Substitution in Markusen's classic trade and factor movement complementarity models

Mundell and Markusen each wrote classic papers on the relationship between trade and factor movement. Mundell showed that substitution holds in the Heckscher-Ohlin model. Markusen challenged the substitution result and showed in five different models that removing barriers to factor movement results in complementarity under free trade, identical factor endowments, and a change in any one of the other assumptions underlying the Heckscher-Ohlin model. The author generalizes Markusen's analysis by considering the liberalization of barriers to factor movement under any non-negative level of protection, and liberalizing trade barriers under factor mobility. He shows that (1) substitution holds at high protection levels, (2) complementarity holds at low protection levels, and (3) either substitution or complementarity hold under large tariff changes.Free Trade,Trade Law,Economic Theory&Research,Trade Policy,International Trade and Trade Rules

Will the real"natural trading partner"please stand up?

Adherents of the"natural trading partner"hypothesis argue that preferential trade agreements (PTAs) are more likely to improve welfare if participating countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare gains are likely to be greater if participating countries trade less with each other. The author shows that neither analysis is correct. The"natural trading partner"hypothesis can be rescued if it is redefined in terms of complementarity or substitutability in the trade relations of countries, rather than in terms of their volume of trade. The author asks not whether a country should form or join a trading bloc but which partner or partners it should select if it does join such a bloc. He shows that the pre-PTA volume of trade is not a useful criterion for selecting a partner. The pre-PTA volume is equal to zero if the partner is an importer of the good sold to the home country and it is indeterminate if the partner is an exporter of that good. Among the author's conclusions: 1) The home country is better off with a larger partner country. First, a large partner is more likely to satisfy the home country's import demand at the world price. Second, the home country is likely to gain more on its exports to a large partner country, because that partner is likely to continue importing from the world market after formation of the trading bloc. And since the partner charges a tariff on imports from the world market, the home country is more likely to improve its terms of trade by selling to the partner at the higher tariff-inclusive price if the partner is large. 2) The PTA as a whole is likely to be better off if each country imports what the other exports (rather than each country importing what the other imports). Losses are similar but less likely, while gains are both more likely and the same or larger.Rules of Origin,Environmental Economics&Policies,Trade Policy,Economic Theory&Research,Payment Systems&Infrastructure,Trade Policy,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Trade and Regional Integration,Environmental Economics&Policies

Small State Regional Cooperation, South-South and South-North Migration, and International Trade

This paper provides a different basis than previous analyses for regional bloc formation and regional migration. Due to low bargaining power and fixed costs, small states face a severe disadvantage in negotiations with the rest of the world and might benefit by forming a regional bloc. The study a) presents a general equilibrium model where bargaining power, international (IC) and regional (RC) negotiation costs, number of issues negotiated (N), and accession rule to the bloc determine its size and welfare impact, and b) examines the impact of international migration as well as the migration-trade relationship. The main findings are: i) the likelihood of regional bloc formation, its size and welfare impact increases with IC, N and decreases with RC; ii) bloc size is optimal (below the optimum) if an accession fee is (is not) charged; iii) South-South migration raises bloc size and welfare; iv) South-South migration and trade are complements under market access negotiations and are substitutes under negotiations for unilateral transfers as well as under migrant remittances; and vi) South-North migration and bloc formation, and South-North and South-South migration, are substitutes for the states that benefit from membership in the bloc.small states, regional cooperation, South-South migration, South-North migration, trade

Multilateral trade liberalization and political disintegration - implications for the evolution of free trade areas and customs unions

The author combines two theories - one about how multilateral trade liberalization affects regional integration, the other about how it affects political disintegration - to explain why the ratio of free trade areas to customs unions has increased over time. Ethier argues (1998, 1999) that multilateral trade liberalization led to the recent wave of regional integration arrangements. Alesina and others (1997), in discussing the number and size of countries, argue that multilateral trade liberalization leads to political disintegration, with an increase in the number of countries. Combining the two arguments, the author hypothesizes that as multilateral trade liberalization proceeds, and the number of regional integration arrangements increases, the ratio of free trade areas to customs unions also increases. The data, which show that ratio increasing in the 1990s, are consistent with the hypothesis.Environmental Economics&Policies,Economic Theory&Research,Rules of Origin,Earth Sciences&GIS,Trade Policy,Rules of Origin,Earth Sciences&GIS,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade and Regional Integration,Economic Theory&Research

On the inefficiency of inequality

A number of studies have examined the implications of preference interdependence. This paper models individual utility as depending either on the level of other people's consumption or on the difference in consumption levels. It assumes that the impact of an increase in other people's consumption on individual utility diminishes with the level of consumption, raising individual utility when that consumption is very small and lowering it when that consumption is very large. Based on that plausible assumption, the paper shows that, whether individual utility depends on the level of other people's consumption or on the difference in consumption levels, i) welfare declines with inequality, ii) equilibrium inequality is inefficient, and iii) the optimal intervention leads to a more equal distribution. Implications for the role of development institutions are examined.Economic Theory&Research,Labor Policies,Environmental Economics&Policies,Financial Intermediation,Services&Transfers to Poor,Economic Theory&Research,Inequality,Environmental Economics&Policies,Governance Indicators,Financial Intermediation

