We examine the relationship between real and financial integration. Real integration is measured ... more We examine the relationship between real and financial integration. Real integration is measured by productivities of capital and labor from trade data for 1982 to 1997. Financial integration is measured by the black market exchange rate. We find more evidence of convergence to equality for returns to capital than for returns to labor. There is some support for convergence of black market premia being associated with declines in black market premia. Acknowledgement 1 We thank the Associazione Guido Carli and Fondazione Cesifin Alberto Predieri for supporting the Fifth Colloquium at which this paper was presented and at which we received many helpful comments. Helpful comments also were received from participants at the INFINITI conference at Trinity College, Dublin when we presented the paper there. We thank the Federal Reserve Bank of Atlanta for research support and Linda Mundy for editorial
In this chapter, a version of the Cass-Koopmans economy is used for the purpose of studying the i... more In this chapter, a version of the Cass-Koopmans economy is used for the purpose of studying the impact of fiscal policy changes on capital accumulation. The focus of the study is on transitional dynamics. It is shown that even moderate change in fiscal policy can have sizeable level effects on income levels along the transition path.
We show that estimated productivities of labor and capital which rationalize trade flows across c... more We show that estimated productivities of labor and capital which rationalize trade flows across countries are related to total factor productivities which rationalize output differences across countries. We present evidence that these productivies from trade flows are related to the institutions and geography across countries. Protection of property rights is the dominant influence on both labor and capital productivity. We also address whether these institutions have a differential effect on those with relatively less education. We find little evidence that more property rights protection has a differential impact on skilled workers relative to unskilled workers. Evidence concerning democracy 1 is not compelling. Geography is only important in terms of distance to a large market.
This article introduces original annual average years of schooling measures for each state from 1... more This article introduces original annual average years of schooling measures for each state from 1840 to 2000. The paper also combines original data on real state per-worker output with existing data to provide a more comprehensive series of real state output per worker from 1840 to 2000. These data show that the New England, Middle Atlantic, Pacific, East North Central, and West North Central regions have been educational leaders during the entire time period. In contrast, the South Atlantic, East South Central, and West South Central regions have been educational laggards. The Mountain region behaves differently than either of the aforementioned groups. Using their estimates of average years of schooling and average years of experience in the labor force, the authors estimate aggregate Mincerian earnings regressions. Their estimates indicate that a year of schooling increased output by between 8 percent and 12 percent, with a point estimate close to 10 percent. These estimates are in line with the body of evidence from the labor literature.
Are financial crises more likely among countries that have more economic freedom? At one level, t... more Are financial crises more likely among countries that have more economic freedom? At one level, the answer to this is obvious. Consider an economy such as North Korea, which has a totally repressed financial system run by the government. The possibility of a financial crisis is not a problem for North Korea, even if a lack of economic growth is a problem for the citizens. Beyond that extreme though, the relationship between economic freedom and financial crises is not so obvious. Just as for economic freedom, a careful definition of financial crises is necessary before examining it empirically. Financial crises often are not well defined: many definitions are broad, such as sharp decreases in asset prices, and would include many relatively common decreases in stock prices; others are quite narrow, including only runs on banking systems. Reinhart and Rogoff (2009) define a financial crisis either by events (banking crises, domestic defaults, or external debt defaults) or by "quantitative thresholds" (inflation crisis, currency crashes, currency debasement, and the bursting of asset-price bubbles). We limit our empirical analysis in this chapter to banking crises, which can be defined by relatively objective criteria and are an important aspect of recent events. There is a large empirical literature that looks at financial crises and the role government regulation or the lack thereof played in the financial crises and subsequent events. For example, after the Asian financial crisis, several empirical papers examined the relationship between capital controls and currency crises and capitalaccount liberalization and the likelihood of a financial-market and exchange-rate crisis.1 As for North Korea, the answer is partly obvious. A closed economy cannot have a crisis due to inflows or outflows of foreign funds. On the other hand, permitting capital flows into and out of a country can improve the economy's efficiency and can make the country's citizens better off (Bekaert, Harvey, and Lundblad, 2005
