Archive for the ‘Uncategorized’ Category

The NAFTA trucking dispute in 2015

8 May 2015

I’ve been blogging the NAFTA trucking dispute since 2008. Under NAFTA, Mexican trucks were supposed to be able to operate in Texas, California, New Mexico, and Arizona by December 1995. That never happened, and it took a dozen years for a pilot program to be started, only to be aborted in 2009. Another pilot took place 2011-2014.

Nearly twenty years late, the US government may be close to fulfilling its NAFTA obligations. In January 2015, the US DOT announced “that Mexican motor carriers will soon be able to apply for authority to conduct long-haul, cross-border trucking services in the United States.” I’m not immediately finding confirmation that this has actually started, so I won’t call this case closed quite yet. We’ll see if it hits the 20-year mark this December.

What the Heckscher-Ohlin theorem is and is not about

18 January 2015

In a piece for Bloomberg, Noah Smith wrote:

No. 9. The Heckscher-Ohlin theorem

This is a theory about trade. It says that countries with more capital — industrialized countries such as the U.S. or Japan — will tend to make things that are more capital-intensive. And countries with more labor — such as India — will tend to make things that are more labor-intensive. That’s why the U.S. makes a lot of semiconductors (which require huge fabrication plants), and India makes a lot of clothes.

Tyler Cowen says Noah Smith oversimplified/misrepresented the theorem. He raises four objections, concluding with:

I continue to believe most economists don’t have such a clear sense of the Hechscker-Ohlin theorem. There are so many tricks to HOT I wouldn’t be surprised if I slipped up somewhere myself in this post.

Indeed, I do think Tyler slipped up a bit. He’s right that identifying “effective units” of capital and labor is the relevant exercise and also very difficult (objection #2), and of course the Heckscher-Ohlin theorem is all about ratios, not absolute quantities (objection #3).1

But I want to defend Noah a bit from Tyler’s first complaint, which was:

The HOT proposition is about exports being relatively capital- or labor-intensive, not about production per se. Even for a popular audience, I think that substitution should have been easy enough.

Is that so? Here’s how Ron Jones and Peter Neary stated the theorem in question in their 1984 Handbook chapter, which surely was not aimed at a popular audience:

Heckscher-Ohlin theorem. A country has a production bias towards, and hence tends to export, the commodity which uses intensively the factor with which it is relatively well endowed.

Why does production composition determine net export composition in this model? Well, the factor-abundance theory is a story about economies’ endowments determining the pattern of trade. To talk only about endowments (and thus only about supply-side elements), we have to neuter demand by assuming identical, homothetic preferences.2 Given commodity-price equalization and homothetic preferences, each country has a consumption vector that is proportionate to its share of world income. With no differences in the composition of consumption, differences in the composition of production translate into differences in the composition of net exports, which are simply production minus consumption.

Thus, the prediction about the pattern of trade simply falls out of the prediction about the pattern of production. Here’s how Jones and Neary explained it:

The final core proposition is the Heckscher-Ohlin theorem itself, but this in fact is closely related to the Rybczynski theorem. Consider two countries with different relative factor endowments and the same technology for producing both goods. If both countries face the same commodity prices then, by the Rybczynski theorem, the country with the greater relative endowment of capital will produce relatively more of the capital-intensive good… Provided this production bias is not offset by a demand bias, the relatively capital-abundant country will export the relatively capital-intensive good. When it is expressed in terms of a physical definition of factor abundance, the Heckscher-Ohlin theorem is thus a simple corollary of the Rybczynski theorem…

In terms of the canonical theorem, I think that Noah got that part right. And in a meta sense, Tyler was right as well.


1. When he cites the Leontief paradox, he’s getting into more complicated territory, see Leamer (JPE 1980).
2. In reality, of course, I think that the composition of demand matters!

