that has been developed over the last two centuries and is widely taught in the universities of the world, and also on the research in recent years dealing with specific aspects of trade negotiations in general and of the Doha Round in particular. With regard to the interests of developing countries generally, we provide recommendations for WTO decision-making, agricultural policies, market access, intellectual property, services, the Singapore issues, technical assistance, and special treatment. Each of these recommendations is accompanied by brief arguments in support. The paper then goes on to review several more specific policy and negotiating recommendations focused on India.

It is essential that India and other developing countries participate actively and constructively in the Doha negotiations to further their own interests. They cannot rely on the best-intentioned developed countries to do this for them, since the developed countries will inevitably find themselves making compromises in favor of their own interests and in response to powerful pressures from their domestic constituents. Many developing countries are at a disadvantage in the negotiating process, due to their resource limitations, and in many cases due also to their inexperience in negotiations. Offsetting these disadvantages, however, are their large numbers and the compelling case that can be made for meeting their needs. What the developing countries need is leadership and cooperation, which India is well suited to provide. What is also needed is a willingness to listen and be flexible on the part of their developed country counterparts.

When firms from developed markets acquire firms in emerging markets, marketcapitalization- weighted monthly joint returns show a statistically significant increase of 1.8%. Panel data estimations suggest that the value gains from cross-border M&A transactions stem from the transfer of majority control from emerging-market targets to developed market acquirersójoint returns range from 5.8% to 7.8% when majority control is acquired. Announcement returns for acquirer and target firms estimate the distribution of gains and show a statistically significant increase of 2.4% and 6.9%, respectively. The evidence suggests that the stock market anticipates significant value creation from cross-border transactions that involve emerging-market targets leading to substantial gains for shareholders of both acquirer and target firms.

This paper utilizes micro-panel data for firms located in Japan and examines differences in static and dynamic corporate performance between foreign-owned and domestically-owned firms in the 1990s. We find that foreign-owned firms not only reflect superior static characteristics but also achieve faster growth. In addition, foreign investors appear to invest in firms that may not be immediately profitable now but those that are potentially the most profitable in the future. The results imply that foreign investors bring useful firm-specific assets into the Japanese market, which may work as an effective catalyst for necessary structural reform.

This paper evaluates how much of the economics profession has evaluated the evidence on the relationship between international trade and economic growth. The paper highlights the basic approaches to the trade and growth question that the literature has adopted. The case is made that more attention needs to be paid to the mechanisms by which trade impacts growth and that future research should move away from a focus on outcomes and look instead at these mechanisms.

This paper quantifies the macroeconomic effects of capital income tax competition in the European Union using a two-country neoclassical dynamic general equilibrium model. This model incorporates three key externalities of tax competition: the relative price externality, the wealth distribution externality and the fiscal solvency externality. We consider tax strategies limited to the class of time-invariant taxes and allow governments to issue debt to smooth the tax burden. The analysis starts from a pre-tax-competition equilibrium calibrated to represent the United Kingdom and Continental Europe (France, Germany and Italy) using data from the early 1980s, just before the European integration of financial markets. When labor taxes adjust to maintain fiscal solvency, competition does not trigger a ìrace to the bottomî in capital taxes. The UK makes a large welfare gain and cuts its capital tax. Continental Europe increases both labor and capital taxes and suffers a large welfare loss. These results are consistent with evidence showing that over the last two decades the UK lowered its capital tax, while Continental Europe increased both capital and labor taxes. When consumption taxes adjust to maintain fiscal solvency, there is a ìrace to the bottomî in capital taxes but both the UK and Continental Europe are better off than in the pre-tax-competition equilibrium. The gains from coordination in all of these experiments are trivial.

Theory predicts that strategically-determined tax rates induce negative externalities across countries in relative prices, the wealth distribution and tax revenue. This paper studies the interaction of these externalities in a dynamic, general equilibrium environment and its effects on quantitative outcomes of tax competition in one-shot games over capital income taxes between two governments that set time-invariant taxes and issue debt. Strategic payoffs correspond to welfare gains net of the cost of transitional dynamics in a standard neoclassical two-country model with exogenous balanced growth. The model is calibrated to European data for the early 1980s starting from a benchmark with symmetric countries. When countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency, the Nash equilibrium replicates calibrated taxes, suggesting that European taxes can be the outcome of Nash competition. When consumption taxes are adjusted to maintain fiscal solvency, competition triggers a ìrace to the bottomî in capital taxes but this outcome is welfare-improving relative to calibrated taxes. Sensitivity analysis shows that competition can produce a ìrace to the topî in capital taxes and that the United Kingdom can benefit from tax competition with Continental Europe. Surprisingly, the gains from coordination in all of these experiments are small.

This paper examines dollar interventions by the G3 since 1989, and the reasons that trader reactions to these interventions might differ over time and across central banks. Market microstructure theory provides a framework for understanding the process by which sterilized central bank interventions are observed and interpreted by traders, and how this process in turn, might influence exchange rates. Using intra-daily and daily exchange-rate and intervention data, the paper analyzes the influence of interventions on exchange-rate volatility, finding evidence of both within day and daily impact effects, but little evidence that interventions influence longer term volatility.

The procompetitive effects of trade policies are analyzed in a foreign duopoly model of vertical product differentiation. A uniform tariff policy complying with the Most Favored Nation (MFN) clause is welfare superior to free trade because of a pure rent-extracting effect. A nonuniform tariff policy yields an even higher level of social welfare because of procompetitive effects. The optimal policy is sensitive to firmsí cost asymmetries: if these are high, imports of low quality are subsidized and imports of high quality face a tariff; otherwise, both imports face a tariff. Regional Trade Agreements (RTAs) are examples of such nonuniform tariff policies. They yield higher welfare than free trade because they are procompetitive; moreover, a RTA with a low-quality producing country yields larger gains than a RTA with a high-quality producing country because the former enables the importer to extract foreign rents.

Growing shares of international trade flows consist of intermediate and unfinished goods shipped from one country to another to combine manufacturing or services activities at home with those performed abroad. This configuration of the productive structure has been named ìinternationally fragmentedî. The purpose of our work is to analyze the labor market effects of international fragmentation of production in Europe, looking at how it affects relative labor demand. Models of trade due to fragmentation of production suggest that when international fragmentation takes place we can expect to observe a change in the relative factor intensities of the affected industries. We use international trade data specifically related to international fragmentation of production to test if the shift in intensity of skilled and unskilled labor employed in Italy and Germany during the 1990s it related to the fragmentation activity.

This paper develops a rational expectations model of physical arbitrage incorporating storage and trade to explain how markets are integrated when trade is costly and non-instantaneous. The paper finds a striking empirical verification of the model from an analysis of the late nineteenth century corn markets in Chicago and New York. The dataset is particularly high quality and includes weekly data on spot and future prices, storage quantities and the cost of three modes of transport for a fourteen year period. In keeping with the model, it is shown that the New York spot price frequently exceeded both the New York futures price and the Chicago spot price plus the transport cost by several percent when inventories in New York were low, but not when they were high. The paper also derives a supply of storage curve for New York corn and argues it can be explained as the outcome of rational arbitrage when transport is slow.

This paper examines the role of comparative advantage in a Ricardian trade model with intermediate inputs. The first issue is how to define comparative advantage when there are intermediate inputs. Several definitions are suggested, differing in whether they are based on the total costs of producing goods, on the one hand, or on the labor requirements per dollar of value added, on the other; and differing also ñ since both approaches require prices of intermediate inputs ñ in the choice of prices for making these comparisons. Standard ìpredictionsî of trade patterns in terms of comparative advantage are easily derived, but using the value-added definition and actual prices that prevail with trade. These have the usual implications for patterns of specialization based on rankings, or ìchains,î of comparative advantage. However, because these prices are not given and may depend on barriers to trade, these comparisons are less informative than in Ricardian models with only final goods. In fact, trade patterns here can be so sensitive to trade costs that any such comparison predicting the trade in particular goods fails to be robust. In spite of this, the gains from trade are unambiguous in these Ricardian models, with imported inputs actually providing an additional source of gain from trade. Also, a weaker statement of the Law of Comparative Advantage, using only a correlation or average relationship between relative autarky prices and trade, is also valid under weaker assumptions than in more general models.

When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a countryís costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the Law of Comparative Advantage, first in a Ricardian model with trade costs. It then extends a result from Deardorff (1980) and Dixit and Norman (1980) to include trade costs explicitly in a more general framework. It uses this result to derive two correlations that relate trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, it examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a countryís costs of both production and trade relative to an index of those costs for other countries.

This policy brief takes the position that international labor standards should not be incorporated into the WTO and other trade agreements as we argue that this will not achieve either of the two professed goals: a) improving the wages and working conditions of workers in poor countries and b) keeping more jobs in the industrialized countries. In fact, empirical evidence shows that such mandates can reduce the number of workers with better working conditions and increase the number in poorer conditions, hence creating further inequality. The literature also shows that low labor standards do not provide developing countries with an unfair advantage in their export trade nor do they drive FDI. We recommend alternative policies be deployed through existing institutions. For the poor countries, sustainable improvement of the wages and working conditions of workers can only be achieved through solid economic and social development policies, deployed with the assistance of international organizations (regional banks, NGOs, etc). For the industrialized countries, we recommend that more effort be focused on preparing workers to be able to adapt to the evolving global economy. The process of economic change is complex and cannot be managed by mandates. The alternative policies we propose will be far more effective in making workers and the economies better off.

