Showing papers on "Bilateral trade published in 2006"

Gravity for dummies and dummies for gravity equations

Abstract: This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop’s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

Africa's Silk Road: China and India's New Economic Frontier

Abstract: As illustrated in Africa's Silk Road: China and India's New Economic Frontier, the new South-South economic relations present real opportunities-as well as challenges-to African countries. They also highlight the need for complementary reforms by China and India to support more vigorous African development. In analyzing Africa's intensifying relationships with China and India, Africa's Silk Road examines the trends to date and considers the implications of these developments for the economic future of the African continent. The diagnosis cautions that the opportunities engendered by China and India's trade and investment with Africa will not necessarily be converted into growth and poverty reduction in the region. A critical finding of the study is that it is not just the quantity of these trade and investment flows that matters-it is also the quality of the overall commercial relationships underlying as well as shaping these flows. This paper contains the following headings: connecting two continents; performance and patterns of African-Asian trade and investment flows; challenges at the border - Africa and Asia's trade and investment policies; behind-the-border constraints on African-Asian trade and investment flows; between-the-border factors in African-Asian trade and investment; and investment-trade linkages in African-Asian commerce - scale, integration, and production networks.

Trading on Time

Abstract: The authors determine how time delays affect international trade using newly collected World Bank data on the days it takes to move standard cargo from the factory gate to the ship in 126 countries. They estimate a modified gravity equation, controlling for endogeneity and remoteness. On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 70 kilometers on average. Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. In particular, a day's delay reduces a country's relative exports of time-sensitive to time-insensitive agricultural goods by 6 percent.

FDI as an Outcome of the Market for Corporate Control: Theory and Evidence

Abstract: Much foreign direct investment (FDI) takes the form of mergers and acquisitions (M&A). It is commonplace in finance to view acquisitions as manifestations of the market for corporate control. Following on that insight we propose a model of FDI in which headquarters bid to control overseas assets. We derive an equation for bilateral FDI stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows. We estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward FDI.

Managing the Noodle Bowl: The Fragility of East Asian Regionalism

Abstract: The paper argues that East Asian regionalism is fragile since (i) each nation's industrial competitiveness depends on the smooth functioning of 'Factory Asia' - in particular on intra-regional trade; (ii) the unilateral tariff-cutting that created 'Factory Asia' is not subject to WTO discipline (bindings); (iii) there is no 'top-level management' to substitute for WTO discipline, i.e. to ensure that bilateral trade tensions - tensions that are inevitable in East Asia - do not spillover into region-wide problems due to lack of cooperation and communication. This paper argues that the window of opportunity for East Asian 'vision' was missed; what East Asia needs now is 'management' not vision. East Asia should launch a 'New East Asian Regional Management Effort' with a reinforced ASEAN+3 being the most likely candidate for the job. The first priority should be to bind the region's unilateral tariff cuts in the WTO.

The War on Terroir: Geographical Indications as a Transatlantic Trade Conflict

Abstract: Terroir, the concept of an essential link between location of production and a specific quality attribute, is emerging as a contentious issue in trade negotiations and disputes. This issue is manifest through disputes and disagreements about appropriate protection of ‘geographical indications’ (GIs). This paper explores the differences in approach taken by the EU and the US towards GI protection, and illustrates the nature of the legal and economic arguments. The transatlantic dispute is spreading to other countries through the inclusion of GI protection in regional and bilateral trade pacts. It also has implications for the eventual conclusion of the WTO Doha Round negotiations, as the terroir issue arises in both the agricultural and the Trade-Related Intellectual Property (TRIPS) agendas, once again pitting the US and EU as protagonists. But there are signs of change in these positions as the GI system in the EU comes under review and producers in the US reconsider the possible advantages of location-based identifiers. These issues are important in a number of food sectors, and are likely to be persistent. They deserve more attention from practising applied economists than they have yet received.