This paper examines the effect that biofuels production has had on commodity and global food pric... more This paper examines the effect that biofuels production has had on commodity and global food prices. The innovative contribution of this paper is the interactive spreadsheet that allows the reader to choose the assumptions behind the estimates. By allowing the reader to choose the country, time period, supply and demand elasticities, and the size of indirect effects we explicitly illustrate the sensitivity of the estimated effect of biofuels production on prices. Our best estimates suggest that the increase in biofuels production over the past two years has had a sizeable impact on corn, sugar, barley and soybean prices, but a much smaller impact on global food prices. Over the past two years (ending June 2008), we estimate that the increase in worldwide biofuels production pushed up corn, soybean and sugar prices by 27, 21 and 12 percentage points respectively. The countries that account for most of the upward pressure on these prices are the United States and Brazil. Our best estimates suggest that the increase in U.S. biofuels production (ethanol and biodiesel) pushed up corn prices by more than 22 percentage points and soybean prices (soybeans and soybean oil) by more than 15 percentage points, while the increase in EU biofuels production pushed corn and soybean prices up around 3 percentage points. Brazil's increase in sugar-based ethanol production accounts for the entire rise in the price of sugar. Although biofuels had a noticeable impact on individual crop prices, they had a much smaller impact on global food prices. Our best estimate suggests that the increase in worldwide biofuels production over the past two years accounts for just over 12 percent of the rise in the IMF's food price index. The increase in U.S. biofuels production accounts for roughly 60 percent of this effect, while Brazil accounts for 14 percent and the EU accounts for 15 percent. The key takeaway point is that nearly 90 percent of the rise in global food prices comes from factors other than biofuels.
We examine the relationship between real and financial integration. Real integration is measured ... more We examine the relationship between real and financial integration. Real integration is measured by productivities of capital and labor from trade data for 1982 to 1997. Financial integration is measured by the black market exchange rate. We find more evidence of convergence to equality for returns to capital than for returns to labor. There is some support for convergence of black market premia being associated with declines in black market premia. Acknowledgement 1 We thank the Associazione Guido Carli and Fondazione Cesifin Alberto Predieri for supporting the Fifth Colloquium at which this paper was presented and at which we received many helpful comments. Helpful comments also were received from participants at the INFINITI conference at Trinity College, Dublin when we presented the paper there. We thank the Federal Reserve Bank of Atlanta for research support and Linda Mundy for editorial
In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman... more In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327-377] stated that the answer to the fundamental question ''Why has world trade grown?'' remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [
Bayoumi and Eichengreen (1997, p. 142) note that the gravity equation has "long been the workhors... more Bayoumi and Eichengreen (1997, p. 142) note that the gravity equation has "long been the workhorse for empirical studies of the pattern of trade." In 1992, the European Union commissioned a major study to analyze the potential enlargement of the union into central and eastern Europe. That study, now Baldwin (1994), used the gravity equation as the primary empirical tool. The gravity equation has also been used to study the effects of partial preferential arrangements, cf., Sapir (1981); however, we will not address those here. This study (purposefully) does not address ex ante analyses of the effects of FTAs on trade flows using computable general equilibrium models. Do Free Trade Agreements Actually Increase Members' International Trade? The issue of exogeneity may also be an important problem when dummy variables are used (in a gravity equation) to estimate the effects of free trade areas (Lawrence, 1998, p. 59). One might expect-having witnessed a virtual explosion in the number of regional free trade agreements (FTAs) among nations over the past decade and a half-that the answer to the question posed in this paper's title is unequivocal: yes! Surprisingly, international trade economists can actually claim little firm empirical support for reliable quantitative estimates of the average effect of an FTA on bilateral trade (all else constant). Over 40 years, the "gravity equation" has emerged as the empirical workhorse in international trade to study the ex post effects of FTAs and customs unions on bilateral merchandise trade flows. 1 The gravity equation is typically used to explain cross-sectional variation in country pairs' trade flows in terms of the countries' incomes, bilateral distance, and dummy variables for common languages, for common land borders, and for the presence or absence of an FTA. Nobel laureate Jan Tinbergen (1962) was the first to publish an econometric study using the gravity equation for international trade flows, which included evaluating the effect of FTA dummy variables on trade. His results suggested economically insignificant "average treatment effects" of FTAs on trade flows. Tinbergen found that membership in the British Commonwealth (Benelux FTA) was associated with only 5 (4) percent higher trade flows. Since then, results have been mixed, at best. Aitken (1973), Abrams (1980), and Brada and Mendez (1983) found the European Community (EC) to have an economically and statistically significant effect on trade flows among members, whereas Bergstrand (1985) and Frankel, Stein and Wei (1995) found insignificant effects. Frankel (1997) found positive significant effects from Mersosur,
Using a Taylor-series expansion, we solve for a simple reduced-form gravity equation revealing a ... more Using a Taylor-series expansion, we solve for a simple reduced-form gravity equation revealing a transparent theoretical relationship among bilateral trade flows, incomes, and trade costs, based upon the model in Anderson and van Wincoop [Anderson, James E., and van Wincoop, Eric. "Gravity with Gravitas: A Solution to the Border Puzzle." American Economic Review 93, no. 1 (March 2003): 170-192.]. Monte Carlo results support that virtually identical coefficient estimates are obtained easily by estimating the reduced-form gravity equation including theoretically-motivated exogenous multilateral resistance terms. We show our methodology generalizes to many settings and delineate the economic conditions under which our approach works well for computing comparative statics and under which it does not.
