Showing papers on "Bilateral trade published in 2004"

Port Efficiency, Maritime Transport Costs and Bilateral Trade

Abstract: Recent literature has emphasized the importance of transport costs and infrastructure in explaining trade, access to markets, and increases in per capita income. For most Latin American countries, transport costs are a greater barrier to U.S. markets than import tariffs. We investigate the determinants of shipping costs to the U.S. with a large database of more than 300,000 observations per year on shipments of products aggregated at six-digit HS level from different ports around the world. Distance volumes and product characteristics matter. In addition, we find that ports efficiency is an important determinant of shipping costs. Improving port efficiency from the 25th to the 75th percentile reduces shipping costs by 12 percent. (Bad ports are equivalent to being 60% farther away from markets for the average country.) Inefficient ports also increase handling costs, which are one of the components of shipping costs. Reductions in country inefficiencies associated to transport costs from the 25th to 75th percentiles imply an increase in bilateral trade of around 25 percent. Finally, we try to explain variations in port efficiency and find that they are linked to excessive regulation, the prevalence of organized crime, and the general condition of the country's infrastructure.

The Puzzling Persistence of the Distance Effect on Bilateral Trade

Abstract: One of the best established empirical results in international economics is that bi-lateral trade decreases with distance. Although well-known, these results have not been systematically analyzed before. We examine 1052 distance effects estimated in 78 papers. Information collected on each estimate allows us to test hypotheses about causes of variation in the estimates. We focus on the question of whether distance effects have fallen over time. We find that the negative impact of distance on trade is not shrinking, but increasing slightly over the last century. This result holds even after controlling for many important differences in samples and methods.

Factor Proportions and the Structure of Commodity Trade

Abstract: This paper examines how factor proportions determine the structure of commodity trade. It integrates a many-country version of a Heckscher-Ohlin model with a continuum of goods with Paul R. Krugman's (1980) model of monopolistic competition and transport costs. The commodity structure of production and bilateral trade is fully determined. Two main predictions emerge. Countries capture larger shares of world production and trade of commodities that more intensively use their abundant factors. Countries that rapidly accumulate a factor see their production and export structures systematically shift towards industries that intensively use that factor. Both predictions receive support from detailed trade data.

The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement

Abstract: 1. INTRODUCTION Countries participating in a currency area face benefits and costs of the common currency. The benefits are directly related to transaction costs in countries' bilateral trade. Therefore, countries with intensive trade relations are likely to gain relatively more from the monetary integration. In addition, Frankel and Rose (1997, 1998) hypothesize that business cycles are also becoming more similar across countries having intensive trade links. This hypothesis is supported by cross-section estimations of the relation between the correlation of business cycles and trade intensity among Organisation for Economic Co-operation and Development (OECD) countries between 1959 and 1993. Moreover, Fatas (1997) and Hochreiter and Winckler (1995) show that a common European business cycle has been emerging as predicted by the endogeneity hypothesis of optimum currency area (OCA) criteria. Nevertheless, there remains considerable doubt whether there is a causal relationship between trade links and the correlation of business cycles in the involved countries. Kose et al. (2003) find only weak evidence for the hypothesis that increased trade and financial flows have increased the synchronization of business cycles. Kenen (2000) notes that the correlation of business cycles may increase with the intensity of trade links between these countries, but he argues that this does not necessarily mean that asymmetric shocks are reduced as well. Moreover, Hughes Hallett and Piscitelli (2001) show that a currency union may increase cyclical convergence, but only if there is already a sufficient symmetry in the shocks and institutional structure across the countries. Their findings thus support Krugman's (1993) discussion of the implications from the U.S. currency union for the Economic and Monetary Union (EMU) in Europe. In Krugman's view, trade liberalization facilitates increased specialization according to comparative advantage of countries and possibly a divergence of business cycles in the EMU. Furthermore, Frankel and Rose's work lacks a stronger relation to trade structure, (1) which should also explain the similarity of business cycles, although they use intraindustry trade (IIT) as an argument. In particular, the effects of trade on the convergence of business cycles depend on the degree of industrial specialization induced by the integration. Indeed, Helpman (1987) and Hummels and Levinsohn (1995) find that trade specialization plays a lesser role for trade among developed economies. Thus a majority of trade is observed within the same industries (the so called IIT). This should imply increasing correlation of business cycles between these countries. Therefore, this article tests the OCA endogeneity using bilateral levels of IIT between OECD countries in the 1990s. It is shown that IIT induces the convergence of business cycles between trading partners, but there is no direct relation between business cycle and trade intensity. As a result, the OCA endogeneity hypothesis is confirmed. However, this finding also underlines the role of the specialization in trade. Finally, the article asks whether the Central and Eastern European countries (CEECs) should introduce the euro as soon as possible after accession to the European Union (EU), or whether they should do so at a later stage. This question is addressed by applying the endogeneity hypothesis of OCA criteria to ten transition economies (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia). This article applies the relation between the degree of trade integration, the shares of IIT, and the convergence in business cycles to CEECs and EU countries to predict the degree of business cycle harmonization of CEECs with EU countries in the medium term. This approach reflects the Lucas critique insofar as it considers possible structural changes during the accession of the CEECs to the EU and the EMU. …

