JEP – firms, trade, and trade costs

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The latest issue of the Journal of Economic Perspectives has some top notch trade economists discussing their research specialties.


First up: Firms in International Trade. Of course, it’s by the Bernard, Jensen, Redding, and Schott team.

Abstract: Since the mid-1990s, researchers have used micro datasets to study countries’ production and trade at the firm level and have found that exporting firms differ substantially from firms that solely serve the domestic market. Across a wide range of countries and industries, exporting firms have been shown to be larger, more productive, more skill- and capital-intensive, and to pay higher wages than nonexporting firms. These differences exist even before exporting begins and have important consequences for evaluating the gains from trade and their distribution across factors of production. The new empirical research challenges traditional models of international trade and, as a result, the focus of the international trade field has shifted from countries and industries towards firms and products. Recently available transaction-level U.S. trade data reveal new stylized facts about firms’ participation in international markets, and recent theories of international trade incorporating the behavior of heterogenous firms have made substantial progress in explaining patterns of trade and productivity growth.

Highlights: Exporting is a relatively rare firm activity… of the 5.5 million firms operating in the United States in 2000, just 4 percent engaged in exporting. Even within the smaller set of U.S. firms active in industries more predisposed to exporting—like those in the manufacturing, mining, or agricultural sectors that produce tradable goods— only 15 percent were exporters…

The finding that exporters are systematically more productive than nonexporters raises the question of whether higher-productivity firms self-select into export markets, or whether exporting causes productivity growth through some form of “learning by exporting.” Results from virtually every study across industries and countries confirm that high productivity precedes entry into export markets… Most studies also find little or no evidence of improved productivity as a result of beginning to export… However, some recent research on low-income countries finds productivity improvement after entry. Van Biesebroeck (2005), for example, reports evidence that exporting raises productivity for sub-Saharan African manufacturing firms…

One framework, developed by Bernard, Eaton, Jensen, and Kortum (2003), introduces stochastic firm productivity into the multicountry Ricardian model of Eaton and Kortum (2002). A second class of models initiated by Melitz (2003) introduces firm heterogeneity into Krugman’s (1980) model of intra-industry trade…

In Bernard, Redding, and Schott (2007), heterogeneous firms are integrated into the standard trade paradigm of Helpman and Krugman (1985). The resulting framework explains why some countries export more in certain industries than in others (endowment-driven comparative advantage); why nonetheless two-way trade is observed within industries (firm-level horizontal product differentiation com- bined with increasing returns to scale); and why within industries engaged in these two forms of trade, some firms export and others do not (self-selection driven by trade costs)…

Recently available transaction-level trade data permit examination of a number of new dimensions of international trade, including the concentration of exports, the infrequency of export activity, the range of products that firms export, and the variety of destinations to which firms’ exports are shipped. In this section, we analyze the Linked-Longitudinal Firm Trade Transaction Database (LFTTD) that is
based on data collected by the U.S. Census Bureau and the U.S. Customs Bureau. This dataset captures all U.S. international trade transactions between 1992 and 2000. For each flow of goods across a U.S. border, this dataset records the product classification(s) of the shipment, the value and quantity shipped, the date of the shipment, the destination or source country, the transport mode used to ship the goods, and the identity of the U.S. firm engaging in the trade. Bernard, Jensen, and Schott (forthcoming) provide a more detailed description of the LFTTD and its construction.

We use these data to distinguish between the firms’ extensive margins—that is, the number of products that firms trade and their number of export destinations— and their intensive margin—that is, the value they trade per product per country. We show that adjustment along the extensive margins is central to understanding the well-known “gravity model” of international trade, which emphasizes the role of distance in dampening trade flows between countries. More generally, we find that while some aspects of the LFTTD illuminate directions in which recent theories of heterogeneous firms and trade can be extended, others pose additional challenges that have yet to be explored.

Second, Transportation Costs and International Trade in the Second Era of Globalization by David Hummels. Hummels is well-known for his work on trade costs that somehow remains unpublished despite being cited hundreds of times.