To date, most estimates of the effects of free trade agreements (FTAs) on international trade flo... more To date, most estimates of the effects of free trade agreements (FTAs) on international trade flows have used the gravity equation in international trade, but have often yielded highly "fragile" estimates. This paper instead employs a non-parametric "matching" statistical estimation technique of BAIER and BERGSTRAND (2009), using methods developed by ABADIE and IMBENS (2006), to evaluate ex post the impact of Swiss FTAs on Swiss trade flows, including notably the recent Switzerland-Mexico Free Trade Agreement (FTA) on Swiss-Mexico trade flows. The main empirical finding is that the Swiss-Mexico FTA of 2001 increased bilateral trade about 37 percent, after only four years in place. This result is consistent with the impacts (over 10–15 years) of other Swiss FTAs. Moreover, these results are consistent with the findings in BAIER and BERGSTRAND (2007) using parametric panel techniques and with those in BAIER and BERGSTRAND (2009) using matching econometrics that the likely impact of such an agreement on Swiss-Mexico trade after 10–15 years should be approximately 100 percent.
Three years ago, very few economists would have imagined that one of the newest and fastest growi... more Three years ago, very few economists would have imagined that one of the newest and fastest growing research areas in international trade is the use of quantitative trade models to estimate the economic welfare losses from dissolutions of major countries' economic integration agreements (EIAs). In 2016, "Brexit" was passed in a United Kingdom referendum. Moreover, in 2019, the existence of the entire North American Free Trade Agreement (NAFTA) is at risk if the United States withdraws-a threat President Trump has made if the proposed United States-Mexico-Canada Agreement is not passed by the U.S. Congress. We use state-of-the-art econometric methodology to estimate the partial (average treatment) effects on international trade flows of the six major types of EIAs. Armed with precise estimates of the average treatment effect for a free trade agreement, we examine the general equilibrium trade and welfare effects of the elimination of NAFTA (and for robustness U.S. withdrawal only). Although all the member countries' standards of living fall, surprisingly the smallest economy, Mexico, is not the biggest loser; Canada is the biggest loser. Canada's welfare (per capita income) loss of 2.11 percent is nearly two times that of Mexico's loss of 1.15 percent and is nearly eight times the United States' loss of 0.27 percent. The simulations will illustrate the important influence of trade costs-international and intranational-in contributing to the gains (or losses) from an economic integration agreement's formation (or elimination).
It is now widely accepted that economic integration agreements (EIAs) and other tradepolicy liber... more It is now widely accepted that economic integration agreements (EIAs) and other tradepolicy liberalizations contribute to nations' economic growth and development and help alleviate poverty. However, the economic effects of such policies vary across countries' economic structures; for instance, developing countries face higher fixed trade costs (partly due to higher government border-crossing costs and weaker port infrastructures). We offer three potential contributions. First, we extend a standard Melitz general equilibrium trade model with firm heterogeneity to show how variable-cost and fixed-cost "trade elasticities" associated with trade liberalizations are heterogeneous and endogenous to levels of country-pairs' bilateral policy and non-policy, variable and fixed trade costs-even allowing for CES preferences and an untruncated Pareto distribution of productivities. Using associated comparative statics, we provide several explicit predictions of the heterogeneous (variable-and fixed-cost) bilateral extensivemargin, intensive-margin, and trade elasticities. Second, we provide empirical support for the theoretical hypotheses. Trade elasticities vary across particular settings. Third, we demonstrate the relevance of these theoretical and empirical results for ex ante trade-flow predictions of potential EIAs. For instance, we show that a 10 percent lower average per capita income of a country-pair is associated with a 60 percent higher partial EIA effect. Moreover, we show empirically that 95-99 percent of the welfare (or probability) estimates of EIA liberalizations between 1,358 North-North, North-South, and South-South country-pairs can be explained by our heterogeneous EIA partial treatment effects.