The Institutional Determinants of Bilateral Trade Patterns

Abstract: The intensity of international transactions remains lower than could be potentially justified on the basis of transportation costs alone. This has become known as the ‘mystery of the missing trade’. Transaction costs may be responsible for ‘under-trading’ across national borders. More specifically, the relatively low intensity of foreign trade may reflect the importance of institutions for cross-border transactions. This paper studies the effect of institutions on trade flows, using a gravity model approach. According to the gravity model, trade between any two countries is a function of each country's gross domestic product, the distance between them, and possibly other variables that reflect the costs of trade between them. We start from a standard gravity equation that incorporates variables for geographical proximity, common language, trade policy and common history. These factors reflect costs of trade across geographical and cultural distances. The quality of governance and the extent of familiarity with the resulting framework of rules and norms also affect the costs of doing business between any pair of countries. The effects of institutional quality and similarity on transaction costs may be substantial in international markets. Because of the greater extent of competition and higher uncertainty in international markets, the impact of quality and similarity of institutions on cross-border trade may be relatively pronounced. Therefore, this paper extends the gravity equation to include proxies for institutional quality and institutional homogeneity between trade partners. We use indicators on political stability, regulatory quality, corruption and other proxies that reflect the quality of governance, available from the comparative data set constructed by Kaufmann and others (World Bank, 2002). Variables that capture similarity in the quality of institutions are then constructed from these indicators. We test whether institutional homogeneity and institutional quality have an independent impact on trade volume between pairs of countries. The results indicate that, for example, having a similar law or regulatory framework promotes bilateral trade. Furthermore, a better quality of formal institutions on average coincides with higher trade. JEL codes: F14 Keywords: bilateral trade flows, gravity model, institutions

Global Agricultural Trade and Developing Countries

Abstract: This book explores the outstanding issues in global agricultural trade policy and evolving world production and trade patterns. Its coverage of agricultural trade issues ranges from the details of cross-cutting policy issues to the highly distorted agricultural trade regimes of industrial countries and detailed studies of agricultural commodities of economic importance to many developing countries. The book brings together the background issues and findings to guide researchers and policymakers in their global negotiations and domestic policies on agriculture. The book also explores the key questions for global agricultural policies, both the impacts of current trade regimes and the implications of reform. It complements the recent agricultural trade handbook that focuses primarily on the agricultural issues within the context of the World Trade Organization (WTO) negotiations (Ingco and Nash 2004).

A Decomposition of Global Linkages in Financial Markets Over Time

Abstract: This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by global, sectoral, and cross- country factors (returns in large financial markets) and by country-specific effects. Then it uses a new data set on bilateral linkages between the world's five largest economies and approximately 40 other markets to decompose the cross-country factor loadings into direct trade flows, competition in third markets, bank lending, and foreign direct investment. In the latter half of the 1990s, bilateral trade flows are large and significant determinants of how shocks are transmitted from large economies to other stock and bond markets. Bilateral foreign investment is usually insignif- icant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how move- ments in the world's largest markets affect financial markets around the globe. n the first half of 2002, the United States was buffeted by a series of negative shocks—from disappointing eco- nomic growth, to terrorist threats and uncertainty about a potential war with Iraq, to continued fallout from a series of financial scandals that raised broader concerns about corpo- rate governance. As a result, the U.S. stock market fell by approximately 17% over the first 6 months of the year. 1 Many other markets around the world declined in harmony; over the same 6-month period, Finland's stock market fell by 30%, Ireland's by 14%, Mexico's by 11%, and Hong Kong's by 6%. Other stock markets, however, performed relatively well and appeared to be insulated from the flow of negative news emanating from the United States. For ex- ample, over the same period Iceland's stock market experi- enced positive returns of 26%, South Africa's of 21%, South Korea's of 12%, and Colombia's of 11%. Shocks to the world's largest economies and their financial markets often spread to some markets, whereas markets in other countries are relatively insulated. This paper examines if real and financial linkages be- tween countries can explain why the world's largest finan- cial markets often appear to have such large, yet diverse, effects on other financial markets, and how these cross- market linkages have changed over time. More specifically, the paper attempts to answer four questions. First, how important are cross-country linkages with large financial markets, as compared to global and sectoral factors, in explaining financial market returns in countries around the world? Second, how important are bilateral trade flows, trade competition in third markets, bank lending, and in- vestment exposure in explaining these cross-country link- ages? Third, how has the relative importance of these various global linkages changed over time? Finally, how does the relative importance of these global linkages differ across stock markets and bond markets? In order to answer these questions, this paper begins by developing a factor model of market returns in different countries. It assumes that a country's market returns are a function of cross-country factors (returns in other large financial markets), global factors (world stock market re- turns, global interest rates, oil prices, gold prices, and commodity prices), sectoral factors (stock returns for 14 sectoral indices), and country-specific effects. After estimat- ing the importance of these factors for different countries and regions, the paper then focuses on the estimated cross- country linkages between the five largest economies (France, Germany, Japan, the U.K. and U.S.) and approxi- mately 40 developed countries and emerging markets around the world. It decomposes these cross-country link- ages into four specific bilateral linkages: two real linkages (direct trade flows and competition in third markets) and two financial linkages (bank lending and foreign direct investment). After measuring the importance of each of these factors and bilateral linkages in stock markets between 1986 and 2000, the paper than examines how their relative importance has changed over time and differs in bond markets.