This is a position paper dealing with the major issues of the Doha Round negotiations that are of importance for developing countries. It was prepared for circulation prior to the Cancun Ministerial Meeting of the WTO. It provides recommendations for WTO decision making, agricultural policies, market access, intellectual property, services, the Singapore issues, technical assistance, and special treatment. These are accompanied by brief arguments in support of these recommendations.

This paper provides descriptive data on the interactions of the economy of the State of Michigan with the rest of the world outside the United States. Most of the focus is on international trade and investment, with specific attention to Michigan's exports and the foreign ownership of establishments in Michigan. For both of these, data are presented on the size of these international transactions by value and by employment, comparison of these with other states, their industry composition, and their foreign-country composition. It is noted that Michigan is one of the largest exporting states in the nation, with the largest share of these exports being in the transportation equipment industry, and with most of these exports destined for Canada and Mexico. Foreign ownership is also important in Michigan, although not as important as trade.

There is a wide disparity of views on issues of international labor standards. Labor and social activists are concerned about the increased imports from countries in which labor standards are ostensibly not enforced at a sufficiently high level. They fear that these imports will be detrimental to wages and employment conditions in the industrialized importing countries and that workers in the developing countries will be exploited, their wages suppressed, and that they will be subjected to abusive work conditions. This paper explores these different views and the available options for addressing the issues involved. The paper begins with the definition and scope of labor standards and then turns to theoretical aspects of the economic effects of labor standards and a summarizes the empirical evidence on the effects on wages, trade, and foreign direct investment, and the role of interest groups. Global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards are discussed and implications for policy presented.

In this paper we discuss the various aspects of the Doha Round of Multilateral Trade Negotiations in the WTO that offer potential benefits for developing countries. We then use the Michigan Model of World Production and Trade to simulate the economic effects on the major trading countries/regions of the reductions in tariffs, subsidies in agriculture, and barriers in services that may be negotiated in the Doha Round, as well as a variety of regional free trade agreements (FTAs). We estimate that an assumed reduction of post-Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 percent in the Doha Round would increase world welfare by $686.4 billion, with significant gains for all industrialized and developing countries/regions.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare, but by much less than the Doha multilateral trade round. There would also be trade diversion and detrimental welfare effects on some nonmember countries for the FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

This paper uses a Gravity Model to analyze the border effect in the Japanese market, which indicates how biased interregional trade is compared with international trade. The results suggest that the border effect in Japan is much lower than in the United States and Canada, and has declined year by year between 1960 and 1990. Possible reasons for the decline include the reduction of tariff rates and non-tariff barriers, the surge of foreign direct investment, and the appreciation of the yen.

Despite considerable theoretical work predicting that product quality plays an important role in determining the direction of international trade, there is no empirical evidence on the existence and magnitude of such a quality e.ect on trade. In this paper, I provide a framework to estimate the impact of cross-country di.erences in product quality on bilateral trade flows. The model allows countries to di.er both in the quality of goods they produce and in their aggregate demand for quality. It also takes into account other determinants of international trade, such as di.erences in factor proportions. I estimate the model using cross-sectional data on bilateral trade flows at the sectoral level. The empirical results confirm the theoretical prediction: rich countries import relatively more from countries that produce high-quality goods. Even though traditional determinants of comparative advantage are still the main driving force of trade, quality di.erences between countries have a significant e.ect on the pattern of international trade flows.

Critics of globalization object to many things, some of which can be easily understood within standard economic models, but others of which seem to reflect a view of the world that economists generally do not share. This paper attempts to identify several alternative frameworks for analysis within which some of their criticisms may be understood, with the ultimate aim of extracting testable implications that differ from standard models. Three such alternative models are suggested, all of which focus mainly on the behavior of owners and managers of corporate capital: an anti-labor model, in which capitalists are willing to sacrifice some of their own profits for the chance to make labor worse off; a labor-monopsony model in which capitalists cooperate globally to increase profits by depressing wages; and an international political economy model in which capitalists use their resources to influence the political process for more than just obtaining import protection. This third framework, which is not spelled out in any detail here, has capitalists seeking policies such as export subsidies and other means of promoting market access, and it also has them influencing the international negotiations that set the rules of international agreements and organizations, such as the NAFTA and WTO. Examples of the latter sort of influence are discussed.

We provide an econometric analysis of whether or not the tariff preferences extended to Canada and Mexico under NAFTA may have resulted in trade diversion. A review of previous studies, both descriptive and econometric, suggests that trade diversion has occurred especially as evidenced by Mexico's increased shares of U.S. imports apparently at the expense of several Asian countries. We use a conceptual framework based on a partial-equilibrium model of differentiated product industries under monopolistic competition for many countries. The model is implemented empirically using a fixed-effect panel analysis of U.S. imports at the Harmonized System (HS) 2-digit level for the period, 1992-98. Of the 70 sets of regressions that were run, the coefficients of the tariff rates were statistically significant in 15 cases. The strongest evidence of trade diversion was found mainly for U.S. imports of textile and apparel products. We also estimated regressions for selected commodities at the HS 4-digit level. The results suggest trade diversion for textiles, apparel, and some footwear products but not for trade in motor cars and vehicles and television receivers, which may have been more influenced by changes in foreign direct investment and outsourcing rather than tariff preferences.

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of the Doha Round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 percent in the Doha Round would increase world welfare by $686.4 billion, with gains of $164.0 billion for the United States, $132.6 billion for Japan, and significant gains for all other industrialized and developing countries/regions. If there were global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would increase by $2.1 trillion, with gains of $497.0 billion (5.5 percent of GNP) for the United States and $401.9 billion (6.2 percent of GNP) for Japan.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than the Doha multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile, and Korea and the United States with Chile, Singapore, and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

We have used the Michigan Model of World Production and Trade to simulate the economic effects of the Uruguay Round of multilateral trade negotiations completed in 1993-94 on the major industrialized and developing countries/regions. We estimate that the Uruguay Round negotiations increased global economic welfare by $73.0 billion. The developed countries overall have an estimated welfare gain of $53.8 billion, and the developing countries an estimated welfare increase of $19.2 billion.

We have also simulated the effects of assumed 33 percent reductions in trade barriers in the ongoing Doha Development Round. There is an estimated increase in global welfare of $574.0 billion. There is a global welfare decline of $3.1 billion from agricultural liberalization due primarily to the assumed reductions in export subsidies. There are global welfare gains of $163.4 billion from reductions in manufactures tariffs and $413.7 billion from reductions in services barriers. All of the countries/regions covered in the Michigan Model show overall welfare increases, with the largest absolute gains going to the developed countries.

The Heckscher-Ohlin theory links specialization of production to relative factor endowments. Endowments are the result of accumulation in response to economic in-centives. Taking this into account allows us to reconcile wildly di§erent predictions in the empirical literature about the e§ect of capital accumulation on manufacturing output. We estimate the e§ect of factor proportions on specialization in a cross-section of OECD countries. We show that using the estimation results alone, we cannot dis-tinguish between specialization driven by factor proportions, and specialization that is correlated with factor proportions for other reasons. But our results are consistent with evidence on sectoral factor intensities, which supports the H-O theory. Moreover, our model does a good job of predicting the substantial reallocation that takes place within manufacturing as countries grow. It explains 2/3 of the observed di§erence in the pattern of specialization between the poorest and richest OECD countries.

Almost from its inception as the European Economic Community, the European Union has excited the hope if not the expectation that it would generate dynamic gains from trade, including perhaps a permanent increase in the rates of growth of participating countries. This paper examines the empirical evidence relating to this issue and then interprets the economic performance of the EU countries in terms of a simple theoretical model of economic integration with increasing returns to scale. The paper concludes that evidence for increased long-run growth rates of the EU countries is weak, and that what may have happened instead is that countries have benefited asymmetrically from the formation and the later expansion of the EU. Benefits of economic integration appear to accrue - in the form of temporarily higher growth rates leading to higher levels of per capita income - first to large countries and then to some smaller countries that entered the arrangement relatively early.

We present in this paper a description and discussion of the state of scholarly debate on the supply and demand-side determinants of child labor. We first review the theoretical literature and some incidental empirical evidence concerning household decision-making and its implications for work and school choices for children. We then turn to a discussion of the empirical evidence on these and related issues based on survey research of household decision-making. The demand side of child labor is broached next, followed by a more thorough treatment of the rise and fall of child labor during the 19th century. We turn finally to specific issues thought to be important in affecting both the supply and demand for children: the conflicting effects that trade openness has on child labor; the impact of compulsory education laws; and the value of an education and the determinants of education quality.

