Author Archives: jdingel

Atkin & Donaldson – Who’s Getting Globalized? The Size and Nature of Intranational Trade Costs

David Atkin and Dave Donaldson are presenting this paper tomorrow afternoon at the NBER summer institute:

This paper uses a newly collected dataset on the prices of narrowly defined goods  across many dispersed locations within multiple developing countries to address the  question, How large are the costs that separate households in developing countries from the  global economy? Guided by a flexible model of oligopolistic intermediation with variable mark-ups, our analysis proceeds in four steps. first, we measure total intranational trade costs (ie marginal costs of trading plus mark-ups on trading) using price gaps over space within countries—but we do so only among pairs of locations that  are actually trading a good by drawing on unique data on the location of production  of each good. Second, we estimate, separately by location and commodity, the passthrough rate between the price at the location of production and the prices paid by inland consumers of the good. Our estimates imply that incomplete pass-through—and therefore, intermediaries’ market power—is a commonplace, and that pass-through is especially low in remote locations. Third, we argue that our estimates of total trade costs (Step 1) and pass-through rates (Step 2) are sufficient to infer the primitive effect  of distance on the marginal costs of trading; after correcting for the fact that mark-ups  vary systematically across space we find that marginal costs are affected by distance  more strongly than typically estimated. finally, we show that, in our model, the estimated pass-through rate (Step 2) is a sufficient statistic to identify the shares of social  surplus (ie the gains from trade) accruing to inland consumers, oligopolistic intermediaries, and deadweight loss; applying this result we find that intermediaries in  remote locations capture a considerable share of the surplus created by intranational  trade.

You can listen to a podcast of Donaldson presenting a much earlier version of this work from the International Growth Centre. He does a really nice job of summarizing the issues involved in inferring trade costs from price data.

Davis & Dingel – A Spatial Knowledge Economy

What I’ve been up to:

Leading empiricists and theorists of cities have recently argued that the generation and exchange of ideas must play a more central role in the analysis of cities. This paper develops the first system of cities model with costly idea exchange as the agglomeration force. Our model replicates a broad set of established facts about the cross section of cities. It provides the first spatial equilibrium theory of why skill premia are higher in larger cities, how variation in these premia emerges from symmetric fundamentals, and why skilled workers have higher migration rates than unskilled workers when both are fully mobile.

NBER Working Paper 18188.

Is the renminbi significantly undervalued?

William Cline and John Williamson describe their latest “estimates of fundamental equilibrium exchange rates” (pdf):

China is still judged undervalued by about 3 percent … Thus, whereas a year ago we estimated that the renminbi needed to rise 16 percent in real effective terms and 28.5 percent bilaterally against the dollar (in a general realignment to FEERs), the corresponding estimates now are 2.8 and 7.7 percent, respectively. It is entirely possible that future appreciation will bring the surplus [China’s trade surplus] down to less than 3 percent of GDP. But China still has fast productivity growth in the tradable goods industries, which implies that a process of continuing appreciation is essential to maintain its current account balance at a reasonable level.

via Timothy Taylor.

International trade in summer 2012

Recently completed conferences include New Faces in International Economics at Penn State, the Midwest International Economics Group, CESifo in Munich, the European Research Workshop in International Trade at CREI, and the Rocky Mountain Empirical Trade Conference at UBC.

The agendas for the Princeton IES Summer Workshop (June 26 – 28) and the NBER Summer Institute trade session (July 9-12) are online.

European summer includes the European Trade Study Group conference in September.

Summer deadlines include July 15 for submissions to Empirical Investigations in International Trade (November) and presumably an August deadline for the October Midwest meeting.

Thanks to Bernardo Diaz de Astarloa for suggesting this post and some of its content.

What the WTO’s “Made in the World” isn’t

The WTO’s “Made in the World” initiative is a data exercise aimed at measuring and analyzing value-added trade flows.

Michele Nash-Hoff, a US manufacturing advocate, misrepresents this statistical exercise as a massive policy change. Her Huffington Post piece is curious because it accurately describes the statistical project and the shortcomings of measuring trade flows in gross terms while simultaneously quoting people out of context to invent the idea that rules of origin may soon be eliminated. (HT: Alex Raileanu)

How would you like to go shopping and find that everywhere you went, the label said “Made in the World” instead of “Made in China,” “Made in India,” “Made in USA” etc.?…

In 2011, Andreas Maurer, chief of the WTO’s International Trade Statistics Section, said “… in the past two or three years there has been huge momentum to get the necessary information” that would be used to rationalize elimination of country of origin labeling.

The World Trade Organization and the European Union moved one step closer to eliminating “country of origin” labeling. On April 16, 2012, the European Commission and WTO held a conference to mark the launch of the World Input-Output Database (WIOD). This new database allows trade analysts to have a better view of the global value chains created by world trade…

Director-General Pascal Lamy has said that “improved measurement and knowledge of actual trade flows will help better understand the interdependencies of today’s national economies, supporting the design of better policies and better trade regulation worldwide.”…

This Initiative could have dire consequences for America’s manufacturers and consumers. For manufacturers, it could eliminate one of the options allowed by the WTO — filing a charge for product “dumping” against another country to have countervailing duties applied against that country. For consumers, “Made in the World” labels wouldn’t allow you to protect your family from the tainted, harmful, and even life threatening products coming from China.

