Are U.S. exports different from China’s 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 China’s 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 China’s 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 countries’ growth experiences during the second half of the 20th century have matched Nurkse’s 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 Nurkse’s 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 firms’ 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 firms’ 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 firms’ 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 Ethiopia’s 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 countries’ external balance, including the oil trade balance, the non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975– 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. Srinivasan’s (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 Srinivasan’s 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 “reallocation.” 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 “reallocation” 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 consumers’ 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 firms’ 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 “learning-by-exporting” 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 members’ 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. 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 buyer’s 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 Canada’s 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 “unfair trade” 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 declines—on the order of 40%—in 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 migrants’ 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 market’s 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 – one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime’s 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 –either 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 investments—in particular, in child human capital and household enterprises? This paper examines Philippine households’ responses to overseas members’ 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 migrant’s 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 migrants’ 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 – 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 “hiring integrity” 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 India’s 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 India’s 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 India’s newly elected coalition parties, the implications of the emphasis on social reform and equity for India’s 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 firm’s 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 “Doha Development Agenda,” with the promise in the Doha Ministerial Declaration to “place [developing countries’] needs and interests at the heart of the Work Programme adopted in this Declaration.” 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 acquirers—joint 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 “race to the bottom” 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 “race to the bottom” 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 “race to the bottom” in capital taxes but this outcome is welfare-improving relative to calibrated taxes. Sensitivity analysis shows that competition can produce a “race to the top” 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 firms’ 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 “internationally fragmented”. 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 – since both approaches require prices of intermediate inputs – in the choice of prices for making these comparisons. Standard “predictions” 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 “chains,” 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 country’s 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 country’s 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 we’ve 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 increa