484. Gary R. Saxonhouse and Robert M. Stern, Japan's Lost Decade: Origins, Consequences, and Prospects For Recovery - Introduction, August 22, 2002. ABS PDF

483. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, "The Effects of Multinational Production on Wages and Working Conditions in Developing Countries" August 30, 2002; in Robert E. Baldwin and L. Alan Winters, eds., Challenges to Globalization: Analyzing the Economics, National Bureau of Economic Research, Chicago: University of Chicago Press, 2004, pp. 279-326. ABS PDF

This paper is designed to assess the empirical evidence regarding the effects of multinational production on wages and working conditions in developing countries. It is motivated by the controversies that have emerged, especially in the past decade or so, concerning whether or not multinational firms in developing countries are exploiting their workers by paying low wages and subjecting them to coercive, abusive, unhealthy, and unsafe conditions in the workplace. We begin by addressing the efforts and programs of social activist groups and universities and colleges involved in the "Anti-Sweatshop" Campaign in the United States, the social accountability of multinational firms, and the role of such international insti-tutions as the International Labor Organization and World Trade Organization in dealing with labor standards and trade. We then consider the conceptual aspects of the effects of foreign direct investment on wages in host countries and the effects of outsourcing, subcontracting, and other forms of fragmenta-tion by multinational firms. We note in particular that available theories yield ambiguous predictions for the effects of multinational production on wages, leaving the effects to be examined empirically. We therefore, in the final section of the paper, review the empirical evidence on multinational firm wages in developing countries, and the relationship between foreign direct investment and labor rights. This evi-dence indicates that multinational firms routinely pay higher wages and provide better working conditions than their local counterparts, and they are typically not attracted preferentially to countries with weak labor standards.

Analyzing the distributional impacts of economic crises is important and, unfortunately, an ever more pressing need. If policymakers are to intervene to help those most adversely impacted, then policymakers need to identify those who have been most harmed and the magnitude of that harm. Furthermore, policy responses to economic crises typically must be timely. In this paper, we develop a simple methodology to fill the order and weíve applied our methodology to analyze the impact of the Indonesian economic crisis on household welfare there. Using only pre-crisis household information, we estimate the compensating variation for Indonesian households following the 1997 Asian currency crisis and then explore the results with flexible non-parametric methods. We find that virtually every household was severely impacted, although it was the urban poor that fared the worst. The ability of poor rural households to produce food mitigated the worst consequences of the high inflation. The distributional consequences are the same whether we allow households to substitute towards relatively cheaper goods or not. However the geographic location of the household mattered even within urban or rural areas and household income categories. Additionally, households with young children may have suffered disproportionately adverse effects.

We test for home-market effects using a difference-in-difference gravity specification. The home-market effect is the tendency for large countries to be net exporters of goods with high transport costs and strong scale economies. It is predicted by models of trade based on increasing returns to scale but not by models of trade based on comparative advantage. In our estimation approach, we select pairs of exporting countries that belong to a common preferential trade area and examine their exports of goods with high transport costs and strong scale economies relative to their exports of goods with low transport costs and weak scale economies. We find that home-market effects exist and that the nature of these effects depends on industry transport costs. For industries with very high transport costs, it is national market size that determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this case, national market size plus market size in nearby countries determine national exports.

Russia's application for accession to the WTO is currently in its final phases and may be completed by the end of 2003. In this context, this paper provides some background information on Russia's recent policy and structural reforms, the composition and geographic distribution of trade, tariff rates by commodity groups, and other aspects of trade and domestic policies at issue in the accession process. The accession proce-dure and the current status of the accession process are then discussed. Using a computable general equilibrium (CGE) modeling analysis of China's WTO accession as a prototype, the potential use of CGE model-ing of Russian accession is considered as well as Russia's participation in the Doha Development Round and preferential trading arrangements. It is concluded that Russia may realize significant benefits from WTO accession and from the multilateral trade liberalization to be effected in the Doha Round.

This paper identifies and measures new goods in the U.S. manufacturing sector in the late 1970s and 1980s, and finds that: (i) The average skilled-labor intensity of new goods exceeds that of old goods by over 40%; (ii) even within 4-digit industries, new goods are slightly more skilled-labor intensive than old goods (by about 4%); (iii) new goods can account for about 30% of the increase in the relative demand for skilled labor. Therefore, new goods help explain the rising skill premium in the U.S. Furthermore, new goods provide a direct measure of technological changes so that this paper provides new evidence that technology has shifted demand in favor of skilled labor and finds that a sizeable "between" component of the rise in the relative demand for skilled labor is due to technology.

This paper examines the effects of new goods on the relative wages of skilled-labor and the pattern of trade in a two-cone Heckscher-Ohlin model and shows that: (i) new goods can be a valid theoretical explanation for the rising skill premium in the U.S. (ii) the outcome depends on both domestic and international factor market effects of the new goods, and the interplay between these two effects gives rise to surprising results; (iii) new goods that are "friendly" to the abundant (scarce) factors move the relative factor prices in the direction of convergence (divergence). The setup is general in the goods dimension so that the introduction of new goods is completely unrestricted, and the results apply to any one or any combination of the relative demand shocks for skilled labor. The results also apply when non-tradable goods are present.

This paper addresses the debate over whether labor standards ought to be linked to trade policy, specifically by being included in the World Trade Organization and becoming subject to trade sanctions. We first try to put the debate into context by reviewing the issues and the events that have led to the current situation. We next turn to the arguments in favor of putting labor standards into the WTO, then address the arguments against doing so. Finally we offer our own advice to developing countries as to the position that they should take in this debate, and how more broadly they should deal with this and other issues in multilateral trade negotiations.

Previous theoretical contributions on endogenous tariff formation have focused on trade mod-els with homogeneous goods and constant returns to scale. This paper investigates the political equilibrium of trade policy when economic structure is instead characterized by differentiated products and increasing returns to scale and there exists intra-industry trade. The result shows that endogenous tariffs are positive for all industries with non-negligible shares of world pro-duction. However, the level of protection is less than the optimal tariff that would otherwise be imposed by a benevolent government in an unorganized industry, and higher in an organized industry. The protection provided to all unorganized (organized) industries increases (falls) with the relative weight the government attaches to aggregate welfare vis-` a-vis campaign contribu-tions and falls with the fraction of the population that belongs to a lobby group. The model also indicates that the endogenous tariff level in an organized industry might be explosive. The higher is the fraction of the population represented by a lobby and the higher is the weight on aggregate welfare in the governmentís objective function, the smaller is the possibility for such an explosive tariff.

This paper attempts to study the usage of the GATT/WTO dispute settlement mechanism and to explain its patterns across different regimes and decades, using a unified theoretical model. This study first explores the role of the degree of legal controversy over a panel ruling in determining countries' incentives to block/appeal a panel report under the GATT/WTO regime. The model is able to explain the surge in blocking incidence during the 1980s over the preceding GATT years and the immense frequency at which the new appellate procedure under the WTO is invoked. Furthermore, a two-sided asymmetric information framework is used to study the effects of political power on countries' incentives to use, and interactions in using, the GATT/WTO dispute settlement mechanism. It is shown that the magnitude of the political cost relative to the potential benefit that the complainant stands to gain when using this mechanism determines the pattern of filing activity and the frequency of various procedural outcomes. This result, when confronted with the statistics on disputes in different decades of the GATT regime, provides us an indicator of how well the dispute procedure has worked during various decades, in terms of how much this procedure has been subject to potential power politics.

There is a growing theoretical and empirical literature concerning the causes and consequences of child labor. The objective of this paper is to evaluate the policy initiatives targeted on child labor in light of the newly emerging theoretical argumentation and empirical evidence. We focus in particular on programs to address child-labor practices, and we attempt to evaluate these programs, given the empirical evidence concerning the primary determinants of when and why children work. Throughout, we find it instructive to evaluate the policies that have been adopted with the intent of reducing overall child labor in terms of the impact they are likely have on the welfare of children.

In this paper I lay out the case, as I see it, for tariffication of services. I argue that the prospects for achieving significant liberalization of the international provision of services will be greatly improved if something like this proposal is followed. By amending the GATS to permit countries to tax foreign providers of services in a manner that is roughly analogous to tariffs on imported goods, countries will be encouraged to bring most categories of services under GATS discipline. Of course, that discipline will be much weakened by doing this, since the taxes may be set so high that little if any trade will occur. However, once this is done, it will become possible for countries to negotiate reductions in these service tariffs in exactly the same way that they have done for goods over the last fifty years. Considering the amount of time it has taken to achieve significant liberalization of trade in goods, we should not expect to achieve it in services any time soon. However, by starting the process with tariffication, we place services upon the same well-traveled road that has been followed before, and we can be more confident that the future negotiating process will take us where we want to go, even if we cannot know how soon we will get there.

At the time the Uruguay Round Agreements were passed by Congress, particular concern was expressed about their implications for U.S. national sovereignty. Concern was sufficiently great that the Clinton Administration committed its support to the creation of a commission that would review each adverse decision against the United States by the WTO. The commission was designed such that the outcome of its review process might trigger a serious Congressional consideration of U.S. withdrawal from the WTO. While the so-called Dole Commission was never created, the Congressional controversy surrounding the ratification of the Uruguay Round Agreement has led to particular concern with USTR performance at the WTO. Curiously, enhanced Congressional concern has not gone hand in hand with more resources for USTR. Over the 1990s, USTR has rarely asked for, and, until 2000 has not received additional resources for its work.

The analysis here shows that if the USTR is concerned not only about the number of cases it wins but also about its rate of success, having more resources may have an ambiguous impact on the USTR's rate of success. Depending on how relatively promising are the additional cases that may yet be brought by USTR to the WTO, and how usefully additional resources may be applied to existing cases, it is possible that more resources can lower USTR's success rate. This is true, though for different reasons, when explicit allowance is made for the response by the other party to the dispute to a USTR commitment of additional resources. More resources cannot explain the increased use that the USTR has made since the WTO was established, because until recently USTR has received no additional resources. Rather, a more predictable DSM may have encouraged more rather than fewer cases to be brought to the WTO in preference to further efforts at extra-WTO bilateral settlements.