When international shipping is cheaper than domestic

26 December 2014

The Washington Post headlined this “The Postal Service is losing millions a year to help you buy cheap stuff from China“:

This strange consequence of postal law was less significant when the mail was mostly personal correspondence. But as Chinese companies began logging on to Web marketplaces like eBay, Amazon, and Alibaba, they started taking advantage of the shipping deal to sell directly to American consumers. And so it’s never been easier to get something cheap and Chinese delivered to your door for a startlingly low price: $4.64 for a digital alarm clock; $2.50 for a folding knife; $1.88 for an iPhone cable — all with shipping included…

Countries used to provide this forwarding service to each other for free, but in 1969 an update to this postal treaty called for small fees (called terminal dues) on each mail piece. Since then the dues have grown, and the payment system has become labyrinthine. In most cases, however, postal services still charge each other less than they would charge their own citizens for moving a package across the country.

According to the terms set out in Universal Postal Union treaty, the USPS in 2014 gets paid no more than about $1.50 for delivering a one-pound package from a foreign carrier, which makes it hard to cover costs. [1] The USPS inspector general’s office estimated that the USPS lost $79 million in fiscal year 2013 delivering this foreign treaty mail. (The Postal Service itself declined to provide specific figures.) …

At the latest round of negotiations in 2012, countries did agree to raise fees slightly. The United States will get to charge about 13 percent more every year from 2014 to 2017. Under the new terms, the inspector general’s office believes that the USPS will start to lose less money on inbound mail. [3]

All this should be a reminder that any trade deal has winners and losers and unintended consequences. Internet commerce suddenly made the terms of a long-standing mail treaty a competitive advantage for Chinese merchants, and U.S. importers like the McGraths have been feeling the squeeze. But this same system also means that average Americans can get a really sweet deal on an iPhone case shaped like an Absolut bottle.

Hat tip to Corinne Low.

Shipping costs are endogenous

30 November 2014

Cost to transport a 20′ container from major US ports to various foreign ports:

Cost to transport a 20' container from major US ports to various foreign ports

From Jose Asturias and Scott Petty.

Trade JMPs (2014-2015)

18 November 2014

It’s already that time of year again, and I’m a little late. Who’s on the job market this year with a paper on international trade?

As in prior years, I focus on trade papers, thereby neglecting international finance and open-economy macro papers. If I’ve missed someone, please contribute to the list in the comments.

Here are folks listing international trade as a field with a JMP in economic geography:

Also, Jon Haveman is making my annual compilation obsolete by offering a full-featured database of trade candidates with candidate-created profiles: Job Candidate Database.

Recently on Twitter

11 July 2014

While I’ve fallen behind on blogging, I do a better job of staying active on Twitter. In the last two weeks, @TradeDiversion has tweeted about:

Chicago Booth

27 March 2014

I’m happy to say that I will become an assistant professor at Chicago Booth in July.

Look what I found…

25 November 2013

In the course of researching my job market paper, I read a lot of old or obscure literature related to the Linder hypothesis. It yielded some real gems. Unfortunately, I also unearthed some big disappointments. You’ll see what I mean in a moment.

For the moment, here’s the abstract of McPherson, Redfearn and Tieslau – “International trade and developing countries: an empirical investigation of the Linder hypothesis” in Applied Economics (2001), an article with 44 citations in Google Scholar:

This paper presents empirical evidence in support of the Linder hypothesis for five of the six East African developing countries studied here: Ethiopia, Kenya, Rwanda, Sudan and Uganda. This finding implies that these countries trade more intensively with others who have similar per capita income levels, as predicted by Linder. The contributions of this research are three-fold. First, new information is provided on the Linder hypothesis by focusing on developing countries. Second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set. Third, the empirical methodology used in the analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.

Now, here’s the abstract of Bukhari, Ahmad, Alam, Bukhari, and Butt – “An Empirical Analysis of the Linder Theory of International Trade for South Asian Countries” in The Pakistan Development Review (2005), with zero citations in Google Scholar:

This paper presents empirical evidence in support of the Linder theory of international trade for three of the South Asian countries, Bangladesh, India, and Pakistan. This finding implies that these countries trade more intensively with countries of other regions, which may have similar per capita income levels, as predicted by Linder in his hypothesis. The contribution of this research is threefold: first, there is new information on the Linder hypothesis by focusing on South Asian countries; second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set; third, the empirical methodology used in this analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.