Trade policy and labor services : final status options for the West Bank and Gaza

The author considers the policy options of the West Bank and Gaza with respect to trade and the export of labor services. He concludes that: 1) Nondiscriminatory trade policy is unambiguously superior to a free trade agreement with Israel; 2) The West Bank and Gaza should pursue a nondiscriminatory trade policy with all its neighbors, but only on the condition that the trade policy be open, transparent, and enforced by a credible lock-in mechanism. Otherwise, a customs union with Israel may be preferable; 3) The Palestinian Authority should establish a system of fee-based permits for Palestinians working in Israel; and 4) The Palestinian Authority should consider allowing Jordanians access to the West Bank and Gaza labor market.Payment Systems&Infrastructure,Economic Theory&Research,Trade Policy,Environmental Economics&Policies,Rules of Origin,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Economic Theory&Research,Trade Policy,Trade and Regional Integration

Small is beautiful : preferential trade agreements and the impact of country size, market share, efficiency, and trade policy

There has been a resurgence of preferential trade agreements (PTAs). This has led to renewed debate about how PTAs affect both welfare and the multilateral system. The author examines two ideas: the welfare impact of PTAs and the effect of structural and policy changes on PTAs. He asks how the PTA's effect on home-country welfare is affected by higher imports demand; the production efficiency of the partner or rest of the world; the share imported from the other partner; and the initial protection on imports from the partner. There are several findings. An individual country benefits more from a PTA if it imports less from its partner countries. A small home country loses from forming a free trade agreement with a small partner country, but gains from forming one with the rest of the world. In other words, the home country is better off as a small member of a large bloc than as a large member of a small bloc. This result need not hold if smuggling is a factor. Home country welfare after formation of a free trade agreement (FTA) is higher when imports from the partner country are smaller, whether the partner country is large or small. Welfare worsens as imports from the partner country increase. In general a PTA is more beneficial for a country with lower import demand. A PTA is also more beneficial for a country with an efficient import-substituting sector. A small country may gain from forming a PTA when smuggling is a factor.Consumption,Economic Theory&Research,Environmental Economics&Policies,Trade Policy,Markets and Market Access,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Environmental Economics&Policies,Trade and Regional Integration,Trade Policy

Labor market integration in the presence of social capital

Labor market integration is typically assumed to improve welfare in the absence of distortions, because it allows labor to move to where returns are highest. The author examines this result in a simple general equilibrium model in the presence of a common property resource: social capital. Drawing on evidence that social capital raises productivity and falls with labor mobility, the author's main findings are that: 1) Labor market integration imposes a negative externality and need not raise welfare. 2) The welfare impact is more beneficial (or less harmful) the greater the difference in endowments is between the integrating regions. 3) Whether positive or negative, the welfare impact is larger the more similar the levels of social capital of the integrating regions are and the lower the migration costs are. 4) Trade liberalization generates an additional benefit -- over and above the standard gains from trade -- by reducing labor mobility and the negative externality associated with it. Trade liberalization is superior to labor market integration. 5) The creation of new private or public institutions in response to labor market integration may reduce welfare. The author shows that the welfare implications depend on two parameters of the model, the curvature of the utility function and the cost of private migration.Economic Theory&Research,Public Health Promotion,Banks&Banking Reform,Decentralization,Labor Policies,Poverty Assessment,Health Economics&Finance,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies

The impact of two tier producer and consumer food pricing in India

India's government procures agricultural products such as rice, wheat, and sugar at below-market prices and sells them in both urban and rural ration shops. The rest of such crops is sold in the open market. This creates a two-tier price system for consumers and producers. Many (including Dantwala, Mellor, and Hayami, Subbarao, and Otsuka) claim that such a policy raises the open-market price so much that it ultimately increases the average price received by farmers. Iftrue, the gainers would be the farm sector as a whole and low-income urban consumers with access to the ration shops. Losers would be the high-income urban consumers who buy at the open-market price. This view has provided an intellectual basis for the policy. The author examines a variety of cases: with and without rationing, with rationing by ration cards or by queuing, with and without the urban rich having access to the ration shops, with and without free trade, and with a marketable surplus with positive, negative, or zero price elasticity. He finds that in most cases the policy's impact on the average price is either negative or ambiguous, and it is negative in the more realistic cases. A negative impact implies that farmers on the whole lose from the procurement policy. But small farmers who are net buyers of the procured crops, and landless laborers, gain from a lower average price in the short run (especially if they have easy access to the rural ration shops). The long-run effect depends on the impact of the lower average price on rural employment and wages.Markets and Market Access,Economic Theory&Research,Environmental Economics&Policies,Consumption,Access to Markets

Topics in the Economics of Integration in the Americas - Introduction

Trade, regional integration, Mercosur, NAFTA