Handbook of International Trade and Transportation
We review and interpret the main theoretical developments in the gravity literature from its very... more We review and interpret the main theoretical developments in the gravity literature from its very early, a-theoretical applications to the latest structural contributions. We also discuss challenges and implement methods to estimate empirical gravity equations. We finish with a presentation and examples of numerical simulations with the structural gravity model. Throughout the analysis we attempt to emphasize the links and importance of transportation costs for the trade literature and we outline avenues where we believe interdisciplinary contributions between the international trade and transportation economics fields will be most valuable.
Gravity equations have been used for more than 50 years to estimate ex post the partial effects o... more Gravity equations have been used for more than 50 years to estimate ex post the partial effects of trade costs on international trade flows, and the well-known and traditionally presumed exogenous – “trade-cost elasticity” plays a central role in computing general equilibrium tradeflow and welfare effects of trade-cost changes. This paper addresses theoretically and empirically the influence of variable and fixed export costs in explaining the likely heterogeneity in the trade-cost elasticity. We offer four potential contributions. First, for motivation, we show empirically that the heterogeneity in various economic integration agreements’ (EIAs’) partial effects on trade flows far exceeds that explained simply by variation in depth of the trade liberalization. Second, we use standard Armingtonand Melitz-type general equilibrium trade models to motivate theoretically the roles of variable trade costs and of fixed and variable export costs, respectively, for explaining (endogenous) h...
The gravity model of international trade states that the volume of trade between two countries is... more The gravity model of international trade states that the volume of trade between two countries is proportional to their economic mass and a measure of their relative trade frictions. Perhaps because of its intuitive appeal, the gravity model has been the workhorse model of international trade for more than 50 years. While the initial empirical work using the gravity model lacked sound theoretical underpinnings, the theoretical developments have highlighted how a gravity-like specification can be derived from many models with varying assumptions about preferences, technology, and market structure. Along the strengthening of the theoretical roots of the gravity model, the way in which it is estimated has also evolved significantly since the start of the new millennium. Depending on the exact characteristics of regression, different estimation methods should be used to estimate the gravity model.
Motivated to solve the “border puzzle” of Canadian-U.S. trade, theoretical foundations for the gr... more Motivated to solve the “border puzzle” of Canadian-U.S. trade, theoretical foundations for the gravity equation of international trade were refined recently to emphasize the importance of the endogeneity of multilateral price (resistance) terms, cf., Anderson and van Wincoop (2003). While regionspecific fixed effects can also generate consistent estimates of gravity-equation coefficients, cf., Feenstra (2004), Anderson and van Wincoop argue that proper computation of general equilibrium comparative statics requires custom estimation of the entire nonlinear system of trade flow and price equations. We show in this paper that these multilateral price terms are critical, but nonlinear estimation is not. Virtually identical results can be obtained using “good old” ordinary least squares – bonus vetus OLS. The key is using a first-order log-linear Taylor-series expansion to approximate the multilateral price terms. Among several findings, we note just three. First, the approximation allo...
International Political Economy: Globalization eJournal, 2015
Gravity equations have been used for more than 50 years to estimate ex post the partial effects o... more Gravity equations have been used for more than 50 years to estimate ex post the partial effects of trade costs on international trade flows, and the well-known - and traditionally presumed exogenous – “trade-cost elasticity” plays a central role in computing general equilibrium trade-flow and welfare effects of trade-cost changes. This paper addresses theoretically and empirically the influence of variable and fixed export costs in explaining the likely heterogeneity in the trade-cost elasticity. We offer four potential contributions. First, for motivation, we show empirically that the heterogeneity in various economic integration agreements’ (EIAs’) partial effects on trade flows far exceeds that explained simply by variation in depth of the trade liberalization. Second, we use standard Armington- and Melitz-type general equilibrium trade models to motivate theoretically the roles of variable trade costs and of fixed and variable export costs, respectively, for explaining (endogeno...