It continues like this, paragraph for paragraph. Finally, we arrive at Table 2 of each paper. Here’s McPherson, Redfearn and Tieslau:

McPherson

And here’s Bukhari, Ahmad, Alam, Bukhari, and Butt:

Bhukari

That’s Bangladesh-Kenya, India-Ethiopia, and Pakistan-Uganda with identical rows. The same thing occurs in Table 3. It continues, all the way through the concluding paragraphs.

Trade JMPs (2013-2014)

8 November 2013

It’s that time of year again. Who’s on the job market this year with a paper on international trade?

As in prior years, I focus on trade papers, thereby neglecting international finance and open-economy macro papers. If I’ve missed someone, please contribute to the list in the comments.

As resident blogger, I’m going to exercise a point of personal privilege to note that I am on the job market this year. Please tell your friends who are on hiring committees.

Jonathan Dingel (Columbia): “The Determinants of Quality Specialization”

With that important piece of information out of the way, here are this year’s trade candidates:

  • Vanessa Alviarez (Michigan): “Multinational Production and Comparative Advantage”
  • Andrea Ariu (Université catholique de Louvain): “Crisis-Proof Services: Why Trade in Services Did not Suffer During the 2008-2009 Crisis”
  • Dany Bahar (HKS): “Heavier than Air? Knowledge Transmission within the Multinational Firm”
  • Xue Bai (Penn State): “How You Export Matters: Export Mode, Learning, and Productivity in China”
  • Silja Baller (Oxford): “Product Quality, Market Size and Welfare: Theory and Evidence from French Exporters”
  • Felipe Benguria (UVA): “Production and Distribution in International Trade: Evidence from Matched Exporter-Importer Data”
  • Johannes Boehm (LSE): “The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity”
  • Doug Campbell (UC Davis): “Relative Prices, Hysteresis, and the Decline of American Manufacturing”
  • Cheng Chen (Princeton): “Management Technology and the Hierarchical Firm in the Global Economy”
  • Eliav Danziger (Princeton): “Skill Acquisition and the Dynamics of Trade Induced Inequality”
  • David DeRemer (Université libre de Bruxelles): “Domestic Policy Coordination in Imperfectly Competitive Markets”
  • Jonathan Dingel (Columbia): “The Determinants of Quality Specialization”
  • Raluca Dragusanu (HBS): “Firm-to-Firm Matching Along the Global Supply Chain”
  • Daisuke Fujii (Chicago): “International Trade Dynamics with Sunk Costs and Productivity Shocks”
  • Cecile Gaubert (Princeton): “Firm Sorting and Agglomeration”
  • Hang-Wei Hao (UC Davis): “The China Puzzle: Theory and Evidence on the Behavior of Chinese Exports during the 2008-2009 Global Financial Crisis”
  • Leo Karasik (Toronto): “New Exporters during the Great Recession: Is the Large Fixed Cost Story Marginal?”
  • Adriaan Ten Kate (Chicago): “Industry composition, trade barriers and their welfare implications: Evidence from Peru’s trade liberalization”
  • Minho Kim (WUSTL): “Multi-Stage Production and International Trade”
  • Ahmad Lashkaripour (Penn State): “Breaking Down Elasticities: Rebuilding Gravity and the Gains from Trade”
  • Chi-Hung Liao (UC Davis): “Pricing-to-Market in Quality Dimension and Income Inequality”
  • Philip A. Luck (UC Davis): “Intermediate Good Sourcing, Wages and Inequality: From Theory to Evidence”
  • Michael Maio (Minnesota): “Foreign Competition and Firm Productivity: A Principal-Agent Approach”
  • Ryan Monarch (Michigan): “It’s Not You, It’s Me: Breakups in U.S.-China Trade Relationships”
  • Joan Monras (Columbia): “Immigration and Wage Dynamics: Evidence from the Mexican Peso Crisis”
  • Gabriel Smagghue (Sciences Po): “A new Method for Quality Estimation using Trade Data: An Application to French firms”
  • Sebastian Sotelo (Chicago): “Trade Frictions and Agricultural Productivity: Theory and Evidence from Peru”
  • Grigorios Spanos (Toronto): “Sorting in French Production Hierarchies”
  • Walter Steingress (Montreal): “Entry barriers to international trade: product versus firm fixed costs”
  • Claudia Steinwender (LSE): “Information Frictions and the Law of One Price: When the States and the Kingdom became United”
  • Sebastian Stumpner (Berkeley): “Trade and the Geographic Spread of the Great Recession”
  • Phyllis Kit Yee Sun (Princeton): “A Theory of Worker-Level Comparative Advantage and Task Specialization within Jobs”
  • Pierre-Louis Vezina (Oxford): “Migrant Networks and Trade: The Vietnamese Boat People as a Natural Experiment”
  • Andrea Waddle (Minnesota): “Trade, Technology and the Skill Premium: The Case of Mexico”