Comparative Advantage, Demand for External Finance, and Financial Development

Abstract: The differences in the levels of financial development between industrial and developing countries are large and persistent. Theoretical and empirical literature has argued that these differences are the source of comparative advantage and could therefore shape tradepatterns. This paper points out the reverse link: financial development is influenced by comparative advantage. The authors illustrate this idea using a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: financial systems are more developed in countries with large financially intensive sectors. After trade opening demand for external finance, and therefore financial development, are higher in a country that specializes in financially intensive goods. By contrast, financial development is lower in countries that primarily export goods which do not rely on external finance. The authors demonstrate this effect empirically using data on financial development and export patterns in a panel of 96 countries over the period 1970-99. Using trade data, they construct a summary measure of a country's external finance need of exports and relate it to the level of financial development. In order to overcome the simultaneity problem, they adopt a strategy in the spirit of Frankel and Romer (1999). The authors exploit sector-level bilateral trade data to construct, for each country and time period, a predicted value of external finance need of exports based on the estimated effect of geography variables on trade volumes across sectors. Their results indicate that financial development is an equilibrium outcome that depends strongly on a country's trade pattern.

India's Global Trade Potential: The Gravity Model Approach

Abstract: In this article an augmented gravity model equation has been used to analyze the world trade flows using a sample of 146 countries. The coefficients thus obtained are then used to predict trade potential for India. Ordinary Least Squares with cross-section data for the year 2000 have been used for estimation. The results show that all three traditional “gravity” effects are intuitively reasonable, with statistically significant t-statistic often exceeding 50 in absolute value. Alternative measures of gross national product (GNP) dollar value and purchasing power parity do not alter either the sign or significance of different explanatory variables. Historical and cultural similarities also impact positively upon bilateral trade. As concerns India's trade potential, the model shows that there is tremendous potential with China and trade can more than double if barriers and constraints are removed. Our estimates also indicate a huge potential, of the order of US$6.5 billion, with Pakistan.

Determinants of Business Cycle Synchronisation Across Euro Area Countries

Abstract: We investigate the key factors underlying business cycle synchronisation in the euro area applying the extreme-bounds analysis. We examine both traditional determinants and new, EMU-specific policy and structural indicators over the past 25 years. Our evidence seems to support the endogeneity hypothesis of the optimum currency area criteria. The implementation of the single market intensified bilateral trade across euro area countries and contributed to higher business cycle symmetry. The introduction of the single currency led to an intensification of intra-industry trade which has become the main driving force ensuring the coherence of business cycles. In addition, the set of robust determinants of business cycle synchronisation has varied over time, depending on the difference phases of the European construction, with fiscal policy, in addition to industrial and financial structures, playing a greater role during the completion of the Single Market, while short-term interest rate differentials and cyclical services have become more determinant since Economic and Monetary Union.

How Important is the New Goods Margin in International Trade

Abstract: We examine the bilateral trade patterns of countries involved in significant trade liberalizations using detailed data on the value of trade flows by commodity. We find a striking relationship between a good's pre-liberalization share in trade and its growth subsequent to liberalization. The goods that were traded the least before the liberalization account for a disproportionate share in trade following the reduction of trade barriers. The set of goods that accounted for only 10 percent of trade before the liberalization may account for as much as 40 percent of trade following the liberalization. This new finding cannot be accounted for by the standard models of trade, which rely on increases in previously traded goods to produce trade growth. We modify the standard Dornbusch-Fischer-Samuelson model of Ricardian trade to provide a model capable of delivering these new facts. Our specification improves on previous Ricardian models by providing a technology process that can be calibrated using data on intra-industry trade

How Bargaining Alters Outcomes: Bilateral Trade Negotiations and Bargaining Strategies

Abstract: This article considers bargaining strategies used by government negotiators in the context of bilateral trade disputes. I argue that trade officials reach the most durable agreements by using an integrative, or value-creating, strategy and avoiding the use of threats. By contrast, a highly distributive, value-claiming strategy coupled with loud public threats is unlikely to result in a durable agreement and frequently leads to deadlocked negotiations. The irony, however, is that American officials use the latter approach more frequently than the former in bilateral trade disputes. These strategies are usually chosen unconsciously in response to perceptions of losses that drive negotiators to select risky approaches to resolve disputes.By examining bargaining strategies in the U.S. disputes with Japan and South Korea over automobiles and auto parts in the 1990s, this article identifies shifts in negotiation strategies. These shifts in approach closely track the outcomes in these two deeply contentious disputes. After protracted and contentious negotiations with Japan, the final outcome represented a failure to achieve the Americans' most important goals. A less confrontational strategy with South Korea ultimately resulted in greater market opening.