We examine the relationship between real and financial integration. Real integration is measured ... more We examine the relationship between real and financial integration. Real integration is measured by productivities of capital and labor from trade data for 1982 to 1997. Financial integration is measured by the black market exchange rate. We find more evidence of convergence to equality for returns to capital than for returns to labor. There is some support for convergence of black market premia being associated with declines in black market premia. Acknowledgement 1 We thank the Associazione Guido Carli and Fondazione Cesifin Alberto Predieri for supporting the Fifth Colloquium at which this paper was presented and at which we received many helpful comments. Helpful comments also were received from participants at the INFINITI conference at Trinity College, Dublin when we presented the paper there. We thank the Federal Reserve Bank of Atlanta for research support and Linda Mundy for editorial
In this chapter, a version of the Cass-Koopmans economy is used for the purpose of studying the i... more In this chapter, a version of the Cass-Koopmans economy is used for the purpose of studying the impact of fiscal policy changes on capital accumulation. The focus of the study is on transitional dynamics. It is shown that even moderate change in fiscal policy can have sizeable level effects on income levels along the transition path.
We show that estimated productivities of labor and capital which rationalize trade flows across c... more We show that estimated productivities of labor and capital which rationalize trade flows across countries are related to total factor productivities which rationalize output differences across countries. We present evidence that these productivies from trade flows are related to the institutions and geography across countries. Protection of property rights is the dominant influence on both labor and capital productivity. We also address whether these institutions have a differential effect on those with relatively less education. We find little evidence that more property rights protection has a differential impact on skilled workers relative to unskilled workers. Evidence concerning democracy 1 is not compelling. Geography is only important in terms of distance to a large market.
This article introduces original annual average years of schooling measures for each state from 1... more This article introduces original annual average years of schooling measures for each state from 1840 to 2000. The paper also combines original data on real state per-worker output with existing data to provide a more comprehensive series of real state output per worker from 1840 to 2000. These data show that the New England, Middle Atlantic, Pacific, East North Central, and West North Central regions have been educational leaders during the entire time period. In contrast, the South Atlantic, East South Central, and West South Central regions have been educational laggards. The Mountain region behaves differently than either of the aforementioned groups. Using their estimates of average years of schooling and average years of experience in the labor force, the authors estimate aggregate Mincerian earnings regressions. Their estimates indicate that a year of schooling increased output by between 8 percent and 12 percent, with a point estimate close to 10 percent. These estimates are in line with the body of evidence from the labor literature.
Are financial crises more likely among countries that have more economic freedom? At one level, t... more Are financial crises more likely among countries that have more economic freedom? At one level, the answer to this is obvious. Consider an economy such as North Korea, which has a totally repressed financial system run by the government. The possibility of a financial crisis is not a problem for North Korea, even if a lack of economic growth is a problem for the citizens. Beyond that extreme though, the relationship between economic freedom and financial crises is not so obvious. Just as for economic freedom, a careful definition of financial crises is necessary before examining it empirically. Financial crises often are not well defined: many definitions are broad, such as sharp decreases in asset prices, and would include many relatively common decreases in stock prices; others are quite narrow, including only runs on banking systems. Reinhart and Rogoff (2009) define a financial crisis either by events (banking crises, domestic defaults, or external debt defaults) or by "quantitative thresholds" (inflation crisis, currency crashes, currency debasement, and the bursting of asset-price bubbles). We limit our empirical analysis in this chapter to banking crises, which can be defined by relatively objective criteria and are an important aspect of recent events. There is a large empirical literature that looks at financial crises and the role government regulation or the lack thereof played in the financial crises and subsequent events. For example, after the Asian financial crisis, several empirical papers examined the relationship between capital controls and currency crises and capitalaccount liberalization and the likelihood of a financial-market and exchange-rate crisis.1 As for North Korea, the answer is partly obvious. A closed economy cannot have a crisis due to inflows or outflows of foreign funds. On the other hand, permitting capital flows into and out of a country can improve the economy's efficiency and can make the country's citizens better off (Bekaert, Harvey, and Lundblad, 2005
