Trade booms, trade busts and trade costs

What has driven trade booms and trade busts in the past and present? We derive a micro-founded measure of trade frictions from leading trade theories and use it to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally, the entirety of the interwar trade bust is explained by increases in trade costs

Trade, Technology and Wage Inequality in the South African Manufacturing Sectors

This paper advances on previous work on the effects of trade and technical change on labour markets within the framework of Heckscher-Ohlin trade theory. First, we employ dynamic heterogeneous panel estimation techniques not previously used in this context, which separate Heckscher-Ohlin-based long run relationships from short run dynamics that are heterogeneous across sectors. Second, we provide evidence for an unskilled labor abundant developing country that allows comparison of the results against developed country evidence. Third, we consider the appropriateness of alternative approaches and examine endogeneity issues in the impact of technology and price changes on factor returns. For South African manufacturing we find that output prices increase most strongly in sectors that are labor intensive. Our results further suggest that trade-mandated earnings increases are positive for labor, and negative for capital. By contrast technology has mandated negative earnings increases for both factors. We also find that separation of different demand side factors collectively constituting globalization is useful in understanding the impact of trade, and taking account of endogeneity is important in isolating factor and sector bias of technological change.Trade, Total Factor Productivity, Stolper-Samuelson Theorem, Mandated Factor Earnings Changes, Dynamic Heterogeneous Panel Data, Pooled Mean Group Estimation.

Trade and Divergence in Education Systems

This paper presents a theory on the endogenous choice of a country's education policy and the two-way causal relationship between trade and education systems. The setting of a country's education system determines its talent distribution and comparative advantage in trade; the possibility of trade by raising the returns to the sector of comparative advantage in turn induces countries to further differentiate their education systems and reinforces the initial pattern of comparative advantage. Speci…cally, the Nash equilibrium choice of education systems by two countries interacting strategically are necessarily more divergent than their autarky choices,although the difference is still less than what is socially optimal for the world. We provide some preliminary empirical evidence on the relationship between education, talent distribution, and trade.Education System, Talent Distribution, Comparative Advantage, Trade Pattern

Trade and synchronization in a multi-country economy

Substantial evidence suggests that countries with stronger trade linkages have more synchro- nized business cycles. The standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. We show that under certain macro-level conditions but irrespective of the micro-level assumptions concerning trade the puzzle arises because trade fails to substantially increase the correlation between each country's import penetration ratio and the trade partner's technology shock. Within a large class of trade models, there are three channels through which bilateral trade may increase business cycle synchronization. Specifically, increased bilateral trade may (i) raise the correlation between each country's tech- nology shocks, (ii) raise the correlation between each country's share of expenditure on domestic goods, and (iii) raise the response of the domestic import penetration ratio to foreign technology shocks. Empirical evidence strongly supports the first and second channels. We show that the trade-comovement puzzle can be resolved if productivity shocks are more correlated between country-pairs that trade more

Trade costs, 1870–2000

What has driven trade booms and trade busts in the past century and a half? Was it changes in global output or in the costs of international trade? To address this question, we derive a micro-founded measure of aggregate bilateral trade costs based on a standard model of trade in differentiated goods. These trade costs gauge the difference between observed bilateral trade and frictionless trade in terms of an implied markup on retail prices of foreign goods. Thus, we are able to estimate the combined magnitude of tariffs, transportation costs, and all other macroeconomic frictions that impede international trade but that are inherently difficult to observe. We use this measure to examine the growth of global trade between 1870 and 1913, its retreat from 1921 to 1939, and its subsequent rise from 1950 to 2000. We find that trade cost declines explain roughly 55 percent of the pre–World War I trade boom and 33 percent of the post–World War II trade boom, while a precipitous rise in trade costs explains the entire interwar trade bust

Trade Primer: Qs and As on Trade Concepts, Performance, and Policy

[Excerpt] The 112th Congress has a full legislative and oversight agenda on international trade. The agenda may include considering legislation to implement pending free trade agreements with Panama, South Korea, and Colombia, enhanced enforcement of U.S. trade agreements, as well as oversight of the World Trade Organization\u27s Doha Round and trade relations with China. This report provides information and context for many of these topics. It is intended to be read primarily by Members and staff who may be new to trade issues. This report is divided into four sections in a question-and-answer format: trade concepts, U.S. trade performance, formulation of U.S. trade policy, and trade and investment issues. Additional suggested readings are provided in an appendix. The first section on Trade Concepts deals with why countries trade, the consequences of trade expansion, and the relationship between globalization and trade. Key questions address the benefits of specialization in production and trade, efforts by governments to influence a country\u27s comparative advantage, how trade expansion can be costly and disruptive to workers in particular industries and skill categories, and some unique characteristics of trade between developed countries. The second section, on trade performance, focuses on the U.S. trade deficit and its impact on industries. Several questions address the causes of trade deficits, the role of foreign trade barriers, and how the trade deficit can be reduced. In terms of business impacts, the questions focus on which U.S. industries appear to be the most and least competitive, and on the relative size of the manufacturing sector. The third section deals with the roles played by the Executive Branch, Congress, the private sector, and the Judiciary in the formulation of U.S. trade policy. Information on how trade policy functions are organized in Congress and the Executive Branch, as well as the respective roles of individual Members and the President, is provided. The formal and informal roles of the private sector and the involvement of the Judiciary are also covered. The fourth section, on U.S. trade and investment policy, asks questions related to trade negotiations and agreements and to imports, exports, and investments. The justification, types, and consequences of trade liberalization agreements, along with the role of the World Trade Organization, are treated in this section. The costs and benefits of imports, exports, and investments are also discussed, including how the government deals with disruption and injury to workers and companies caused by imports and its efforts to both restrict and promote exports. The motivations and consequences of foreign direct investment flows are also discussed

U.S. Trade with Free Trade Agreement (FTA) Partners

This report presents data on U.S. merchandise (goods) trade with its Free Trade Agreement (FTA) partner countries. The data are presented to show bilateral trade balances for individual FTA partners and groups of countries representing such major agreements as the North America Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement and Dominican Republic (CAFTA-DR) relative to total U.S. trade balances. This report also discusses the issues involved in using bilateral merchandise trade balances as a standard for measuring the economic effects of a particular FTA