A New Look at Exchange Rate Volatility and Trade Flows

Abstract: This study examines the effect of exchange rate volatility on trade, in the light of recent developments in the world economy. It looks at aggregate trade, and considers the effect of volatility on differentiated and homogeneous products. The study finds that, overall, there is no robust evidence of a large negative effect of exchange rate volatility on trade, although this does not rule out the possibility that a large exchange rate volatility could affect an economy through other channels.

On the Conservation of Distance in International Trade

Abstract: The volume of world trade has grown more than twice as fast as real world income since 1980. Surprisingly, the effect of distance on trade has increased during this period. It could be that countries are trading greater volumes of goods that are highly sensitive to distance. An alternative explanation is that distance has become more import for a significant share of goods. Using highly disaggregated bilateral trade data, Berthelon and Freund find that adjustment in the composition of trade has not influenced the way in which distance affects trade. In contrast, for about 25 percent of industries, distance has become more important. This implies that the increased distance sensitivity of trade is a result of a change in relative trade costs that affects many industries, as opposed to a shift to more distance-sensitive products. The authors also find that homogeneous products are twice as likely to have become more distance sensitive as compared with differentiated goods. This is consistent with the hypothesis that falling search costs, resulting from improvements in transport and communications, are relatively more important for differentiated goods. The results offer no evidence of the "death of distance." Rather, they suggest that distance-related relative trade costs have remained unchanged or shifted in favor of proximate markets. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the effect of technology on trade.

Assessing the Potential Benefit of Trade Facilitation: A Global Perspective

Abstract: The relationships between trade facilitation, trade flows, and capacity building are complex and challenging to assess, both empirically and in implementation. The authors measure and estimate the relationship between trade facilitation and trade flows across 75 countries in global trade, considering four important categories: port efficiency, customs environment, regulatory environment, and service sector infrastructure. A gravity model is employed that accounts for bilateral trade flows in manufactured goods in 2000-01 between the 75 countries, using traditional factors such as GDP, distance, language, and trade areas, and is augmented by the trade facilitation measures in the four categories for each country. The results suggest that both imports and exports for a country and for the world will increase with improvements in these trade facilitation measures. Potential gains from trade facilitation reforms are predicted by using the estimated parameters. The gains from trade facilitation are presented by comparing the gains across geographical regions and trade facilitation categories, and by domestic and partner improvements. The total gain in trade flow in manufacturing goods from trade facilitation improvements in all the four areas is estimated to be $377 billion. All regions gain in imports and exports. Most regions gain more in terms of exports than imports, in large part through increasing exports to the OECD market. The most important ingredient in getting these gains, particularly to the OECD market, is the country's own trade facilitation efforts. The detailed presentation of the results of the analysis may help inform policy decisions and capacity building choices.

International Investment Patterns

Abstract: We provide a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly released data on international equity holdings at the end of 2001. We develop a model that links bilateral equity holdings to bilateral trade in goods and services and find that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. We further document that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.