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the NAFTA member countries and other major trading countries/regions of a prospective new round of WTO multilateral trade negotiations, the variety of free trade agreements (FTAs) that the NAFTA members have negotiated or are considering, and the adoption of a system of common external tariffs by the NAFTA members. We estimate that an assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $13.5 billion for Canada, $6.5 billion for Mexico, and significant gains for all other industrialized and developing countries. If there were global free trade, world welfare would increase three-fold to $1.9 trillion and the country/region gains would be similarly larger.

Regional FTAs such as an expansion of NAFTA to include Chile and a Western Hemisphere FTA would increase global and member-country welfare but much less than a new WTO multilateral trade round would. Separate bilateral FTAs negotiated or being considered by Canada, Mexico, and the United States would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. If the NAFTA members were to adopt a system of common external tariffs to replace their existing differentiated external tariffs, a system based on trade weights would have less distortive effects on trade and welfare than a system based on simple averages or production-weighted tariffs.

Given the fact that international trade in services has been increasing significantly in recent decades and now is equal to about 20 percent of global merchandise trade, it is obviously important to consider the barriers that affect services trade and issues of measurement of these barriers. There has been similarly an increasing amount of foreign direct investment (FDI) in both goods and services sectors in and between advanced and developing countries. FDI is subject to a variety of barriers as well and thus merits attention in its own right. This paper reviews the literature on these barriers and presents data from several sources on what the sizes of the barriers to trade and investment in services may be.

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of a prospective new round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $123.7 billion for Japan, and significant gains for all other industrialized and developing countries/regions. If there were global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would increase by $1.9 trillion, with gains of $537.2 billion (5.9 percent of GNP) for the United States and $374.8 billion (5.8 percent of GNP) for Japan.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than a new WTO multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile, and Korea and the United States with Chile, Singapore, and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of: the Uruguay Round of multilateral trade negotiations completed in 1993-94; a prospective new round of WTO multilateral trade negotiations; and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that the Uruguay Round negotiations increased global economic welfare by $75.1 billion annually, with gains of $12.9 billion for the United States and $15.6 billion for Japan. An assumed reduction of all post-Uruguay Round tariffs on agricultural and industrial products and of all services barriers by 33 percent in a new WTO trade round is estimated to increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States and $123.7 billion for Japan. If there were global free trade with all post-Uruguay Round trade barriers completely removed, then world welfare would increase by $1.9 trillion, with gains of $537.2 billion (5.9 percent of GNP) for the United States and $374.8 billion (5.8 percent of GNP) for Japan.

Elimination of APEC-member country bilateral post-Uruguay Round tariffs on agricultural and industrial products and services barriers is estimated to increase world welfare by $764.4 billion, with gains of $294.7 billion for the United States and $283.1 billion for Japan and losses of $7.0 billion for the European Union/EFTA and $1.0 billion for South Asia. Separate bilateral FTAs involving Japan with Singapore, Mexico, South Korea, and Chile and an ASEAN Plus-3 FTA involving Japan, China/Hong Kong, and South Korea would have positive, though generally small, welfare effects, but potentially disruptive sectoral employment shifts in some member countries. Depending on the agreement, there may be detrimental welfare effects on some nonmembers. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

This paper provides a set of forecasts of United States international trade in services, both at the aggregate level and for four subcategories. These sectors are: travel, which is mostly tourist expenditures; passenger fares, which is mostly passenger air transportation; transportation, other than passenger transportation; and other private services, including education, financial services, insurance, telecommunications, and business, professional and technical services. A forecasting model is constructed and estimated, based on conventional economic forces of supply and demand, dependent on cost variables and income variables as well as relative prices. For forecasting purposes, these variables are taken from the Michigan Quarterly Econometric Model of the U.S. Economy, a macroeconomic forecasting model with forecasts provided regularly by the University of Michigan Research Seminar in Quantitative Economics.

The equations of the services trade model are reported and discussed, and the performance of the estimated equations is evaluated. The quarterly forecast paths are provided for both aggregate and sectoral services trade, including exports and imports, through the end of 2001. Results indicate that imports will continue to rise over the forecast period, while exports, after remaining nearly stationary for several quarters in some sectors in 1999, will resume their rise thereafter. This forecasting work is to be continued, and it is suggested, in addition, that future research would be useful to explore the determinants of the production and sales of foreign services affiliates of U.S. parent companies.

Are firms that engage in trade more vulnerable to exchange rate risk? In this paper we examine the relationship between exchange rate movements, firm value and trade. Our empirical work tests whether exchange rate exposure can be explained by variables that proxy for the level of international activity, firm size, industry affiliation and country affiliation. The results suggest that while a significant fraction of firms in these countries is exposed to exchange rate movements, there is little evidence of a systematic link between exposure and trade. Indeed, what little evidence there is of a link suggests that firms that engage in greater trade exhibit lower degrees of exposure. This may reflect the fact that those firms most engaged in trade are also the most aware of exchange rate risk, and therefore are the most likely to hedge their exposure.

Finance theory suggests that changes in exchange rates should have little influence on asset prices in a world with integrated capital markets. Indeed, the existing literature examining the relationship between international stock prices and exchange rates finds little evidence of systematic exchange rate exposure. We argue in this paper that the absence of evidence may be due to restrictions imposed on the sample of data and the empirical specifications used in previous studies. We study a broad sample of firms in eight countries over an eighteen-year period. We find that firm-level and industry-level share values are significantly influenced by exchange rates. Further, we do not find evidence that exchange rate exposure is falling (or becoming less statistically significant) over time. Our results suggest that significant firm, industry and country-specific differences remain even as financial markets become more and more "integrated".

We propose a stylized exchange rate model based on diversity and weight of opinion. Our model departs from standard assumptions in that we allow for heterogeneous agents. We show that such a model can explain both the observed volatility and the persistence of real and nominal exchange rate movements and thus in some measure resolves Rogoffís (1996) purchasing power parity puzzle. Our empirical analysis reconciles the well-known difficulties in beating the random walk forecast model with the statistical evidence of nonlinear mean reversion in deviations from fundamentals. We find strong evidence of long-horizon predictability both in theory and in practice. We also explain why it is difficult to exploit this predictability in out-of-sample forecasts. Our results not only lend support to economistsí beliefs that the exchange rate is inherently predictable, but they also help us to understand the reluctance of applied forecasters to abandon chartists methods in favor of models based on economic fundamentals.

This paper examines the special role that trade liberalization in service industries can play in stimulating not only trade in services itself, but also in stimulating trade in goods. International trade in goods requires inputs from several services industries - what I call trade services, such as transportation, insurance, and finance - in order to complete and facilitate international transactions. Restriction on the ability of national service providers to provide these services across borders and within foreign countries create additional costs and barriers to international trade above those that would arise in otherwise comparable intra-national exchange. As a result, trade liberalization in services can yield benefits, by facilitating trade in goods, that are larger than one might expect from analysis of the services trade alone. This paper explores this idea using simple theoretical models to specify the relationships between services trade and goods trade.

The paper also, to make the point more forcefully, notes the role of services trade in a model of international industrial fragmentation, where production processes can be separated across locations but at some cost in terms of additional service inputs. The incentives for such fragmentation can be larger across countries than within countries, due to the greater differences in factor prices and technologies that are available. However, the service costs of international fragmentation can also be larger, especially if regulations and restrictions impede the international provision of services. As a result, trade liberalization in services can also stimulate fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further.

This paper makes a theoretical argument that growth in developing countries is likely to worsen the income distribution in developed countries and lead to a protectionist response that undermines the incentives for developing country growth. The model for this purpose is the two-cone version of the Heckscher-Ohlin (HO) trade model, in which countries have different factor prices even with free trade and in which they produce mostly different groups of goods. In that model, unlike the HO model with factor price equalization, growth by the poor country expands the output of its capital-intensive good, which is also the labor-intensive good of the other country. Regardless of whether factors are mobile or immobile across sectors, this reduces the real wages of factors that are either intensive or specific in the labor-intensive sector of the rich country. The paper argues that this will then lead to the rich country restricting trade. This in turn will lower the return to capital in the poor country and reduce the incentive for further growth.

This paper argues that successful development by developing countries causes adverse consequences for some factor owners in developed countries. These in turn seek protection from imports and that protection undermines the benefits to the developing countries of their own growth. Several of the main examples of protection in the world today can be interpreted as arising from this mechanism, including protection of textiles, apparel, and steel. More broadly, current resistance to globalization may be due in part to this phenomenon. The paper concludes with a brief discussion of how policies and institutions should respond to this, including increased use and improvement of programs of trade adjustment assistance.

This paper reviews the essentials of economic globalization, as well as the major institution that has recently gotten much of the credit and blame for it, the World Trade Organization (WTO). It first defines globalization, which is just the increasing economic integration of the world economy. It then asks who gains and loses from globalization, drawing primarily upon economic theory to identify its benefits and costs, and who within and among the world's economies get them. That part of the discussion concludes by asking briefly what can and should be done about globalization.

The second half of the paper turns to the WTO, which was the focus of so much negative attention at its Seattle meeting in December 1999. For it too, we first ask what it is, trying to clarify several misperceptions about what it does and why. We then ask what groups gain and lose from the WTO, some simply as a byproduct of its role in facilitating globalization, but others from particular WTO rules and procedures. This takes us to the controversies that raged in Seattle, and we describe those events as they have been described to us by those who were there (we were not). We conclude with our suggestions as to what might be done to change both the WTO itself and the public's perceptions of it.

