Trade Wars and Trade Talks with Data

How large are optimal tariffs? What tariffs would prevail in a worldwide trade war? How costly would be a breakdown of international trade policy cooperation? And what is the scope for future multilateral trade negotiations? I address these and other questions using a unified framework which nests traditional, new trade, and political economy motives for protection. I find that optimal tariffs average 62 percent, world trade war tariffs average 63 percent, the government welfare losses from a breakdown of international trade policy cooperation average 2.9 percent, and the possible government welfare gains from future multilateral trade negotiations average 0.5 percent. Optimal tariffs are tariffs which maximize a political economy augmented measure of real income.

A 'New Trade' Theory of GATT/WTO Negotiations

I develop a novel theory of GATT/WTO negotiations. This theory provides new answers to two prominent questions in the trade policy literature: first, what is the purpose of trade negotiations? And second, what is the role played by the fundamental GATT/WTO principles of reciprocity and nondiscrimination? Relative to the standard terms-of-trade theory of GATT/WTO negotiations, my theory makes two main contributions: first, it builds on a 'new trade' model rather than the neoclassical trade model and therefore sheds new light on GATT/WTO negotiations between similar countries. Second, it relies on a production relocation externality rather than the terms-of-trade externality and therefore demonstrates that the terms-of-trade externality is not the only trade policy externality which can be internalized in GATT/WTO negotiations.Trade negotiations, GATT/WTO, New trade theory

Trade Liberalization, Outsourcing, and Firm Productivity

Empirical evidence suggests that trade liberalization increases firm productivity. This paper offers a novel explanation for this finding. I develop a simple general equilibrium model of trade in which trade liberalization leads to outsourcing as firms focus on their core competencies in response to tougher competition. Since firms are the better at performing tasks the closer they are to their core competencies, this outsourcing increases firm productivity. Moreover, I also investigate the links between various technological parameters and outsourcing. In particular, I analyze how technological progress, changes in fixed costs, and changes in internal governance costs affect firms' integration decisions.Trade Liberalization, Outsourcing, Productivity

A Gold Rush Theory of Economic Development

This paper presents a model of social learning about the suitability of local conditions for new business ventures and explores its implications for the microeconomic patterns of economic development. I show that: i) firms tend to 'rush' into business ventures with which other firms have had surprising success thus causing development to be 'lumpy'; ii) sufficient business confidence is crucial for fostering economic growth; iii) development may involve wave-like patterns of growth where successive business ventures are first pursued and then given up; iv) there is, nevertheless, no guarantee that firms pursue the best venture even in the long-run.Economic Development, Social Learning, Lumpiness

A Global View of Productivity Growth in China

How does a country's productivity growth affect worldwide real incomes through international trade? In this paper, we take this classic question to the data by measuring the spillover effects of China's productivity growth. Our framework features traditional terms-of-trade effects and new trade home market effects as suggested by the theoretical literature and works from a reference point which perfectly matches industry-level trade. Focusing on the years 1995 to 2007, we find that the cumulative welfare effect on individual regions ranges between -1.2 percent and 3.6 percent and only 3.0 percent of the worldwide gains of China's productivity growth accrue to the rest of the world.

A Global View of Productivity Growth in China

We revisit a classic question in international economics: how does a country's productivity growth affect worldwide real incomes through international trade? We first identify the channels through which productivity shocks transmit in a model featuring inter-industry trade as in Ricardo (1817), intra-industry trade as in Krugman (1980), and firm heterogeneity as in Melitz (2003). We then estimate China's productivity growth at the industry level and use our model to quantify what would have happened to real incomes throughout the world if nothing but China's productivity had changed. We find that average real income in the rest of the world increased by a cumulative 0.48% from 1992-2007 due to China's productivity growth. This represents 2.2% of the total income gains to the world.Productivity growth, China

Crumbling economy, booming trade: the surprising resilience of world trade in 2020

How can it be that we experience a historic recession, but international trade is doing just fine? In this Kühne Impact Series, we argue that the COVID-19 recession is one in which non-tradable services suffer but tradable goods thrive. Reasons include that (i) consumption of in-person services is restricted; (ii) demand for consumer durables is strong; (iii) demand for medical goods is high; and (iv) online shopping is popular

A new hope for the WTO? Past achievements, current challenges, and planned reforms

The World Trade Organization (WTO) has a new Director General, and we take her appointment as an opportunity to brief the reader on this important international organization. In particular, we (i) explain its past achievements, (ii) discuss its current challenges, and (iii) summarize its planned reforms

A quantitative analysis of subsidy competition in the U.S.

I use a quantitative economic geography model to explore subsidy competition among U.S. states. I ask what motivates state governments to subsidize firm relocations and quantify how strong their incentives are. I also characterize fully non-cooperative and cooperative subsidy choices and assess how far away we are from these extremes. I find that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. I also find that observed subsidies are closer to cooperative than non-cooperative subsidies but the potential losses from an escalation of subsidy competition are large

Was aus der WTO wird, wenn der Handelskrieg vorbei ist

Die WTO hat eine realistische Chance, aus dem Handelskonflikt gestärkt hervorzugehen. Es ist die Geschichte, die uns lehrt, dass die internationale Handelskooperation letztlich im Interesse aller ist