This paper examines the effect that biofuels production has had on commodity and global food pric... more This paper examines the effect that biofuels production has had on commodity and global food prices. The innovative contribution of this paper is the interactive spreadsheet that allows the reader to choose the assumptions behind the estimates. By allowing the reader to choose the country, time period, supply and demand elasticities, and the size of indirect effects we explicitly illustrate the sensitivity of the estimated effect of biofuels production on prices. Our best estimates suggest that the increase in biofuels production over the past two years has had a sizeable impact on corn, sugar, barley and soybean prices, but a much smaller impact on global food prices. Over the past two years (ending June 2008), we estimate that the increase in worldwide biofuels production pushed up corn, soybean and sugar prices by 27, 21 and 12 percentage points respectively. The countries that account for most of the upward pressure on these prices are the United States and Brazil. Our best estimates suggest that the increase in U.S. biofuels production (ethanol and biodiesel) pushed up corn prices by more than 22 percentage points and soybean prices (soybeans and soybean oil) by more than 15 percentage points, while the increase in EU biofuels production pushed corn and soybean prices up around 3 percentage points. Brazil's increase in sugar-based ethanol production accounts for the entire rise in the price of sugar. Although biofuels had a noticeable impact on individual crop prices, they had a much smaller impact on global food prices. Our best estimate suggests that the increase in worldwide biofuels production over the past two years accounts for just over 12 percent of the rise in the IMF's food price index. The increase in U.S. biofuels production accounts for roughly 60 percent of this effect, while Brazil accounts for 14 percent and the EU accounts for 15 percent. The key takeaway point is that nearly 90 percent of the rise in global food prices comes from factors other than biofuels.
We examine the relationship between real and financial integration. Real integration is measured ... more We examine the relationship between real and financial integration. Real integration is measured by productivities of capital and labor from trade data for 1982 to 1997. Financial integration is measured by the black market exchange rate. We find more evidence of convergence to equality for returns to capital than for returns to labor. There is some support for convergence of black market premia being associated with declines in black market premia. Acknowledgement 1 We thank the Associazione Guido Carli and Fondazione Cesifin Alberto Predieri for supporting the Fifth Colloquium at which this paper was presented and at which we received many helpful comments. Helpful comments also were received from participants at the INFINITI conference at Trinity College, Dublin when we presented the paper there. We thank the Federal Reserve Bank of Atlanta for research support and Linda Mundy for editorial
In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman... more In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327-377] stated that the answer to the fundamental question ''Why has world trade grown?'' remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [
Bayoumi and Eichengreen (1997, p. 142) note that the gravity equation has "long been the workhors... more Bayoumi and Eichengreen (1997, p. 142) note that the gravity equation has "long been the workhorse for empirical studies of the pattern of trade." In 1992, the European Union commissioned a major study to analyze the potential enlargement of the union into central and eastern Europe. That study, now Baldwin (1994), used the gravity equation as the primary empirical tool. The gravity equation has also been used to study the effects of partial preferential arrangements, cf., Sapir (1981); however, we will not address those here. This study (purposefully) does not address ex ante analyses of the effects of FTAs on trade flows using computable general equilibrium models. Do Free Trade Agreements Actually Increase Members' International Trade? The issue of exogeneity may also be an important problem when dummy variables are used (in a gravity equation) to estimate the effects of free trade areas (Lawrence, 1998, p. 59). One might expect-having witnessed a virtual explosion in the number of regional free trade agreements (FTAs) among nations over the past decade and a half-that the answer to the question posed in this paper's title is unequivocal: yes! Surprisingly, international trade economists can actually claim little firm empirical support for reliable quantitative estimates of the average effect of an FTA on bilateral trade (all else constant). Over 40 years, the "gravity equation" has emerged as the empirical workhorse in international trade to study the ex post effects of FTAs and customs unions on bilateral merchandise trade flows. 1 The gravity equation is typically used to explain cross-sectional variation in country pairs' trade flows in terms of the countries' incomes, bilateral distance, and dummy variables for common languages, for common land borders, and for the presence or absence of an FTA. Nobel laureate Jan Tinbergen (1962) was the first to publish an econometric study using the gravity equation for international trade flows, which included evaluating the effect of FTA dummy variables on trade. His results suggested economically insignificant "average treatment effects" of FTAs on trade flows. Tinbergen found that membership in the British Commonwealth (Benelux FTA) was associated with only 5 (4) percent higher trade flows. Since then, results have been mixed, at best. Aitken (1973), Abrams (1980), and Brada and Mendez (1983) found the European Community (EC) to have an economically and statistically significant effect on trade flows among members, whereas Bergstrand (1985) and Frankel, Stein and Wei (1995) found insignificant effects. Frankel (1997) found positive significant effects from Mersosur,
Using a Taylor-series expansion, we solve for a simple reduced-form gravity equation revealing a ... more Using a Taylor-series expansion, we solve for a simple reduced-form gravity equation revealing a transparent theoretical relationship among bilateral trade flows, incomes, and trade costs, based upon the model in Anderson and van Wincoop [Anderson, James E., and van Wincoop, Eric. "Gravity with Gravitas: A Solution to the Border Puzzle." American Economic Review 93, no. 1 (March 2003): 170-192.]. Monte Carlo results support that virtually identical coefficient estimates are obtained easily by estimating the reduced-form gravity equation including theoretically-motivated exogenous multilateral resistance terms. We show our methodology generalizes to many settings and delineate the economic conditions under which our approach works well for computing comparative statics and under which it does not.