I’m interested in these data initiatives and I have never ever seen such a policy implication suggested. It’s clearly absurd.

If the label said “Made in the World”, one couldn’t know if the product were domestic or foreign, so no trade duties of any sort could apply. Is this what we imagine WTO member countries are headed towards? Eliminating rules of origin would render every preferential trade agreement and preference scheme obsolete by implementing perfectly non-discriminatory trade. The world has never been close to such a policy regime. I’m bemused that Ms Nash-Hoff has managed to turn an exercise in data collection and analysis into a scary free-trade conspiracy.

The WTO’s Andreas Maurer posted in the comments section of the Huffington Post to set the record straight:

Your article refers to another article which stated that “… in the past two or three years there has been huge momentum to get the necessary information” that would be used to rationalize elimination of country of origin labeling. This is not true.
That article by Mr Richard McCormack referred to the WTO’s Public Forum Session in September 2011. But that Session in no way propagated the “elimination of country of origin labelling” and the introduction of a “Made in the World” label. Rather it stated that current international trade statistics do not adequately reflect where value added is created.
Understanding where value is created is very important for business and national policy makers alike, and is the object of intense academic investigation. As your article points out, a research consortium produced a public database last month. In addition, WTO and OECD are jointly working to develop statistics on trade in value added.
But this research project does not affect whatsoever the way country of origin is reported by official statistics collected through customs. There is no intention at all to have the “Made in the World” logo actually appearing on any traded product. This logo only illustrated a statistical concept. Thus the article above misrepresents the objectives of the WTO.

How big are the gains from trade?

One of the most-mentioned trade papers of the last couple years is “New Trade Models, Same Old Gains?” by Arkolakis, Costinot & Rodriguez-Clare, now published in the AER. Their theoretical work shows that, for a broad class of theoretical models that includes the Armington, Eaton and Kortum (2002), and Melitz-Chaney approaches, the gains from trade are characterized by a formula involving only two numbers – the domestic expenditure share and the trade elasticity. The former can be straightforwardly obtained from the data. The latter needs to be estimated, which is more involved but feasible. ACR shows that their formula says that US welfare is about 1% higher than it would be under autarky.

In the words of Ralph Ossa, “either the gains from trade are small for most countries or the workhorse models of trade fail to adequately capture those gains.” Different people come down on different sides of that choice. Ed Prescott, for example, is clearly in the latter camp.

Ossa has a new paper, “Why Trade Matters After All“, aimed at reconciling this divide:

I show that accounting for cross-industry variation in trade elasticities greatly magnifies the estimated gains from trade. The main idea is as simple as it is general: While imports in the average industry do not matter too much, imports in some industries are critical to the functioning of the economy, so that a complete shutdown of international trade is very costly overall…

I develop a multi-industry Armington (1969) model of international trade featuring nontraded goods and intermediate goods and show what it implies for the measurement of the gains from trade…

Loosely speaking, the exponent of the aggregate formula is therefore the inverse of the average of the trade elasticities whereas the exponent of the industry-level formula is the average of the inverse of the trade elasticities which is different as long as the elasticities vary across industries.

allowing for cross-industry heterogeneity in the trade elasticities substantially increases the estimated gains from trade for all countries in the sample. For example, the estimated gains from trade of the US increase from 6.4 percent to 42.0 percent if I do not adjust for nontraded goods and intermediate goods and from 3.8 percent to 23.5 percent if I do…

the 10 percent most important industries account for more than 80 percent of the log gains from trade on average.

Thinking about the firm-size distribution

[Note: This post isn’t about international economics. I’ll use an example from trade to comment on a feature of the US real-estate market.]

In a letter to the Economist, the president of the National Association of Realtors writes:

[I]t is not true that large brokers dominate the industry. In fact, the real-estate industry consists mostly of independent contractors and small firms. Eight out of ten realtors work as independent contractors for their firms.

The second sentence appears to be a non-sequitur, unless one thinks that existence is informative about dominance. It’s not. In their first glance, antitrust authorities would look at concentration ratios or Herfindahl–Hirschman indices, because dominance is about economic outcomes, such as market shares, not mere existence.

According to Bernard, Jensen, Redding, and Schott’s JEP survey, four percent of the 5.5 million US firms export. That makes 220,000 exporters. The top ten percent, just 22,000 exporters, are responsible for 96% of US exports. Would we say that “larger exporters do not dominate exporting because the exporting set of firms consists mostly of small exporters”? Of course not.

When thinking about the sales distribution, we care about the exponent of the power law characterizing it, not merely the fact that its support includes small sizes.

Quick links

My blogging has taken a back seat to my research recently. Here are some quick links that I wish I had more time to discuss:

Melitz & Trefler – Gains from Trade when Firms Matter (JEP 2012)

The Spring 2012 JEP has a symposium on international trade. I already mentioned the great article on the Ricardian model by Eaton and Kortum. Another very nice contribution to the symposium is a piece by Marc Melitz and Daniel Trefler on the “Gains from Trade when Firms Matter” (pdf).

Today, we focus on three sources of gains from trade: 1) love- of-variety gains associated with intra-industry trade; 2) allocative efficiency gains associated with shifting labor and capital out of small, less-productive firms and into large, more-productive firms; and 3) productive efficiency gains associated with trade-induced innovation.

This survey distills a very large body of literature. It belongs on your syllabi.