Harmonisation of food regulations and trade in the Single Market: evidence from disaggregated data

Abstract: This paper uses a structural gravity model based on Anderson and van Wincoop (2003) to quantify and test the hypothesis that EU harmonization of food regulations increases EU bilateral trade. Using a self-constructed database that identifies processed food products at a detailed level covered by harmonization, our results suggest that bilateral exports subject to harmonized food regulations are 253% greater than bilateral exports not covered by harmonized food regulations for 1998. The paper also estimates a tariff equivalent of trade costs that arises from non-harmonized food regulations which ranges between 73% and 97%. Both of these effects vary across food sub-sectors.

Managing the Noodle Bowl: The Fragility of East Asian Regionalism

Abstract: The paper argues that East Asian regionalism is fragile since (i) each nation's industrial competitiveness depends on the smooth functioning of 'Factory Asia' - in particular on intra-regional trade; (ii) the unilateral tariff-cutting that created 'Factory Asia' is not subject to WTO discipline (bindings); (iii) there is no 'top-level management' to substitute for WTO discipline, i.e. to ensure that bilateral trade tensions - tensions that are inevitable in East Asia - do not spillover into region-wide problems due to lack of cooperation and communication. This paper argues that the window of opportunity for East Asian 'vision' was missed; what East Asia needs now is 'management' not vision. East Asia should launch a 'New East Asian Regional Management Effort' with a reinforced ASEAN+3 being the most likely candidate for the job. The first priority should be to bind the region's unilateral tariff cuts in the WTO.

Exchange Rate Sensitivity of U.S. Trade Flows: Evidence from Industry Data

Abstract: 1. IntroductionIn an effort to boost employment, a country could stimulate its exports and discourage its imports and thereby improve its trade balance. One policy that has received a great deal of attention in the literature is currency devaluation. By making exports cheaper and imports expensive, devaluation is said to improve the trade balance. The only condition required is that the sum of import and export demand price elasticities exceed unity (that condition, known as the Marshall-Lerner condition, is derived under the assumption of perfectly elastic supply of trade). Most previous studies that attempted to assess the Marshall-Lerner condition relied on price elasticities that were obtained by estimating aggregate import and export demand functions. These studies provided mixed conclusions as far as the effectiveness of devaluation or depreciation is concerned. Examples include Houthakker and Magee (1969), Khan (1974), Goldstein and Khan (1976, 1978), Wilson and Takacs (1979), Haynes and Stone (1983a, 1983b), Warner and Krienin (1983), Bahmani-Oskooee (1986, 1998), and Bahmani-Oskooee and Niroomand (1998). The mixed conclusion could be related to aggregation bias. When aggregate trade data are employed in import and export demand functions, significant price elasticity with one trading partner could be more than offset by an insignificant price elasticity with another trading partner, yielding an insignificant price elasticity.Because of aggregation bias, another body of the literature has emerged in recent years that concentrates on using trade data at the bilateral level. Examples in this latter group include Rose and Yellen (1989), Cushman (1987, 1990), Summary (1989), Marquez (1990), Haynes, Hutchison, and Mikesell (1986), Eaton (1994), Bahmani-Oskooee and Brooks (1999), Nadenichek (2000), and Bahmani-Oskooee and Goswami (2004). Except Bahmani-Oskooee and Goswami (2004), all other studies in this second group have estimated bilateral trade elasticities between the United States and her major trading partners and concluded that the real bilateral exchange rate is a significant determinant of bilateral trade balance, at least in some cases. Bahmani-Oskooee and Goswami (2004), who considered the bilateral trade flows between Japan and her nine major trading partners, found that in most cases Japanese exports are not sensitive to the real bilateral exchange rate, but her imports are. These studies as well as those in the first group estimate price elasticities in demand under the assumption that supply is perfectly elastic and then evaluate the Marshall-Lerner condition involving own-price coefficients in demand. Thus, evidence in these studies is limited because it assumes perfectly elastic supply of trade for both exports and imports.Although there is additional room to expand the literature in the second group by considering the experiences of countries other than the United States and Japan, in this paper we would like to open another avenue of research by investigating the impact of real depreciation of the dollar on imports and exports of 66 American industries, a disaggregation by industry rather than by country. Disaggregation by industry will avoid problems associated with petroleum imports, as does disaggregation by country (Rose and Yellen 1989).1 For this purpose, in Section 2 we outline the import and export demand functions for each commodity group along with the estimation method. In Section 3, we present the empirical results. Section 4 provides our summary and conclusion. Data definitions and sources are cited in an appendix.2. The Models and the MethodIn formulating any import and export demand function, it is a common practice to relate the volume of imports and exports to a measure of income and relative prices. The main purpose is to obtain estimates of import and export demand elasticities so that we can better judge the effectiveness of currency devaluation in increasing a country's inpayments and reducing outpayments. …

