INTEGRATION OF TRADE AND DISINTEGRATION OF PRODUCTION IN THE GLOBAL ECONOMY

The last few decades have seen a spectacular integration of the global economy through trade. The rising integration of world markets has brought with it a disintegration of the production process, however, as manufacturing or services activities done abroad are combined with those performed at home. I compare several different measures of foreign outsourcing, and argue that they have all increased since the 1970s. I also consider the implications of globalization for employment and wages of low-skilled workers, and for trade and regulatory policy, such as labor standards.

Trade and Uneven Growth

We consider trade between two countries of unequal size, where the creation of new intermediate inputs occurs in both. We assume that the knowledge gained from R&D in one country does not spillover to the other. Under autarky, the larger country would have a higher rate of product creation. When trade occurs in the final goods, we find that the smaller country has its rate of product creation stowed, even in the long run. In contrast, the larger country enjoys a temporary increase in its rate of R&D. We also examine the welfare consequences of trade in the final goods, which depend on whether the intermediate inputs are traded or not.

Incentive Compatible Trade Policies

We consider a two country trade model with production uncertainty. If complete contingent markets do not exist, it is desirable for governments to adopt some trade policies to share the production risk. A full information policy involves income transfers across countries, which can be achieved by equal import tariffs and export subsidies. With incomplete information we consider incentive compatible trade policies, which are designed to be truth revealing while partially sharing the production risk. In this case the tariff in one country may differ from the export subsidy abroad.

Gains from Trade in Differentiated Products: Japanese Compact Trucks

We present a methodology for estimating the welfare gains from a product with new characteristics, and apply it to Japanese and American compact trucks. Our approach can be used on any products for which a hedonic regression can be estimated. For 1979-80 we find average welfare gains of $500-600 per Japanese truck. In later years the benefit to consumers is reduced by the tariff on imports and the introduction of American compact models. American compacts have consumer gains which are much less than the average for Japanese models, since for each American compact there is an import with very similar characteristics.

Symmetric Pass-Through of Tariffs and Exchange Rates Under Imperfect Competition: An Empirical Test

This paper examines the effect of tariffs and exchange rates on U.S. prices of Japanese cars, trucks and motorcycles. In particular, we test whether the long run pass-through of tariffs and exchange rates are identical: the symmetry hypothesis. We find that this hypothesis is easily accepted in our sample. We also find that the pass-through relation varies across products, ranging from about 0.6 for trucks to unity for motorcycles. These coefficients have very different implications for trade policy. We explain the results based on demand, cost and institutional conditions in each industry. We also find weak evidence that the pass-through of exchange rates has fallen in more recent years.

Auctioning U.S. Import Quotas, Foreign Response, and Alternative Policies

In this paper we quantify the potential revenue available to the U.S. from auctioning import quotas, and the resulting drop in foreign producer surplus relative to free trade. Previous estimates of auction revenue are in the range of $3 7-5.15 billion for 1986 or 1987. Using simulation results from computable partial or general equilibrium models, we find that this revenue gain would be at the expense of a large drop in foreign producer surplus. Ignoring textiles and apparel, the potential auction revenue is$1 3-2.15 billion, and the foreign loss is $0.5-O.7 billion relative to free trade. One alternative to auction quotas is a system of tariff-rate quotas, which are designed to keep supplier countries welfare equal to that in free trade. We calculate that the tariff-rate quotas could raise$067-1.55 billion in revenue for the U.S. While this amount is less than available through auction quotas, it could still fund a significant program of worker adjustment, and would mitigate the foreign response.