When international shipping is cheaper than domestic

26 December 2014 by

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 by

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 by

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 by

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:

How not to estimate an elasticity

29 June 2014 by

The Cato Institute’s Randal O’Toole claims to debunk a recent paper suggesting a “fundamental of road congestion”.

In support of the induced-demand claim, Mann cites research by economists Matthew Turner of the University of Toronto and Gilles Duranton of the University of Pennsylvania. “We found that there’s this perfect one-to-one relationship,” Mann quotes Turner as saying. Mann describes this relationship as, “If a city had increased its road capacity by 10 percent between 1980 and 1990, then the amount of driving in that city went up by 10 percent. If the amount of roads in the same city then went up by 11 percent between 1990 and 2000, the total number of miles driven also went up by 11 percent. It’s like the two figures were moving in perfect lockstep, changing at the same exact rate.” If this were true, then building more roads doesn’t make traffic worse, as the Wired headline claims; it just won’t make it any better.

However, this is simply not true. Nor is it what Duranton & Turner’s paper actually said. The paper compared daily kilometers of interstate highway driving with lane kilometers of interstates in the urbanized portions of 228 metropolitan areas. In the average metropolitan area, it found that between 1983 and 1993 lane miles grew by 32 percent while driving grew by 77 percent. Between 1993 and 2003, lane miles grew by 18 percent, and driving grew by 46 percent.

That’s hardly a “perfect one-to-one relationship.”

The paper also calculated the elasticities of driving in relationship to lane kilometers. An elasticity of 2 would mean a 10 percent increase in lane miles would correspond with a 20 percent growth in driving; an elasticity of 1 would mean that lane miles and driving would track closely together. The paper found that elasticities were very close to 1 with standard errors of around 0.05. Even though this is contradicted by the previously cited data showing that driving grew much faster than lane miles, this is the source of Turner’s “perfect one-to-one relationship.”

My prior belief is that results published in the American Economic Review are unlikely to be debunked by a couple of paragraphs in a blog post. In this case, it’s fairly straightforward to explain why the average growth rates of lane kilometers and vehicle-kilometers traveled are not informative about the elasticity.

The lane-kilometer elasticity of VKT describes how changes in VKT relate to changes in lane kilometers. O’Toole tries to say something about this relationship by noting the average value of each. But describing the average growth rates does not say whether cities that experienced faster growth in lane kilometers also experienced faster growth in vehicle-kilometers traveled. It’s entirely possible for both averages to be positive and the elasticity relating them to be negative! Here are a few lines of Stata code to generate an example in which the averages are 32% and 77%, while the elasticity is -1.

set obs 228
gen delta_lane = .32 + rnormal(0,.2)
gen delta_VKT = (.77 +.32) - delta_lane + rnormal(0,.2)
twoway (scatter delta_VKT delta_lane) (lfit delta_VKT delta_lane), graphregion(color(white))

That yields a figure like this:


Having made this econometric point, one can grab the data used in the Duranton and Turner paper to  note the average values and appropriately estimate the elasticity, revealing no contradiction whatsoever between these two moments.

use "Duranton_Turner_AER_2010.dta", clear
gen delta_VKT = log(vmt_IHU_93) - log(vmt_IHU_83)
gen delta_lane = log(ln_km_IHU_93) - log(ln_km_IHU_83)
summ delta*
reg delta_VKT delta_lane
twoway (scatter delta_VKT delta_lane) (lfit delta_VKT delta_lane), graphregion(color(white))


Across MSAs, the average VKT change was a 61 log-point increase, while the average lane kilometers change was a 25 log-point increase. That’s a ratio greater than two, but the estimated elasticity is 0.955. Hence Matt saying that he and Gilles found a one-to-one relationship. Their paper deals with various types of roads and instrumenting to infer the causal relationship, but I don’t need to describe those issues here. I’ve written enough to demonstrate why O’Toole’s blog post does not debunk the Duranton-Turner findings.

Chicago Booth

27 March 2014 by

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

Look what I found…

25 November 2013 by

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:


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


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.

“Ricardian Productivity Differences and the Gains from Trade”

18 November 2013 by

You’ll recall that Ralph Ossa emphasized sectoral heterogeneity in trade elasticities as one reason the ACR formula might understate the gains from trade. I haven’t read it yet, but this new NBER WP by Andrei Levchenko and Jing Zhang also emphasizes the importance of sectoral heterogeneity in thinking about this topic:

[T]he simpler formulas that do not use information on sectoral trade volumes understate the true gains from trade dramatically, often by more than two-thirds. The error in the formulas across countries is strongly negatively correlated to the strength of Ricardian comparative advantage: the one-sector formula-implied gains understate the true gains from trade by more in countries with greater dispersion in sectoral productivity. The model-based exercise thus reinforces the main result of the paper that accounting for sectoral heterogeneity in productivity is essential for a reliable assessment of the gains from trade.

Trade JMPs (2013-2014)

8 November 2013 by

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 by

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.