To date, most estimates of the effects of free trade agreements (FTAs) on international trade flo... more To date, most estimates of the effects of free trade agreements (FTAs) on international trade flows have used the gravity equation in international trade, but have often yielded highly "fragile" estimates. This paper instead employs a non-parametric "matching" statistical estimation technique of BAIER and BERGSTRAND (2009), using methods developed by ABADIE and IMBENS (2006), to evaluate ex post the impact of Swiss FTAs on Swiss trade flows, including notably the recent Switzerland-Mexico Free Trade Agreement (FTA) on Swiss-Mexico trade flows. The main empirical finding is that the Swiss-Mexico FTA of 2001 increased bilateral trade about 37 percent, after only four years in place. This result is consistent with the impacts (over 10–15 years) of other Swiss FTAs. Moreover, these results are consistent with the findings in BAIER and BERGSTRAND (2007) using parametric panel techniques and with those in BAIER and BERGSTRAND (2009) using matching econometrics that the likely impact of such an agreement on Swiss-Mexico trade after 10–15 years should be approximately 100 percent.
Three years ago, very few economists would have imagined that one of the newest and fastest growi... more Three years ago, very few economists would have imagined that one of the newest and fastest growing research areas in international trade is the use of quantitative trade models to estimate the economic welfare losses from dissolutions of major countries' economic integration agreements (EIAs). In 2016, "Brexit" was passed in a United Kingdom referendum. Moreover, in 2019, the existence of the entire North American Free Trade Agreement (NAFTA) is at risk if the United States withdraws-a threat President Trump has made if the proposed United States-Mexico-Canada Agreement is not passed by the U.S. Congress. We use state-of-the-art econometric methodology to estimate the partial (average treatment) effects on international trade flows of the six major types of EIAs. Armed with precise estimates of the average treatment effect for a free trade agreement, we examine the general equilibrium trade and welfare effects of the elimination of NAFTA (and for robustness U.S. withdrawal only). Although all the member countries' standards of living fall, surprisingly the smallest economy, Mexico, is not the biggest loser; Canada is the biggest loser. Canada's welfare (per capita income) loss of 2.11 percent is nearly two times that of Mexico's loss of 1.15 percent and is nearly eight times the United States' loss of 0.27 percent. The simulations will illustrate the important influence of trade costs-international and intranational-in contributing to the gains (or losses) from an economic integration agreement's formation (or elimination).
It is now widely accepted that economic integration agreements (EIAs) and other tradepolicy liber... more It is now widely accepted that economic integration agreements (EIAs) and other tradepolicy liberalizations contribute to nations' economic growth and development and help alleviate poverty. However, the economic effects of such policies vary across countries' economic structures; for instance, developing countries face higher fixed trade costs (partly due to higher government border-crossing costs and weaker port infrastructures). We offer three potential contributions. First, we extend a standard Melitz general equilibrium trade model with firm heterogeneity to show how variable-cost and fixed-cost "trade elasticities" associated with trade liberalizations are heterogeneous and endogenous to levels of country-pairs' bilateral policy and non-policy, variable and fixed trade costs-even allowing for CES preferences and an untruncated Pareto distribution of productivities. Using associated comparative statics, we provide several explicit predictions of the heterogeneous (variable-and fixed-cost) bilateral extensivemargin, intensive-margin, and trade elasticities. Second, we provide empirical support for the theoretical hypotheses. Trade elasticities vary across particular settings. Third, we demonstrate the relevance of these theoretical and empirical results for ex ante trade-flow predictions of potential EIAs. For instance, we show that a 10 percent lower average per capita income of a country-pair is associated with a 60 percent higher partial EIA effect. Moreover, we show empirically that 95-99 percent of the welfare (or probability) estimates of EIA liberalizations between 1,358 North-North, North-South, and South-South country-pairs can be explained by our heterogeneous EIA partial treatment effects.