Trade liberalization and industry wage structure : evidence from Brazil

Abstract: Industry affiliation provides an important channel through which trade liberalization can affect worker earnings and wage inequality between skilled and unskilled workers. This empirical study of the impact of the 1988-94 trade liberalization in Brazil on the industry wage structure suggests that although industry affiliation is an important component of worker earnings, the structure of industry wage premiums is relatively stable over time. There is no statistical association between changes in industry wage premiums and changes in trade policy or between industry-specific skill premiums to university graduates and trade policy. Thus trade liberalization in Brazil did not significantly contribute to increased wage inequality between skilled and unskilled workers through changes in industry wage premiums. The difference between these results and those obtained for other countries (such as Colombia and Mexico) provides fruitful ground for studying the conditions under which trade reforms do not have an adverse effect on industry wage differentials

The Home-Market Effect and Bilateral Trade Patterns

Abstract: We develop a monopolistic-competition model of trade with many industries to examine how home-market effects vary with industry characteristics. Industries with high transport costs and more differentiated products tend to be more concentrated in large countries than industries with low transport costs and less differentiated products. We test this prediction using a difference-in-difference gravity specification that controls for import tariffs, importing-country remoteness, home bias in demand, and the tendency for large countries to export more of all goods. We find strong evidence of home-market effects whose intensity varies across industries in a manner consistent with theory.

Trade, Regulations, and Growth

Abstract: Trade does not stimulate growth in economies with excessive business and labor regulations. The authors examine the effect of openness on growth using cross-country regressions in both levels and changes. Results from the levels regressions imply that increased openness is associated with a lower standard of living in heavily-regulated economies. Growth regressions confirm that the effect of increased trade on growth is absent in these countries. The authors also find that once they control for the effect of trade on growth in heavily regulated economies, the evidence that trade positively affects growth is stronger than has been found in previous studies. Excessive regulations restrict growth because resources are prevented from moving into the most productive sectors and to the most efficient firms following liberalization. In addition, in highly regulated economies, increased trade is more likely to occur in the wrong goods-that is, goods where comparative advantage does not lie. The results imply that countries must create a sound business environment before trade can be used as an engine of growth.

Infrastructure and trade

Abstract: This paper explores the role that quality of infrastructure has on a country's trade performance, estimating a gravity model that incorporates bilateral tariffs and a number of indicators for the quality of infrastructure. The paper looks at the impact of the quality of infrastructure (road, airport, port and telecommunication, and the time required for customs clearance) on total bilateral trade and on trade in the automotive, clothing and textile sectors. In order to obtain unbiased estimators, multilateral resistances for tariffs and remoteness are introduced in the gravity equation. Moreover, the robustness of the results is tested by estimating a fixed-effect model, where bilateral indexes of the quality of infrastructure are included. The results can be summarised in four main findings: (i) bilateral tariffs, generally neglected in gravity regression of bilateral flows, have a significant negative impact on trade; (ii) quality of infrastructure is an important determinant of trade performance; (iii) port efficiency appears to have the largest impact on trade among all indicators of infrastructure; (iv) timeliness and access to telecommunication are relatively more important for export competitiveness in the clothing and automotive sector respectively.

AFTA and the Asian Crisis: Help or Hindrance to ASEAN Intra-Regional Trade?

Abstract: Using a modified gravity equation, this paper examines ASEAN intra- and extra-regional bias in bilateral trade flows and how these relationships have altered over time. We pay particular attention to the periods before and after the signing of AFTA as well as the crucial years prior to and following the Asian crisis. Given the ‘openness’ of ASEAN countries we consider not only intra-ASEAN trade but also the effect of AFTA on non-members. We find that trade flows were not significantly affected in the years immediately following the signing of the AFTA agreement and also that the traditional stance of ASEAN countries to outward-oriented economic activity has not been significantly damaged but rather stimulated by the AFTA process and/or the Asian economic crisis. We do find, however, that that one effect of the Asian economic crisis was to generate a stronger desire to source imports from within the region.

People's Republic of China's Competitive Threat to Latin America: An Analysis for 1990-2002

Abstract: This paper explores the competitive threat posed by the People's Republic of China (PRC) to Latin America and Caribbean (LAC). It focuses on the impact of PRC's rise as a major exporter of manufactured goods and discusses bilateral trade between LAC and PRC. The authors explore these issues with trade data collected from 1990-2002, analyzing and comparing export performance and specialization patterns in the global market as well as in the U.S.A., which is the main market for both the PRC and LAC. This paper was presented at the 2004 LAEBA Annual Conference, held in Beijing, People's Republic of China, on December 3-4, 2004.

