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Advances in International Trade

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Meeting Room 414
Hosted By: Econometric Society
  • Chair: Peter Neary, University of Oxford

Trade and Minimum Wages in General Equilibrium: Theory and Evidence

Xue Bai
,
Brock University
Arpita Chatterjee
,
University of New South Wales
Kala Krishna
,
Pennsylvania State University
Hong Ma
,
Tsinghua University

Abstract

This paper develops a new simple competitive model of supply in a Heckscher-Ohlin setting, with heterogeneous firms and migration. It uses the model to help understand the effect of minimum wages in general equilibrium using Chinese transaction level trade data matched with firm level production data. The model makes a number of intuitive and clean predictions of the effects of a binding minimum wage, for which we provide robust empirical evidence. A binding minimum wage raises prices of all goods, while reducing the output and exports
of the labor intensive good, along with creating unemployment. As price rises but quantity falls, value may rise or fall depending on the elasticity of demand. Higher minimum wages encourage substitution away from low skilled labor and, less obviously, make selection stricter in the labor intensive sector and weaker in the capital intensive sector. The minimum wage also encourages the flow of migrants from the hinterland, creates unemployment, as well as amplifying the effects of the minimum wage itself.

Trade and Inequality: Evidence From Worker-level Adjustment in France

Sergi Basco
,
Charles III University of Madrid
Maxime Liegey
,
Toulouse School of Economics
Marti Mestieri
,
Northwestern University
Gabriel Smagghue
,
Charles III University of Madrid

Abstract

We use nationally-representative matched employer-employee panel data to investigate the effect of Chinese import competition on French workers between 2001 and 2006. We document a negative impact of Chinese import competition on earnings for workers in the bottom third of the earnings distribution. The effect of Chinese competition is negligible on workers with higher earnings. In addition, we exploit the richness of the dataset to document novel margins of adjustment. First, we show that the decline in earnings in the bottom third is accounted by a reduction in hours worked, while wages per hour are not significantly affected by Chinese competition. Workers in the bottom third experience reductions in the number of hours per working contract and more churning across employers. Second, we show that low-earners are relatively more likely to change occupations in response to a trade shock and to switch to relatively lower-paying occupations. Low-earners are also relatively more likely to stay in the same industry. Finally, we also document that Chinese competition increases the probability of changing the place of residence, which mostly occurs for workers who also change the industry they work in.

Gravity Across Space and Time

Mariko Jasmin Klasing
,
University of Groningen
Petros Milionis
,
University of Groningen
Robert Zymek
,
University of Edinburgh

Abstract

How well can the standard gravity equation account for the evolution of global trade flows over the long run? This paper provides the first systematic attempt to answer this question using a newly-assembled data set of bilateral trade flows, income levels and trade frictions that spans the years from 1870 to 2005. Using this panel data set we perform a structural estimation of the gravity equation and compare the gravity-predicted trade flows with their empirical counterparts. The estimation results highlight two major puzzles: (i) the standard gravity model can explain only a small share of the variation in trade flows over time, and (ii) it requires very large time-invariant trade costs to match the average value of trade flows between country pairs. The two puzzles appear to be closely related to the assumption of a constant trade elasticity throughout the entire sample period. Allowing for modest changes in the trade elasticity across sub-periods significantly improves the time-series fit of the gravity equation and reduces to more reasonable magnitudes the time-invariant trade costs required for gravity-predicted trade flows to match the data. These findings suggest that the key to reconciling the gravity equation with the experience of globalisation history may lie in understanding the reasons for changes in the trade elasticity over time.

Choked by Red Tape? The Political Economy of Wasteful Trade Barriers

Giovanni Maggi
,
Yale University
Monika Mrazova
,
University of Geneva
Peter Neary
,
University of Oxford

Abstract

Rational politically-motivated governments may have incentives to impose trade
barriers that yield no revenue (red-tape barriers, or "RTBs"), if a trade agreement
can constrain tariffs but not RTBs. We show that the extent of tariff liberalization is
limited by the need to prevent such wasteful behavior, but that RTBs may nonetheless
emerge in equilibrium, if the tariff commitments are not fully contingent. When RTBs
are used, they are likely to "choke" trade, implying that the extensive margin is key
for understanding the impact of RTBs; but non-prohibitive RTBs can also arise if
import demand is sufficiently concave. The frequency of RTBs tends to be higher if
the variance in political pressure is higher and if the agreement is re-optimized less
frequently. Within the lifespan of an agreement, globalization (a fall in natural trade
costs) tends to induce declines in RTBs, but if import demand is sufficiently concave,
such declines may get reversed. The main insights apply to both domestic-commitment-
motivated as well as terms-of-trade-motivated trade agreements.
JEL Classifications
  • A1 - General Economics