We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes We then develop a two-stage estimation procedure that uses an equation for selection into trade partners in the first stage and a trade flow equation in the second We implement this procedure parametrically, semiparametrically, and nonparametrically, showing that in all three cases the estimated effects of trade frictions are similar Importantly, our method provides estimates of the intensive and extensive margins of trade We show that traditional estimates are biased and that most of the bias is due not to selection but rather due to the omission of the extensive margin Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics This variation is large and particularly so for trade between developed and less developed countries and between pairs of less developed countries

Estimating Trade Flows: Trading Partners and Trading Volumes

https://www.econstor.eu/bitstream/10419/101013/1/wp0503.pdf

Do Free Trade Agreements Actually Increase Members' International Trade?

Economics and Information Theory

We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data. In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries. As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters. This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes. We then develop a two-stage estimation procedure that uses an equation for selection into trade partners in the first stage and a trade flow equation in the second. We implement this procedure parametrically, semiparametrically, and nonparametrically, showing that in all three cases the estimated effects of trade frictions are similar. Importantly, our method provides estimates of the intensive and extensive margins of trade. We show that traditional estimates are biased and that most of the bias is due not to selection but rather due to the omission of the extensive margin. Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics. This variation is large and particularly so for trade between developed and less developed countries and between pairs of less developed countries.

/pdf/estimating-trade-flows-trading-partners-and-trading-volumes-4yxhflsga0.pdf

The nature of international trade is changing. For centuries, trade mostly entailed an exchange of goods . Now it increasingly involves bits of value being added in many different locations, or what might be called trade in tasks . Revolutionary advances in transportation and communications technology have weakened the link between labor specialization and geographic concentration, making it increasingly viable to separate tasks in time and space. When instructions can be delivered instantaneously, components and unfinished goods can be moved quickly and cheaply, and the output of many tasks can be conveyed electronically, firms can take advantage of factor cost disparities in different countries without sacrificing the gains from specialization. The result has been a boom in “offshoring” of both manufacturing tasks and other business functions. 1 In this paper, we develop a simple and tractable model of offshoring based on the trade able tasks. We conceptualize production in terms of the many tasks that must be performed by each factor of production. A firm can perform each of the continuum of tasks required for the realization of its product either in close proximity to its headquarters or at an offshore location. Offshoring may be attractive, if some factors can be hired more cheaply abroad than at home, but it also is costly, because remote performance of a task limits the opportunities for monitoring and coordinating workers. 2 To capture this aspect of reality, our model features heterogeneous offshoring costs for the various tasks. In each industry, firms choose the geographic organization

/pdf/trading-tasks-a-simple-theory-of-offshoring-2vstzj3iz1.pdf

Trading Tasks: A Simple Theory of Offshoring

World trade evolves at two margins. Where a bilateral trading relation- ship already exists it may increase through time (intensive margin). But trade may also increase if a trading bilateral relationship is newly established between coun- tries that have not traded with each other in the past (extensive margin). We pro- vide an empirical dissection of post-World War II growth in manufacturing world trade along these two margins. We propose a "corner-solutions version" of the gravity model to explain movements on both margins. A Tobit estimation of this model resolves the so-called "distance puzzle". It also finds more convincing evi- dence than recent literature that WTO-membership enhances trade. JEL no. F12, F15

/pdf/exploring-the-intensive-and-extensive-margins-of-world-trade-g00ut2awfj.pdf

Exploring the Intensive and Extensive Margins of World Trade

We develop a dual representation of the technology of international fragmentation for an industry using 2 factors in a continuum of stages. We then derive a generalised factor price frontier which incorporates an endogenous adjustment of the margin of fragmentation. Using this frontier in a 2 × 2 general equilibrium model, we investigate the role of outsourcing in the adjustment to a decline in the final output price of the multistage industry, and the attendant factor price effects. We also explore the implications of an improved technology of international fragmentation on the margin of fragmentation and on domestic factor prices.

International Outsourcing and Factor Prices with Multistage Production

A specific-factors view on outsourcing

In his seminal paper, Rose (2004) concluded from a gravity-type study of bilateral trade that the GATT/WTO does not play a strong role in encouraging trade. Rose looks at countries where the amount of trade was positive to start with (intensive margin). In this paper, we present a corner-solutions version of the gravity model of bilateral trade which explains zero trade and leaves room for WTO membership to promote trade at the extensive margin of trade. Relying on a Tobit estimation approach, we find that WTO membership has promoted world trade to a larger extent than Rose's results seem to indicate.

Does WTO Membership Make a Difference at the Extensive Margin of World Trade

We investigate the link between productivity of firms and their sourcing behavior Following Antras & Helpman (2004) we distinguish between domestic and foreign sourcing, as well as between outsourcing and vertical integration A firm’s choice is driven by a hold-up problem caused by lack of enforceable contracts We use Spanish firm-level data to examine the productivity premia associated with the different sourcing strategies We find strong empirical support for the predictions of the model

https://www.econstor.eu/bitstream/10419/30696/1/617275289.pdf

Wilhelm Kohler

Papers

Exploring the Intensive and Extensive Margins of World Trade

International Outsourcing and Factor Prices with Multistage Production

A specific-factors view on outsourcing

Does WTO Membership Make a Difference at the Extensive Margin of World Trade

Global sourcing decisions and firm productivity: evidence from Spain