The Indian economy has experienced a major transformation during the decade of the 1990s. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral aspect of Indiaís trade policy refers to Indiaís WTO commitments regarding trade in goods and services, trade-related investment measures, and intellectual property rights. The present study analyzes the economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade liberalization and the liberalization that might be undertaken in a new WTO negotiating round. Indiaís welfare gain is expected to be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future WTO round of multilateral trade liberalization is achieved. Resources would be allocated in India to the labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and tobacco. These sectors would also experience growth in output and exports. Real returns to both labor and capital would increase in the economy. The scale effect (percent change in output per firm) is positive for all the ten sectors of manufacturing, indicating that Indian firms become more efficient than before. Finally, even if India undertakes unilateral trade liberalization of the order indicated in the WTO multilateral scenarios, it would still benefit, although less so than with multilateral liberalization.

Motivated by the Asian financial crises that began in 1997, this paper adds money to a Ricardian model of international trade in order to explore the role of financing costs in general-equilibrium trade. The purpose is to show not only that financing costs matter, but to argue a potentially important effect of a financial crisis. If financial markets suddenly come to expect a countryís currency to depreciate, as might happen if it has attempted an unsustainable peg, then that expectation will itself force a depreciation. The depreciation will in turn make it impossible for international traders to repay their financing, and their default will increase the costs of financing trade in subsequent periods. Finally, this crisis-induced increase in costs of trade financing then undermines both trade itself and the gains from trade. The paper also goes on to argue that fragmentation ñ the splitting of production processes across countries ñ contributes to both trade and the gains from trade, but in doing so it makes countries more vulnerable to these effects of a financial crisis.

This paper explores the wide disparity of views on issues of international labor standards and the available options for addressing the issues involved. The discussion and analysis include: the definition and scope of labor standards; theoretical aspects of the economic effects of labor standards and the available empirical evidence; global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards; and implications for policy in dealing with labor standards. It is argued that, because of the diversity of labor standard in countries with differing national characteristics, policies, and institutions, the case for devising WTO rules and disciplines to improve core labor standards in low-income countries cannot be convincingly made. Further, there are no compelling theoretical and empirical grounds to support the international enforcement and harmonization of labor standards.

On a global level, the International Labor Organization (ILO) is best suited to provide a multilateral forum that would serve to strengthen its role and authority in pursuing improved labor standards internationally. The policies of the United States and other industrialized countries should be directed to maintaining open markets and encouraging the economic growth of their developing country trading partners. This is the surest way to achieve higher labor standards since there is pervasive historical evidence that standards are improved with higher levels of per capita incomes. National governments in developing countries should accordingly institute pro-active policies designed to improve working conditions and workers' rights as their economies expand and more resources can be channeled toward social betterment.

This paper reviews the main issues in the forthcoming WTO negotiations, including: a review of the accomplishments of the Uruguay Round and the multilateral negotiations that have since followed; identification and analysis of Uruguay Round built-in agenda issues and new issues that may possibly be considered in a new round; alternative negotiating modalities, including sectoral and broadly based negotiations and possible cross-issue linkages; dovetailing multilateral and regional negotiations; and interest-group alignments. In preparing for a new negotiating round, individual developing countries need to design with care their negotiating strategies and options. Countries have to decide what they want most to achieve from the negotiations and what they are willing to offer in return.

This paper uses basic economic theory to examine the circumstances in which government intervention in markets is justified, and the conditions under which the independent domestic policy choices of national governments can potentially be unambiguously improved upon by international coordination and cooperation. In a closed economy, market intervention is justified when there are "distortions" from the perfectly competitive ideal in which all market participants fully internalize the costs and benefits of their choices and also are too small to affect the prices at which they transact. Similarly, when there are multiple countries, independent policy choices will be optimal only when the distortions being corrected are local and when the effects of the individual national policies on world prices are negligible. When both of these conditions hold, then governments should be left to their own devices in setting domestic policies, and this is true regardless of what domestic objectives these government legitimately pursue. However, when either the distortions themselves or the price effects of market intervention extend across borders, then independent policy choices will not be optimal. Whether it is possible to design a mechanism for international coordination that will improve matters, on the other hand, is open to question.

We investigate the significance of subcontracting arrangements as a source of knowledge transfer and increased efficiency for Czech firms during 1993 through 1996. We draw on detailed enterprise surveys and interviews with the managers of 373 manufacturing firms in the Prague region. The results suggest a positive correlation between employee training and subcontracting. Subcontracting is also associated with a reduction in variable costs and a price premium on the stock market. The effect of subcontracting on other firms in the same industry is weak. A high share of subcontracting activity in a particular industry is associated with increased valuation of firms without foreign partners as investors anticipate more subcontracting arrangements.

In this paper, we adapt the latest version of the Michigan Model of World Production and Trade to incorporate relationships and data for cross-border services trade and foreign direct investment (FDI) in the major developed and developing countries subsumed in the model's structure and database.

Firms are taken to be monopolistically competitive. Each firm produces a set of differentiated products. Products are differentiated both by the original R&D undertaken at headquarters that defines the basic product and by the final location of production. Each firm faces a fixed cost in the country where production occurs, and it then sets an optimal mark-up of price over marginal cost for sales from each location. Free entry guarantees that profits are zero. Firms locate production for export or for local consumption depending on the type of barriers restraining the conduct of multinationals. In this version of the model, barriers to trade in services take two forms. First, firms may face an ad valorem tax on local capital installed. Second, foreign affiliate firms may face a policy-induced fixed cost of production for local operations..

We report the impact on welfare, trade, factor prices, sectoral output, economies of scale, and activities of multinationals that might occur following the introduction of national treatment of multinational firms in all countries of the model.

The origins of stagflation and the possibility of its recurrence continue to be an important concern among policymakers and in the popular press. It is common to associate the origins of the Great Stagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This paper argues that oil price increases were not nearly as essential a part of the causal mechanism generating stagflation as is often thought. We provide a model that can explain the bulk of stagflation by monetary expansions and contractions without reference to supply shocks. Monetary fluctuations also help to explain variations in the price of oil (and other commodities) and help to account for the striking coincidence of major oil price increases and worsening stagflation. In contrast, there is no theoretical presumption that oil supply shocks are stagflationary. In particular, we show that oil supply shocks may quite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocks actually raised the deflator (as opposed to the CPI). The oil supply shock view also fails to explain the dramatic surge in the price of other industrial commodities that preceded the 1973/74 oil price increase and the fact that increases in industrial commodity prices lead oil price increases in the OPEC period.

This paper develops and analyzes a welfare maximizing model of infant industry protection. The domestic infant industry is competitive and experiences dynamic learning effects that are external to firms. The competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. A government planner can protect the infant industry by using domestic production subsidies, tariffs, and quotas in order to maximize domestic welfare over time. As protection is not always optimal even though the domestic industry experiences a learning externality), the paper shows how the decision to protect the industry should depend on the industryís learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods.

Assuming some reasonable restrictions on the flexibility over time of the policy instruments, the paper subsequently compares the effectiveness of the different instruments. The economics literature has mainly explained the widespread use of quantity restrictions by appealing to non-welfare-maximizing behavior of governments or strategic interactions between firms and/or governments. In this work, quantity restrictions have been mostly interpreted as more distorting than other trade instruments such as tariffs or domestic production subsidies. This paper demonstrates that, under the modelís assumptions, the quota almost always yields higher welfare than the tariff. In some cases, the dominance of the quota is so pronounced that it compensates for any amount of government revenue loss caused by practical considerations involved in the administration of the quota. (This is true even in the extreme case of a voluntary export restraint, where no revenues would be collected.) It is further shown that the quota may even be preferred to a domestic production subsidy. The paper thus introduces a new argument to explain why quantity restrictions may create less distortions than tariffs or subsidies and can potentially be welfare enhancing.

The half-life of deviations from purchasing power parity (PPP) plays a central role in the ongoing debate about the ability of macroeconomic models to account for the time series behavior of the real exchange rate. The main contribution of this paper is a general framework in which alternative priors for the half-life of deviations from PPP can be examined. We show how to incorporate formally the prior views of economists about the half-life. In our empirical analysis we provide two examples of such priors. One example is a consensus prior consistent with widely held views among economists with a professional interest in the PPP debate. The other example is a relatively diffuse prior designed to capture a large degree of uncertainty about the half-life. Our methodology allows us to make explicit probability statements about the half-life and to assess the likelihood that the half-life exceeds a given number of years, without taking a stand on whether the data have a unit root or not. We find only very limited support for the common view in the PPP literature that the half-life is between three and five years.

In this paper, we examine the correlation between sectoral shocks and border enforcement in the United States. Enforcement of national borders is the main policy instrument the U.S. government uses to combat illegal immigration. The motivation for the exercise is to see whether border enforcement falls following positive shocks to sectors that are intensive in the use of undocumented labor, as would be consistent with political economy models of how enforcement policy against illegal immigration is determined. The main finding is that border enforcement is negatively correlated with lagged relative price changes in the apparel, fruits and vegetables, and slaughtered livestock industries and with housing starts in the western United States. This suggests that authorities relax border enforcement when the demand for undocumented workers is high.

