Rodney Falvey

Catching up or pulling away: Intra-industry trade, productivity gaps and heterogeneous firms

Rod Falvey et al. — Thu, 04 Oct 2012 23:20:12 PDT

In this paper we develop a heterogeneous firm, intra-industry trade model in which countries are asymmetric in both technology and size. In the trading equilibrium, the industry productivity levels countries are jointly determined by the technology gap and trade barriers. We find that the (exogenous) technological gap is a key determinant of the size and direction of the intra-industry resource reallocation introduced by trade. Most importantly, the effect of trade on the (endogenous) productivity gap could be non monotonic over time. In the short-run, where the number of incumbents cannot adjust to trade, the effect of import competition dominates and the productivity gap between countries is closed as domestic firms in the laggard country face tougher competition from leading country exporters. However, in the long run when entry is possible, the effect of the increased export opportunities in the leading country dominates and the productivity gap is widened as a consequence of entry in the technological leader.

The theory of trade policy and reform

Rodney Falvey et al. — Thu, 04 Oct 2012 23:20:11 PDT

Extract:
Historically, trade taxes have been an important source of government revenue in subsistence-oriented economies with large informal sectors. As countries developed and economic activity became more market-oriented, governments sourced revenue frorn broader, more efficient tax bases. But trade taxes remained, with protection of domestic import-competing activity, rather than revenue, becoming their primary motivation. This shift of motivation also facilitated the substitution of alternative policies, quantitative restrictions for example, which would limit import competition without necessarily generating revenue.

Financial constraints, the distribution of wealth and international trade

Emmanuel Amissah et al. — Wed, 10 Mar 2010 22:55:52 PST

Extract:

As the Heckscher-Ohlin-Mundell paradigm predicts, in a world where capital markets are perfect and production exhibits constant-returns to scale, while aggregate wealth endowments can be an important source of comparative advantage, their internal distribution does not matter for the patterns of international trade. This is because in the absence of financial frictions the only factor that determines the availability of external finance is a project's net present value. In real life financial markets are far from perfect. Informational asymmetries between lenders and borrowers, corporate governance quality shortcomings and non-negligible intermediation costs are only a sample of the types of problems that beset financial markets. The presence of financial frictions implies that the level of wealth of entrepreneurs is a second factor that lenders need to consider when providing external finance. Now some entrepreneurs with profitable projects but insufficient wealth cannot obtain external funds; i.e. they are financially constrained. A steadily growing literature examines the implications of financial constraints for the patterns and volume of international trade. Not surprisingly, cross-country differences in the quality of financial institutions and wealth distributions matter. These issues become more prominent at times of global financial market upheaval where financial constraints are universally tighter.

Does trade weaken product quality standards

Katia Berti et al. — Wed, 10 Mar 2010 22:55:52 PST

In this paper we investigate the effects of trade on the national minimum quality standards applied by two trading partners. We employ a simple partial equilibrium model in which national regulators set a minimum quality standard for a product whose quality is unobservable to consumers prior to purchase. Both producers and consumers can benefit from a minimum standard, but the former prefer a lower standard to the latter. Because producers are organised and consumers are not, the standards set by national regulators will tend to unduly favour producer interests. As always, trade changes the balance of consumer and producer interests in the two countries relative to autarky. It also creates a category of exporters, who have an interest in the standard set in the foreign market but do not figure in that country’s welfare calculations and may not have lobbying access to its regulatory authority. As a result trade raises the minimum standard in the exporting country and may raise or lower the standard in the importing country, depending on parameter values.

Trade liberalisation and human capital adjustment

Rodney E. Falvey et al. — Wed, 10 Mar 2010 22:55:51 PST

This paper highlights the way in which workers of different age and ability are affected by anticipated and unanticipated trade liberalisations. A two-factor (skilled and unskilled labour), two-sector Heckscher-Ohlin trade model is supplemented with a education sector which uses skilled labour and time to convert unskilled workers into skilled workers. A skilled worker's income depends on her ability, but all unskilled workers have the same income. Trade liberalisation in a relatively skilled labour abundant country increases the relative skilled wage and induces skill upgrading by the existing workforce. The younger and more able unskilled workers are most likely to upgrade. But not all upgraders are better off as a result of the liberalisation. The older and less able upgraders are likely to lose. For an anticipated liberalisation we show that the preferred upgrading strategies depend on a worker's ability and that much of the upgrading will take place before the liberalisation. This implies that some workers who would have upgraded had they anticipated the liberalisation will not if it is unanticipated, and that adjustment assistance that applies only to post-liberalisation upgraders will fail to compensate some losers and distort the upgrading decisions of others.