Handbook of International Trade and Transportation
We review and interpret the main theoretical developments in the gravity literature from its very... more We review and interpret the main theoretical developments in the gravity literature from its very early, a-theoretical applications to the latest structural contributions. We also discuss challenges and implement methods to estimate empirical gravity equations. We finish with a presentation and examples of numerical simulations with the structural gravity model. Throughout the analysis we attempt to emphasize the links and importance of transportation costs for the trade literature and we outline avenues where we believe interdisciplinary contributions between the international trade and transportation economics fields will be most valuable.
Gravity equations have been used for more than 50 years to estimate ex post the partial effects o... more Gravity equations have been used for more than 50 years to estimate ex post the partial effects of trade costs on international trade flows, and the well-known and traditionally presumed exogenous – “trade-cost elasticity” plays a central role in computing general equilibrium tradeflow and welfare effects of trade-cost changes. This paper addresses theoretically and empirically the influence of variable and fixed export costs in explaining the likely heterogeneity in the trade-cost elasticity. We offer four potential contributions. First, for motivation, we show empirically that the heterogeneity in various economic integration agreements’ (EIAs’) partial effects on trade flows far exceeds that explained simply by variation in depth of the trade liberalization. Second, we use standard Armingtonand Melitz-type general equilibrium trade models to motivate theoretically the roles of variable trade costs and of fixed and variable export costs, respectively, for explaining (endogenous) h...
The gravity model of international trade states that the volume of trade between two countries is... more The gravity model of international trade states that the volume of trade between two countries is proportional to their economic mass and a measure of their relative trade frictions. Perhaps because of its intuitive appeal, the gravity model has been the workhorse model of international trade for more than 50 years. While the initial empirical work using the gravity model lacked sound theoretical underpinnings, the theoretical developments have highlighted how a gravity-like specification can be derived from many models with varying assumptions about preferences, technology, and market structure. Along the strengthening of the theoretical roots of the gravity model, the way in which it is estimated has also evolved significantly since the start of the new millennium. Depending on the exact characteristics of regression, different estimation methods should be used to estimate the gravity model.
Motivated to solve the “border puzzle” of Canadian-U.S. trade, theoretical foundations for the gr... more Motivated to solve the “border puzzle” of Canadian-U.S. trade, theoretical foundations for the gravity equation of international trade were refined recently to emphasize the importance of the endogeneity of multilateral price (resistance) terms, cf., Anderson and van Wincoop (2003). While regionspecific fixed effects can also generate consistent estimates of gravity-equation coefficients, cf., Feenstra (2004), Anderson and van Wincoop argue that proper computation of general equilibrium comparative statics requires custom estimation of the entire nonlinear system of trade flow and price equations. We show in this paper that these multilateral price terms are critical, but nonlinear estimation is not. Virtually identical results can be obtained using “good old” ordinary least squares – bonus vetus OLS. The key is using a first-order log-linear Taylor-series expansion to approximate the multilateral price terms. Among several findings, we note just three. First, the approximation allo...
International Political Economy: Globalization eJournal, 2015
Gravity equations have been used for more than 50 years to estimate ex post the partial effects o... more Gravity equations have been used for more than 50 years to estimate ex post the partial effects of trade costs on international trade flows, and the well-known - and traditionally presumed exogenous – “trade-cost elasticity” plays a central role in computing general equilibrium trade-flow and welfare effects of trade-cost changes. This paper addresses theoretically and empirically the influence of variable and fixed export costs in explaining the likely heterogeneity in the trade-cost elasticity. We offer four potential contributions. First, for motivation, we show empirically that the heterogeneity in various economic integration agreements’ (EIAs’) partial effects on trade flows far exceeds that explained simply by variation in depth of the trade liberalization. Second, we use standard Armington- and Melitz-type general equilibrium trade models to motivate theoretically the roles of variable trade costs and of fixed and variable export costs, respectively, for explaining (endogeno...
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Papers by Scott Baier