Recent literature on the labor-market effects of U.S. immigration tends to find little correlation between regional immigrant inflows and changes in relative regional wages. In this paper we examine whether immigration, or endowment shocks more generally, altered U.S. regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade theory. This theorem describes how regions can absorb endowment shocks via changes in output mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we search for evidence of regional output-mix effects using a new data set that combines state endowments, outputs, and employment in 1980 and 1990. We have two main findings. First, state output-mix changes broadly match state endowment changes. Second, variation in state unit factor requirements is consistent with relative factor-price equalization (FPE) across states, which is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest that states absorb regional endowment shocks through mechanisms other than changes in relative regional factor prices.

In this paper, we examine the impact of government enforcement of the U.S.-Mexico border on wages in the border regions of the United States and Mexico. The U.S. Border Patrol polices U.S. boundaries, seeking to apprehend any individual attempting to enter the United States illegally. These efforts are concentrated on the Mexican border, as most illegal immigrants embark from a Mexican border city and choose a U.S. border state as their final destination. We examine labor markets in southern California, southwestern Texas, and Mexican cities on the U.S.-Mexico border. For each region, we have high-frequency time-series data on wages and on the number of person hours that the U.S. Border Patrol spends policing border areas. For a range of empirical specifications and definitions of regional labor markets, we find little impact of border enforcement on wages in U.S. border cities and a moderate negative impact of border enforcement on wages in Mexican border cities. These findings are consistent with two hypothesis: (1) border enforcement has a minimal impact on illegal immigration, or (2) illegal immigration from Mexico has a minimal impact on wages in U.S. border areas.

The recent financial crisis in Indonesia has resulted in dramatic price increases. Using very recent data, we investigate whether these price increases have impacted the cost-of-living of poor households in a disproportionately harsh way. We find that the poor have indeed been hit hardest. Just how hard the poor have been hit, though, depends crucially on where the household lives, whether the household is in a rural or urban area, and just how the cost-of-living index is computed. What is clear is that the notion that the very poor are so poor as to be insulated from international shocks is simply wrong. Rather, in the Indonesian case, the very poor appear the most vulnerable.

This paper investigates two explanations for why industries might become more productive over time. The first explanation, termed the real productivity case,' is one in which firms become more productive and this leads to more productive industries. The second explanation, termed the rationalization case,' is one in which firm productivity is constant, but productive firms expand while less productive firms either shrink or exit. Each case has very different implications for factor markets, long term growth prospects, and public policy regarding productivity. Further, one can only distinguish between these two cases with plant- or firm-level data. We investigate the empirical relevance of the two cases using the Chilean manufacturing census. We find that the rationalization case explains much of the measured increase in industry productivity. When industry productivity fails, the rationalization case appears much less important. We also contribute to the applied econometric literature on productivity estimation as we show that the value-added production function is especially well-suited to a simple extension of recent methods developed by Oiley and Pakes.

Tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance. We show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions, if the model under the null hypothesis is highly persistent. This fact calls into question the use of these tests in empirical work. We illustrate the practical importance of this point for tests of long-run purchasing power parity under the recent float. We show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long-run PPP. While the size distortions may be overcome by the use of finite-sample critical values, the resulting tests tend to have low power under economically plausible assumptions about the half-life of deviations from PPP. Thus, the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion. Only in the rare case that stationarity is rejected do size-corrected tests shed light on the question of long-run PPP.

This paper examines the implications of the Heckscher-Ohlin (HO) Model for the patterns of production and trade that will emerge as a country grows. It focuses primarily on world equilibria that include two or more cones of diversification. Starting with the textbook model of two factors and two goods, growth paths for production and trade are derived in terms of a countryís capital-labor ratio relative to that of the world. With additional goods and countries, multiple cones create a ladder of comparative advantage that a country will climb as it accumulates capital relative to the world. With additional factors as well, more complicated patterns can emerge. In a three-factor model based on Krueger (1977), a country with fixed land, growing labor, and faster growing capital can first work its way down the ladder of comparative advantage before climbing back up. Using a graphical representation of a more general three-factor model due to Leamer (1987), cones of diversification with large numbers of goods take the form of polygons that a growing country may pass through, then cross between. In all cases, the lesson of the HO Model is that growth causes repeated and extreme changes in patterns of specialization and trade over time.

This paper reviews the various economic effects on Algeria of accepting the European Union's invitation to enter into an economic partnership, as has already been done by two other countries of the Maghreb, Morocco and Tunisia. These Euro-Mediterranean partnerships consist primarily of the formation of free trade areas, FTAs, including the EU and the country involved, so my analysis is devoted primarily to the economic effects of an FTA. However, the occasion of forming an FTA also provides an opportunity to undertake several additional steps toward integration, which I also examine. These are 1) deeper integration, 2) extension of the FTA to include other neighboring countries, and 3) reductions in tariffs on imports from the rest of the world. The paper concludes that an EU-Algeria FTA would probably be good for Algeria, but the benefits can be substantially enhanced and the costs reduced by pursuing also one or more of these additional steps.

Proceedings of a Conference held in Washington, D.C., April 16-17, 1998. The contributors include members of the trade policy community who analyze and discuss the salient social dimensions of U.S. trade policies. These issues include the effects of trade on wage inequality; trade and immigration policy; U.S. trade adjustment assistance policies; the effects of NAFTA on environmental quality; the role of labor standards in U.S. trade policies; the economics of labor standards and the GATT; issues of child labor; and the role of interest groups in the design and implementation of U.S. trade policies.

This paper examines the choice of policies to redistribute income in response to an increase in inequality caused by a rise in the differential wage paid to skilled labor compared to unskilled labor. The main issue is whether the appropriate policy response depends on the cause of the increased differential. In particular, should policies respond any differently if the rising differential is due to "trade" ñ shorthand for greater openness in global markets and/or greater participation in those markets by developing countries abundantly endowed with unskilled labor ñ or due to technological changes that have favored skilled labor over unskilled labor. The analysis is conducted within the context of a two-sector Heckscher-Ohlin trade model augmented to allow endogenous determination of the level of skill. Utility possibility frontiers are constructed for various policies, then shifted as a result of changes in trade and technology. The conclusion is that the usual trade economists' argument against the use of trade policies applies in this context as well, regardless of the source of the worsening income distribution. If trade is the best available tool for dealing with a trade-induced increase in inequality, then trade policy will also be best for dealing with inequality induced by technology. But more likely, the preferred policy will be a tax/subsidy focused more directly on factors employed, and this preference too will hold regardless of the relative contributions of trade and technology to causing the problem being addressed.

In this paper, I examine the spatial correlation of wages, employment, and consumer purchasing power across U.S. counties to see whether regional product-market linkages contribute to spatial agglomeration. First, I estimate a simple market-potential function, which is a reduced form for several economic geography models. This specification resembles a spatial labor demand function, as it is proximity to consumer markets that determines nominal wages and employment in a given location. The estimation results indicate how far demand linkages extend across space and how income shocks in one location affect other locations. Second, I estimate a more elaborate market-potential function derived from the Krugman model of economic geography. The parameter estimates reflect the importance of scale economies and transport costs, the stability of spatial agglomeration patterns, and how these features evolve over time.

In this paper, we examine the impact of government enforcement of the U.S.-Mexico border on wages in the border regions of the United States and Mexico. The U.S. Border Patrol polices U.S. boundaries, seeking to apprehend any individual attempting to enter the United States illegally. These efforts are concentrated on the Mexican border, as most illegal immigrants embark from a Mexican border city and choose a U.S. border state as their final destination. We examine labor markets in southern California, southwestern Texas, and Mexican cities on the U.S.-Mexico border. For each region, we have high-frequency time-series data on wages and on the number of person hours that the U.S. Border Patrol spends policing border areas. For a range of empirical specifications and definitions of regional labor markets, we find little impact of border enforcement on wages in U.S. border cities and a moderate negative impact of border enforcement on wages in Mexican border cities. These findings are consistent with two hypothesis: (1) border enforcement has a minimal impact on illegal immigration, or (2) illegal immigration from Mexico has a minimal impact on wages in U.S. border areas.

This paper addresses the variety of static and dynamic impacts that the Euro-Med Agreements (EMA) may have on the MENA economies. It first considers options for trade and domestic policy reforms, including the context in which policies are designed and implemented and the range of policy options spanning unilateral measures, multilateral measures, and preferential arrangements such as the EMAs. It then sets out the comparative static and dynamic-growth frameworks for analyzing the effects of alternative policies. This is followed by a review of ex ante assessments of existing and proposed EMAs using CGE modeling and qualitative analysis and the potential dynamic effects that EMAs may bring about. Because EMAs are limited in scope, there is no guarantee that the MENA economies will realize significant dynamic benefits. Nonetheless, if EMAs result in enhancing policy credibility, the MENA economies might well improve their dynamic-growth prospects by instituting effective unilateral domestic-policy reforms and aligning their foreign trade and investment policies more closely on a multilateral basis with the global trading community.

Recent literature on the labor-market effects of U.S. immigration tends to find little correlation between regional immigrant inflows and changes in relative regional wages. In this paper we examine whether immigration, or endowment shocks more generally, altered U.S. regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade theory. This theorem describes how regions can absorb endowment shocks via changes in output mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we search for evidence of regional output-mix effects using a new data set that combines state endowments, outputs, and employment in 1980 and 1990. We have two main findings. First, state output-mix changes broadly match state endowment changes. Second, variation in state unit factor requirements is consistent with relative factor-price equalization (FPE) across states, which is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest that states absorb regional endowment shocks through mechanisms other than changes in relative regional factor prices.

