"Comparative Advantage and Heterogeneous Firms"

You have likley already seen “Comparative Advantage and Heterogeneous Firms,” as Andrew Bernard, Stephen Redding, and Peter Schott worked on it for more than four years. If you haven’t, now is the time. The paper was finally published early this year in the Review of Economic Studies (journal pdf; older ungated pdf). It’s a fabulous piece of theory that introduces heterogeneous firms (via a Pareto distributed productivity term) and fixed trade costs to the classic 2x2x2 monopolistic competition model of trade.

Here’s the abstract:

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations’ responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.

This is clearly an improvement over existing models of trade with hetereogeneous firms, which often feature a numeraire that pins down the wage and labor as the only input. Now we get to talk about wage effects and comparative advantage! Unfortunately, the resulting mathematical complexity is such that closed-form solutions don’t exist for some of the endogeneous variables. The authors have to resort to numerical simulations to describe some areas of interest. Nonetheless, I really like this paper.

“Comparative Advantage and Heterogeneous Firms”

You have likley already seen “Comparative Advantage and Heterogeneous Firms,” as Andrew Bernard, Stephen Redding, and Peter Schott worked on it for more than four years. If you haven’t, now is the time. The paper was finally published early this year in the Review of Economic Studies (journal pdf; older ungated pdf). It’s a fabulous piece of theory that introduces heterogeneous firms (via a Pareto distributed productivity term) and fixed trade costs to the classic 2x2x2 monopolistic competition model of trade.

Here’s the abstract:

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations’ responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.

This is clearly an improvement over existing models of trade with hetereogeneous firms, which often feature a numeraire that pins down the wage and labor as the only input. Now we get to talk about wage effects and comparative advantage! Unfortunately, the resulting mathematical complexity is such that closed-form solutions don’t exist for some of the endogeneous variables. The authors have to resort to numerical simulations to describe some areas of interest. Nonetheless, I really like this paper.

Don't cry for Doha

Alan Beattie had a thoughtful piece on trading ritual and reality in the FT yesterday:

The reality is that the great wave of globalisation since the end of the cold war has had a lot less to do with ministers signing paper trade agreements – most of which are anaemic – and a lot more to do with innovative businesses getting on and doing things…

The 10-member Association of South-East Asian Nations, for example, signed a free trade agreement in 1991. But although trade within the region has grown rapidly, less than 10 per cent of exports use the special tariff rates available under the pact, partly because the rules are so complex. Digitisation, lower transport costs and improved supply chain management have had far more impact on the region than lower tariffs…

The most protected sectors now are either – as in much of agriculture – ferociously defended by the beneficiaries or – as in services – sufficiently complex that writing binding agreements is hard. Witness the lack of progress in official attempts further to liberalise transatlantic trade, one of the biggest and most vibrant trading relationships on earth…

The evidence so far is that with world commerce itself doing fine, there is little contribution to greater globalisation being made by negotiated reductions in official barriers to trade.

It’s worthwhile to read the full column.

Don't cry for Doha

Alan Beattie had a thoughtful piece on trading ritual and reality in the FT yesterday:

The reality is that the great wave of globalisation since the end of the cold war has had a lot less to do with ministers signing paper trade agreements – most of which are anaemic – and a lot more to do with innovative businesses getting on and doing things…

The 10-member Association of South-East Asian Nations, for example, signed a free trade agreement in 1991. But although trade within the region has grown rapidly, less than 10 per cent of exports use the special tariff rates available under the pact, partly because the rules are so complex. Digitisation, lower transport costs and improved supply chain management have had far more impact on the region than lower tariffs…

The most protected sectors now are either – as in much of agriculture – ferociously defended by the beneficiaries or – as in services – sufficiently complex that writing binding agreements is hard. Witness the lack of progress in official attempts further to liberalise transatlantic trade, one of the biggest and most vibrant trading relationships on earth…

The evidence so far is that with world commerce itself doing fine, there is little contribution to greater globalisation being made by negotiated reductions in official barriers to trade.

It’s worthwhile to read the full column.

Don’t cry for Doha

Alan Beattie had a thoughtful piece on trading ritual and reality in the FT yesterday:

The reality is that the great wave of globalisation since the end of the cold war has had a lot less to do with ministers signing paper trade agreements – most of which are anaemic – and a lot more to do with innovative businesses getting on and doing things…

The 10-member Association of South-East Asian Nations, for example, signed a free trade agreement in 1991. But although trade within the region has grown rapidly, less than 10 per cent of exports use the special tariff rates available under the pact, partly because the rules are so complex. Digitisation, lower transport costs and improved supply chain management have had far more impact on the region than lower tariffs…

The most protected sectors now are either – as in much of agriculture – ferociously defended by the beneficiaries or – as in services – sufficiently complex that writing binding agreements is hard. Witness the lack of progress in official attempts further to liberalise transatlantic trade, one of the biggest and most vibrant trading relationships on earth…

The evidence so far is that with world commerce itself doing fine, there is little contribution to greater globalisation being made by negotiated reductions in official barriers to trade.

It’s worthwhile to read the full column.