Abstract: While the precise causes of postwar trade growth are not well understood, declines in transport costs top the lists of usual suspects. However, there is remarkably little systematic evidence documenting the decline. This paper brings to bear an eclectic mix of data in order to provide a detailed accounting of the time-series pattern of shipping costs. The ad-valorem impact of ocean shipping costs is not much lower today than in the 1950s, with technological advances largely trumped by adverse cost shocks. In contrast, air shipping costs have dropped an order of magnitude, and airborne trade has grown rapidly as a result. As a result, international trade has also experienced a significant rise in speed.

Highlights: Because the heaviest goods travel via ocean, weight-based data on international trade significantly understate the economic importance of air shipping… In the past 40 years, air shipments have grown to represent a third of the value of U.S. imports and more than half of U.S. exports with countries outside North America…

Studies examining customs data consistently find that transportation costs pose a barrier to trade at least as large as, and frequently larger than, tariffs. Trade negotiations have steadily reduced tariff rates… As tariffs become a less important barrier to trade, the contribution of transportation to total trade costs—shipping plus tariffs—is rising…

Ocean transport of dry (non-oil) cargo consists of two distinct markets: tramp and liner shipping… Liners are used for “general” cargoes—that is, all but large quantity bulk cargoes—and ply fixed trade routes in accordance with a predetermined timetable. The liner trade is organized into cartels, or conferences, which discuss, and perhaps collude in, the setting of prices and market shares… Hummels, Lugovskyy, and Skiba (2007) show that liners charge shipping prices that are much higher for goods whose import demand is relatively inelastic, which is precisely what one would expect if shipping firms were exercising market power…

Ocean shipping has undergone several important technological and institutional changes in the postwar era: the growth of open registry shipping, scale effects from increased trade volumes, and the introduction of containerization. Open registry shipping is the practice of registering ships under flags of convenience—for example, Liberia or Panama—to circumvent higher regulatory and manning costs… Tolofari (1986) estimates that vessel operating costs for open registry ships are from 12 to 27 percent lower than traditional registry fleets, with most of the estimated savings coming from manning expenses…

The price of bulk shipping measured in real dollars per ton (the solid line) has declined steadily over time so that it is now half as much as in 1960 and a third the price in 1952. However, when measured relative to the commodity price deflator (the dashed line), there are large fluctuations but no downward trend.While the cost of shipping a ton of wheat or iron ore has steadily declined, the cost of shipping a dollar value of wheat or iron ore has not…

If containerization and the associated productivity gains led to lower shipping prices, as is widely believed and as Levinson (2006) qualitatively argues, the effect should appear in the liner series. Yet liner prices exhibit considerable increases, both in absolute terms and relative to tramp prices after containers are introduced… speed improvements are of substantial and growing value to international trade. To the extent that these quality improvements do not show up in measured price indices, the indices understate the value of the technological advance…

Still, many of the purported improvements of container shipping should have lowered explicitly measured ocean shipping costs, and apparently did not. Why?… In the period during which containerization was spreading, input costs, including fuel, ship prices, and port costs, were skyrocketing.

Recent changes in transportation would seem to suggest that the grip of distance should be weakening. Air transport tends to be preferred to ocean transport on especially long-distance shipments… the marginal cost of an additional mile of air transport is dropping rapidly. Strangely then, the distance profile of world trade is little changed over the past 40 years (Berthelon and Freund, 2004; Disdier and Head, 2004). This pattern presents a significant puzzle for future research…

Economic historians have argued that technological change in ocean shipping was the critical input to growing trade in the first era of globalization during the latter half of the nineteenth century. I would argue that technological change in air shipping and the declining cost of rapid transportation has been a critical input into a second era of globalization during the latter half of the twentieth century. There is perhaps a third era in cross-border trade unfolding even now, again driven by rapid improvements in a technology for connecting people across great distances. Clearly, the telecommunication and Internet revolution has already affected international integration, leading to growing trade in information and technology, in services outsourcing, and in migration of highly skilled professionals. The impact of these changes and the extent to which they displace older forms of integration bear close watching in the years to come.

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