A half-century of empirical work on the factor proportions theory has identified ìparadoxesî and ìmysteries,î but has failed to devise simple amendments that bring theory and data into reasonable congruence. Our study considers standard and novel hypotheses regarding the failures of the Heckscher-Ohlin-Vanek formulation and is the first to examine these directly on the technology and absorption data of interest. We show how a few simple and plausible amendments, verified directly by this data, suffice for a striking confirmation of the HOV theory. Countries export the services of abundant factors and in approximately the right magnitude. HOV works.

Factor price equalization (FPE) is a central theme in trade theory, for which Dixit and Norman (1980) establish the necessary and sufficient condition (the FPE condition). Deardorff (1994) provides a more intuitive condition (the lens condition) and establishes its necessity in general, as well as its sufficiency for the case of 2 countries. In this paper, I prove that the lens condition is sufficient for FPE in the case of 2 factors. This theorem has implications for empirical work.

The purpose of this paper is to explore issues of child labor exploitation in developing countries and the variety of trade and other policy options and programs that are available to the United States and other major industrialized countries to deter such exploitation. We begin with a discussion of the determinants of child labor and selected information on the global, national, and sectoral employment of children. We then discuss the range of policies and programs used in the United States to help effect a reduction in foreign child labor. With the foregoing as background, we turn to conceptual considerations, examining first the process of monitoring of child labor, and second the economic determinants of child labor and the expected consequences of alternative measures that are designed to reduce child labor. The paper concludes by drawing out the implications of the discussion for policy.

We present the results based on the Michigan computational general equilibrium model of Western Hemisphere economic integration. It is shown that tariff elimination will have beneficial effects for most countries involved, although the benefits as well as the costs of liberalization are small. However, if a hemispheric treaty were to stimulate an increase in the capital stocks of the major South American economies, the welfare gains would be substantial. Sensitivity tests reveal that the model exaggerates the likely gains from economies of scale due to liberalization. But the error is small in this context because the impact of trade liberalization is small. When econometric estimates of scale economies are incorporated into the model, the welfare gains due to capital flows nevertheless remain robust. A comparison of results for Chile using different databases indicates that the impact of regional liberalization using a 1980 database may overstate the impact on the nonferrous metals sector in particular and manufacturing more generally. Nonetheless, when using a 1990 database, the change in output of the nonferrous metals sector remain larger than for any other sectors in the Chilean economy.

This paper first notes the importance of ìone-coneî versus ìmulti-coneî equilibria in the Heckscher-Ohlin Model of international trade, then asks whether the process of economic growth as modeled in neoclassical growth models tends to lead the world more toward one or the other. The one-cone model has been the workhorse of international trade theory for many years. It is characterized by a single set (cone) of relative factor endowment combinations within which countries can diversify their production of all goods. If all countriesí factor endowments are within that cone, then there is global factor price equalization (FPE) under free trade. The multi-cone model has received attention more recently, and includes separate cones of diversification within each of which there is FPE, but across which factor prices differ. There are several important differences between these two models. The paper examines several neoclassical models of trade and growth, distinguished by their assumptions about the determinants of saving, to see what they imply about the convergence or non-convergence of country factor endowments into a single cone. None of the models suggest convergence, while some of them strongly imply that different countries will end up in different cones. This therefore suggests that the multi-cone version of the Heckscher-Ohlin model should be preferred.

There is a wide disparity of views on issues of international labor standards. Labor and social activists are concerned about the increased imports from countries in which labor standards are ostensibly not enforced at a sufficiently high level. They fear that these imports will be detrimental to wages and working conditions in the industrialized importing countries. The purpose of this paper is to explore these different views and the available options for addressing the issues involved. The paper begins with the definition and scope of labor standards, then turns to theoretical aspects of the economic effects of labor standards. These are followed by a summary of the available empirical evidence. Global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards are then discussed.

A test of the Heckscher-Ohlin-Vanek [HOV] hypothesis for the cases when factor price equalization does not hold is developed. For all the possible country pairs of the BLS (1987) and Trefler (1995) data set, I test whether trade reveals the relative factor abundance of one country compared to another. For the factor pairs capital-labor, labor-land and land-capital, I investigate whether the higher endowment ratio of one country compared to another is reflected in their multilateral trade. A strength of the method is that technology differences, measurement error or home bias are allowed for, but do not have to be estimated. For the hundreds of country pairs, the relative abundance of two countries is revealed in trade in about 75 percent of the cases. In other words, endowments do matter. The more different are country endowments, the stronger are the results. I explicitly study North-South trade and find that it reflects the North's relative capital abundance in over 90 percent of the cases. The obtained sign test results are also analyzed with a probit model. A probit analysis helps to detect empirically other factors than endowment differences that affect the performance of the HOV prediction.

This paper addresses an issue that has received a great deal of attention in recent years, both from international trade economists and from labor economists: What has caused the relative wage of skilled labor compared to unskilled labor in the United States to increase through the 1980s and 1990s? Prime candidates for causing this change have been "trade" ñ the increased competition of U.S. workers with unskilled workers abroad ñ and "technology" ñ new products and processes that may have increased the productivity of skilled workers or skill-intensive industries relative to their unskilled counterparts. The paper reviews what has happened to relative wages and the explanations that have been suggested. A brief look at the empirical evidence from this literature is suggestive, but hardly conclusive. But the paper then asks whether the answer to this question really matters. It turns out that the appropriate policies for dealing with this change in relative wages do not depend on whether the cause of the change has been trade or technology. The paper concludes with an argument about the first-best policy for dealing with the increased wage differential, but also with some skepticism that any policy at all is needed.

This paper examines the effects of fragmentation across cones of diversification in the Heckscher-Ohlin model of international trade. Fragmentation is defined as the splitting of production processes into parts that can be done in different countries. Such fragmentation may occur in a world of factor price equalization (FPE) only if it is costless, and even then it is uninteresting. It becomes more important in a world without FPE, where countries operate in different diversification cones. In that case even costly fragmentation (which uses more resources than the original) may be able to produce a good at a lower cost than the original unfragmented technology, if it can take advantage of different factor prices in different countries. The paper shows when this will be the case, then goes on to examine the effects of fragmentation on factor prices. It is already known that introduction of fragmentation can lead to FPE when FPE did not obtain initially. But it need not do so, and the paper explores the directions of the effects on relative factor prices when they do not become equalized. It turns out that factor prices may actually be driven further apart by fragmentation. This is suggested diagrammatically, and also shown more formally for the case of Cobb-Douglas preferences and technologies.

This paper focuses on the impact of technological progress (modeled as learning by doing) on economic growth when one of the inputs in production is an open access renewable resource. Technological progress is found to indi- rectly induce resource depletion, such that sustainable growth will not occur in autarky under certain preferences, and is possible in trade only if the resource sector contracts over time or shuts down completely. Comparisons of steady state welfare in autarky and free trade reveal that for very high or low world prices of the resource-based good, it is possible for the economy to gain from trade. However if the price is intermediate, it will instead lose.

One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.

This paper assesses the major developments in U.S. trade policies since the creation of the WTO in 1995. It is based in large measure on the fourth biannual (1996) WTO Trade Policy Review of the United States and updated through 1997. The discussion and assessments include in particular: the major U.S. multilateral trade-policy issues and activities centered in the WTO: issues and activities relating to NAFTA; U.S. bilateral trade relations with its major trading partners; administration of U.S. trade laws and regulations; and U.S. agricultural trade policies.

This paper is the text of a lecture given on November 20, 1997 to inaugurate the John W. Sweetland Chair in International Economics, in the Department of Economics of the University of Michigan. Its message is that international trade theory, and in particular the theory of comparative advantage, is really just an application of benefit-cost analysis. This is true both of many of the tools of trade theory, which are familiar as the same tools by which benefit-cost examines all sorts of public projects and policies, and of the implications of the theory. Trade theory does not say, as sometimes claimed, that international trade is necessarily and always good for everyone. On the contrary, the theory of comparative advantage identifies both winners and losers from international trade, and the subtlety of the argument, much like many applications of benefit-cost analysis, consists of quantifying and comparing the gains and losses. The paper works through both the partial and the general equilibrium analyses of trade under a range of assumptions from implausibly perfect to realistically messy. It discusses who gains and who loses from trade in each case, as well as the strength of the argument that the gains outweigh the losses.

This paper examines the effects of "fragmentation," defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

The endogenous growth literature raises the possibility that countries may grow without bound in terms of per capita income, and that they may do so at different rates. This possibility also exists in neoclassical growth models with diverging populations ñ populations that grow at different rates. In both cases, however, this means that international inequality of per capita incomes will not only exist but also get worse over time. This paper examines that possibility within a very simple one-sector model that allows for both diverging populations and endogenous growth. The model also allows for "meaningless" trade and international direct investment, in the sense that these occur at random across countries when traders and investors are indifferent among locations. The model suggests that if people behave as needed to generate endogenous growth, then international per capita income inequality is likely to increase without bound over time, along with increases in apparent importance of international trade and investment in the world economy, a result that may suggest increasing resentment and friction across countries. The simple model, including its odd approach to trade and investment, is argued to be robust to several more conventional and complex specifications. However, the results, including endogenous growth itself, depend on behavioral parameters that may not be empirically relevant or therefore a serious cause for concern.