Economic obstacles to expanding intra-African trade

Abstract: The paper extends the gravity model to examine the impact of infrastructure availability, economic policy, and internal political tensions on intra-African trade. To highlight specific obstacles hampering such a trade, bilateral trade between Africa and developed countries is also analyzed. The results show that, besides traditional gravity variables, poor infrastructure, economic policy mismanagement, and internal political tensions have a negative impact on trade among African countries. Except for political tensions, the identified obstacles are specific to intra-African trade, since they have no impact on African trade with developed countries.

Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality

Abstract: Openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflow, currency crashes, or severe recessions Some believe that openness raises vulnerability to foreign shocks, while others believe that it makes adjustment to crises less painful Several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut-off in funding This would help explain lower vulnerability to crises in Asia than in Latin America Such studies may, however, be subject to the problem that trade is endogenous We use the gravity instrument for trade openness, which is constructed from geographical determinants of bilateral trade We find that openness indeed makes countries less vulnerable, both to severe sudden stops and currency crashes, and that the relationship is even stronger when correcting for the endogeneity of trade

Infrastructure and trade

Abstract: This paper explores the role that quality of infrastructure has on a country's trade performance, estimating a gravity model that incorporates bilateral tariffs and a number of indicators for the quality of infrastructure The paper looks at the impact of the quality of infrastructure (road, airport, port and telecommunication, and the time required for customs clearance) on total bilateral trade and on trade in the automotive, clothing and textile sectors In order to obtain unbiased estimators, multilateral resistances for tariffs and remoteness are introduced in the gravity equation Moreover, the robustness of the results is tested by estimating a fixed-effect model, where bilateral indexes of the quality of infrastructure are included The results can be summarised in four main findings: (i) bilateral tariffs, generally neglected in gravity regression of bilateral flows, have a significant negative impact on trade; (ii) quality of infrastructure is an important determinant of trade performance; (iii) port efficiency appears to have the largest impact on trade among all indicators of infrastructure; (iv) timeliness and access to telecommunication are relatively more important for export competitiveness in the clothing and automotive sector respectively

East Asia Integrates: A Trade Policy Agenda for Shared Growth

Abstract: Rapid and sustained growth in international trade has long been a hallmark of successful growth and development strategies in East Asia. Some success stories are well known: those of the newly industrializing economies (NIEs) such as the Republic of Korea, as well as middle-income economies such as Malaysia and the transition economy of China. More recent entrants to world markets that have seen rapid export growth include low-income economies such as Cambodia and Vietnam. Trade has been an important factor in growth in the region, enabling progress in poverty reduction. Although the 1997-98 financial crisis interrupted this progress, recovery since then has brought poverty rates in every emerging economy in the region to record lows, and in economies like that of Vietnam, trade growth has brought with it a rapid reduction in poverty. Intraregional trade in East Asia has grown faster than trade with any other market, and while the largest economies account for the bulk of this trade, the regional trade of most smaller economies has also grown. Trade integration has been marketled, stemming from a combination of unilateral reforms, fulfillment of multilateral commitments, and a pattern of relocation of production processes (see Kawai and Urata 2002). Intraregional trade has been driven not only by growing demand but increasingly by improved competitiveness in regional markets, as reflected in increased market shares (Figure 1). China has been particularly dynamic, but almost all countries increased their competitiveness in regional markets during 1995-2001.9 This increase was accomplished without loss of competitiveness in other markets; East Asia continued to expand its market shares in the European Union (EU) and North American Free Trade Agreement (NAFTA) markets in the same period.

Trade Blocks and the Gravity Model: Evidence from Latin American Countries

Abstract: We apply the gravity model to examine the effects of the Andean Community and Mercosur on both intra-regional and intra-industrial trade in the period 1980- 1997. After accounting for size distance and competitiveness effects, the Andean Community preferential trade agreements had a significant effect on the reference products but only a marginal effect on the differentiated products, in particular capital-intensive goods. Mercosur preferential trade agreements had a significant positive effect only on the capital-intensive subcategory of the reference products.

Effects of Civil Wars on International Trade, 1950-92:

Abstract: The relationship between economic interdependence and international conflict is a burgeoning research topic. Previous research has examined the role of interstate conflict on bilateral total trade. Civil wars also have severe consequences on society and are not uncommon. This article seeks to shed light on this relationship by examining the impact of civil war in one country on the total bilateral trade between the afflicted state and its trade partners. The repercussions of civil war participation on a militarily intervening third party’s trade also receive scrutiny. Furthermore, the outcome of the civil war is investigated to determine whether all war terminations have the same effects on trade. Finally, this article questions whether the effects of civil wars can be mitigated by security partnerships. One key finding from analyses of 120 countries between 1950 and 1992 is that civil wars decrease bilateral trade between states by one-third. In addition, the findings indicate that the effects of civil w...