A prescient note on the home-market effect by Max Corden

11 October 2013

Paul Krugman’s 1980 AER paper formally introduced the home-market effect. In introducing his result, he mentions (p.955):

Notice that this argument is wholly dependent on increasing returns; in a world of diminishing returns strong domestic demand for a good will tend to make it an import rather than an export. But the point does not come through clearly in models where increasing returns take the form of external economies (see W. M. Corden). One of the main contributions of the approach developed in this paper is that by using this approach the home market can be given a simple formal justification.

I doubt that very many people have looked at the Corden reference, as it appeared in a 1970 conference volume titled Studies in international economics. Monash Conference papers. Here’s an excerpt from the surprisingly prescient three-page note:

A note on economies of scale, the size of the domestic market and the pattern of trade

Professor Grubel suggests that a country will tend to produce and export those products or ‘styles’ of products for which it has a relatively large domestic market. He explains this in terms of economies of scale. This is essentially the ‘Linder hypothesis’ which has obtained some empirical support, as well as being intuitively plausible. But it does raise an interesting theoretical question which has not, to my knowledge, been explored, in a simple static two-product two-country model with no transport costs, with economies of scale and with the demand patterns differing between the two countries it does not follow that a country will export that product to which its own demand pattern is biased. In that sort of model, as is well-known, one can say only that at least one of the two countries, and possibly both, will specialise, but one cannot say which country will specialise in which good. From the point of view of maximising potential world income there will be an optimum pattern of specialisation, but this will not depend in any simple predictable way on differences between the demand patterns of the two countries. Thus we cannot obtain the Linder hypothesis from this simple model. The question then is: What else must we put into the model? Is it transport costs, or is it rather something ‘dynamic’ ? In order to focus on the main point I shall now assume that the two countries are of equal size, that their factor endowments and production functions are identical, and that any differences between the factor-intensities of the two products are not large. Hence the two countries have identical convex production transformation curves. They differ only in their demand patterns. Country A’s demand pattern is biased towards product X and country B’s towards product Y. Needless to say, the discussion to follow is very tentative…

A third approach might be to introduce transport costs. Transporting goods from one country to another uses up resources, and from the point of view of maximising world income it will pay to minimise transport costs. Given that in the final equilibrium both countries will specialise, each country should then specialise on the good for which it has the relatively greater demand, since this will minimise transporting. This seems obvious. Provided we do not introduce other complications, trade along Linder lines will maximise potential world income. But it does not seem so easy to prove that trade will actually assume that pattern. Suppose that, for some reason, one starts with the trade flow in the opposite direction. One might explain this in terms of some dynamic considerations. Will there then be a natural tendency for the pattern of specialisation and hence the flow of trade to reverse itself? It does not seem obvious that this would be so. There is scope for further theoretical explorations here.

As Krugman himself has commented: “Now it is always tricky to reread old texts in the light of subsequent information; knowing what actually happened, you can probably find a prophecy of Nostradamus that fits the event, and knowing subsequent developments in economic theory, you can probably find most of it hinted at in Ibn Khaldun.” Still, I think Corden was onto something in 1970.


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