This paper is about the interactions between what is traditionally considered trade policy and a narrow but important aspect of competition policy, namely merger policy. We focus on links between merger policies and trade liberalization. Interpreting merger policy as a choice of degree of industrial concentration, we investigate how the merger policy that is optimal from the point of view of an individual country is affected by restrictions on the use of tariffs and export subsidies. Two general points emerge. First, merger policies are indeed associated with international externalities in open economies. And second, we argue that one should not expect to find any particular relationship between trade policy and merger policy. In particular, there seems to be no presumption that international trade liberalization induces countries to pursue merger policies that have more of a beggar-thy-neighbor flavor.

This paper explores the rule system of the World Trade Organization (WTO) as reflected mainly in the new and innovative WTO dispute settlement procedures. It begins with a retrospective look at the history of GATT on this subject. The goal of the rest of the paper is then not just to describe the procedures and the practice under them, but also to probe a number of fairly fundamental jurisprudential questions about these procedures, some of which have been apparent for some time, while others have only begun to emerge during the early years of actual application of the WTO Agreement.

Economic sanctions are not only a foreign policy tool but a form of trade policy. Like other kinds of trade policy, sanctions attract domestic political support from both protectionists and the human rights lobby. Sometimes the human rights lobby can piggyback on protectionists to encourage policy-makers to demand sanctions, while protectionists can also hijack the human rights issue for their own ends. Two variables, WTO membership and an independent legislature, affect both the likelihood and the form of sanctions in this domestic political environment. WTO membership, like MFN treatment in general, mobilizes export interests against a trade sanctions policy. Congress's more hawkish preferences on both trade policy and human rights mean that when the United States imposes sanctions against a WTO member, it is likely to do so under congressional leadership and perhaps against the will of the president. These variables color Sino-American trade relations today.

To date, virtually all the equity market literature analyzing the consequences of trade policy changes has assessed only the impact on the home country. Almost no attempt has been made to use equity-market data to assess simultaneously the impact of policy changes on the welfare of trading partners. Nor has this equity market literature attempted to evaluate the impact of trade negotiations. This paper attempts to work in both these neglected areas by assessing the impact on the value of selected equities in the United States and Japan of: (1) the enactment of the so-called "Super 301" legislation; (2) the inclusion of a significantly strengthened Dispute Settlement Mechanism in the final Uruguay Round Agreement; and (3) the Japan-U.S. Automobile Agreement of June 1995. In addition, the domestic political impact of operating in the post-Uruguay Round international economic environment is examined by evaluating the results of the Japan-U.S. Automobile Agreement using evidence from the Iowa Presidential Stock Market.

This paper assesses the major developments in U.S. trade policies since the creation of the WTO in 1995. It is based in large measure on the fourth biannual (1996) WTO Trade Policy Review of the United States and updated through 1997. The discussion and assessments include in particular: the major U.S. multilat-eral trade-policy issues and activities centered in the WTO: issues and activities relating to NAFTA; U.S. bilateral trade relations with its major trading partners; administration of U.S. trade laws and regulations; and U.S. agricultural trade policies.

This paper provides an alternative analytical view of the mechanism by which interest groups influence trade policy. In contrast to other economic models in which trade policy is essentially "bought" by industrial interests, this model views interest groups and legislators as possibly sharing the same objectives, which they then work together to pursue. The legislators have a limited budget of their own and their staff members' time to work on many issues, and the interest groups influence the process by helping with the work. By selecting legislators who are in closest agreement with their own objectives and then by assisting them in a way that, in effect, subsidizes their efforts, interest groups achieve a role in policy making that is potentially more important than if they merely used financial transfers. In the context of international trade policy, we view this model as applying not only to industries seeking protection, but also to many other interest groups who view restrictions of imports or other trade intervention as useful for their purposes. The latter need not have abundant financial resources in order to be effective, since their assistance can consist primarily of their members and volunteers' time, as well as the expertise that they have accumulated from experience in dealing with an issue.

The bulk of Japanese exports and imports are denominated in dollars rather than Japan's local currency, the yen.The consequences of dollar invoicing depend importantly on whether Japanese companies hedge their dollar exposures. If Japanese companies are able fully to hedge their dollar exposures either by using derivative products, locating production in the United States or matching dollar revenues with dollar costs then the choice of invoicing currency will not influence the yen profits of Japanese companies. This paper estimates the degree to which Japanese companies are exposed to movements in the dollar using Japanese stock market data and an international version of the CAPM model to estimate the extent to which Japanese company returns are correlated with changes in the yen-dollar exchange rate. Presumably, if Japanese companies fully hedge their dollar exposures, then their stock price changes should not be correlated with movements in the dollar. Alternatively, if Japanese companies cannot or choose not to hedge fully their dollar exposures, then yen-dollar exchange rates will be correlated with stock prices.

The process of major economic reforms undertaken in the Indian economy has now completed six years of implementation. The unilateral reform measures in the industrial and trade policies of India along with reforms in the tax regime represent a significant departure from the policy framework of the preceding decades. Our paper evaluates the comparative static effects of selected trade and domestic policy reforms on trade, output, domestic prices, economic welfare, and the intersectoral allocation of resources using a computable general equilibrium (CGE) model of the Indian economy.

The results indicate that the import liberalization enhances the welfare of the economy, and that the effect gets further enlarged if exports are also liberalized simultaneously. This is particularly true of the agricultural sectors. The freeing of prices in the sectors which were under some form of administered price controls in the base year (1989-90) adds noticeably to the welfare effect. The economy becomes more efficient through reallocation of land, labor and capital across different producing sectors with increases in the returns to each of the factors of production. The rationalization of the existing structure of indirect taxes (mainly excise) and subsidies is expected to further benefit the factors of production and enhance overall welfare. Though such ex-ante analysis may not be replicated ex-post due to various macroeconomic and other factors that our model does not capture, the positive results nevertheless go a long way in establishing the credibility of the reforms process.

One of the great unknowns in international finance is the process by which new information influences exchange rate behavior. Until recently, data constraints have limited our ability to examine this issue. The Olsen and Associates high-frequency spot market data greatly expand the range of testable hypotheses regarding the influence of information. This paper focuses on one important source of information to the foreign exchange markets, the intervention operations of the G-3 central banks. Previous studies using daily and weekly foreign exchange rate data suggest that central bank intervention operations can influence both the level and variance of exchange rates, but little is known about how exactly traders learn about these operations and whether intra-daily market conditions influence their effectiveness. Using high-frequency data, this paper will examine the relationship between the efficacy of intervention operations and the "state of the market" at the moment that the operation is made public to traders.

For most firms, size and diversification are correlated with lower value. However, for firms possessing substantial information-based asset, geographical diversification, line of business diversification, and growth in general, add value. This is consistent with information-based assets being a critical prerequisite for synergy, as postulated in internalization theories of synergy.

Stock prices in emerging economies move in step much more than in advanced economies. Emerging marketsí prices capitalize less firm specific information, and appear subject to more economy-wide fluctuations. Measures of this consonance of stock returns are positively correlated with indicators of poor property rights protection, inefficient legal systems and corrupt government. Lax accounting standards strengthen these correlations, but do not have an independent effect. We argue that property rights, judicial efficiency, clean government and meaningful accounting information let stock markets process information and allocate capital better, and thus contribute to economic growth. The absence of these factors may discourage informed trading and foster noise trading.

This paper examines the usefulness of a result of Deardorff and Staiger (1988), who showed that the factor content of trade can be interpreted under certain assumptions as indicating the nature of the factor price adjustments that can, in a specified sense, be attributed to that trade. This paper elaborates on the sense in which this result says anything about the factor market effects of trade. It also examines several of the assumptions that were used by Deardorff and Staiger to determine whether they can be relaxed. These include the assumption, used for only one of Deardorff and Staiger's several results, of Cobb-Douglas technology, which is shown to be easily extended to Constant Elasticity of Substitution. Also examined is the assumption of nonspecialization, or that all imported goods are produced or producable in the domestic economy. With Cobb-Douglas technology that assumption is shown not to be needed. With more general technology, however, the presence of non-competing imports requires a reinterpretation of the factor content of trade. Whereas without noncompeting imports, trade itself is analogous, in terms of its effects on factor markets, to a change in factor endowments equal to the factor content of trade, with noncompeting imports trade has an additional effect analogous to a Hicks-neutral technological improvement enabling those noncompeting imports to be produced competitively.

This paper examines the interdependence and coordination of monetary and exchange rate policies among the G-3 countries over the period 1977 through 1993. The results in the paper suggest that the international monetary transmission mechanism is important, and that, among the G-3, US policies are the most influential. Further, it suggests that the G-3 generally honor international monetary policy commitments, although in the case of Germany the commitments seem to have coincided with domestic policy objectives.

Using firm level data from the U.S. steel industry, we find that lobbying for import protection is habit forming, as suggested in the rent-seeking literature. Controlling for firm performance and other factors, past lobbying increases the likelihood of current lobbying in our full sample. Because addicted firms should behave differently from other firms, we let an EM algorithm to sort our firms into groups with differing propensity to lobby. A two pools model consisting of occasional and habitual rent-seekers emerges. Occasional rent-seekers' lobbying depends on their market performance. Habitual rent-seekers' lobbying is unrelated to the market performance of the firm, and only depends on previous lobbying. The evidence is consistent with political rent seeking having dynamic economies of scale: rent-seeking makes further rent-seeking easier and more lucrative.