Shaken, Not Stirred: The Impact of Disasters on International Trade

Abstract: This paper examines the impact of major disasters on import and export flows using a gravity model (170 countries, 1962–2004). As a conservative estimate, an additional disaster reduces imports on average by 0.2% and exports by 0.1%. Despite the apparent persistence of bilateral trade volumes, we find that the driving forces determining the impact of disastrous events are the level of democracy and the geographical size of the affected country. The less democratic and the smaller a country the greater is its loss due to a catastrophe. In autocracies, exports and imports are significantly reduced. Had Togo been struck by a major disaster in 2000, it would have lost 6.2% of its imports and 3.7% of its exports. While democratic countries' exports suffer identical decreases, imports increase.

Trade Costs in the First Wave of Globalization

Abstract: What drives globalization today and in the past? We employ a new micro-founded measure of bilateral trade costs based on a standard model of trade in differentiated goods to address this question. These trade costs gauge the difference between observed bilateral trade and frictionless trade. They comprise tariffs, transportation costs and all other factors that impede international trade but which are inherently difficult to observe. Trade costs fell on average by ten to fifteen percent between 1870 and 1913. We also use this measure to decompose the growth of global trade over that period and find that roughly 44 percent of the global trade boom can be explained by reductions in trade costs; the remaining 56 percent is attributable to economic expansion.

A Systematic Decomposition of World Trade into Horizontal and Vertical IIT

Abstract: We provide a systematic decomposition of world trade using harmonized bilateral flows at the most available detail (some 5,000 product categories), into three trade types: inter-industry, intra-industry in horizontally and in vertically differentiated products. The analysis is diachronic and considers country pairs such as France-Germany, United States-China, Malaysia-Singapore, or India-Nigeria. We show that the increase in IIT at the world level is due to two-way trade of vertically differentiated products. We find France and Germany having the highest share of IIT in their bilateral trade among all country pairs in the world. In value terms, the most important bilateral IIT is between the United States and Canada. Recently, specialization according to the classical theories of international trade (inter-industry trade), has recovered, due to the increasing participation of emerging economies in world trade.

Gravity for Dummies and Dummies for Gravity Equations

Abstract: This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop’s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

Liberalizing trade in services : a survey

Abstract: Since the mid 1980s a substantial amount of research has been undertaken on trade in services. Much of this is inspired by the World Trade Organization or regional trade agreements, especially the European Union, but an increasing number of papers focus on the impacts of services sector liberalization. This paper surveys the literature, focusing on contributions that investigate the determinants of international trade and investment in services, the potential gains from greater trade (and liberalization), and efforts to cooperate to achieve such liberalization through trade agreements. It concludes that there is increasing evidence that services liberalization is an important source of potential welfare gains, but relatively little research has been done that can inform the design of international cooperation-both trade agreements and development assistance-so as to more effectively promote development objectives.

Do Trade Missions Increase Trade

Abstract: In an effort to stimulate trade, has Canada conducted regular trade missions starting in 1994, often led by the Prime Minister. According the Canada, these mission have led to tens of billions of dollars in new business deals. This paper uses multilateral trade data and a gravity equation to assess this claim. Our results do not support the proposition that the trade missions increased tradeâ€"once we control for pre-mission levels of bilateral trade, trade mission do not exert a statistically significant effect on trade.

Preferential Trading in South Asia

Abstract: This paper examines the economic case for the South Asia Free Trade Area (SAFTA) Agreement signed on January 6 th, 2004 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. It starts with a detailed analysis of the preferential trading arrangements in South Asia to look at the region's experience to date and to draw lessons. Specifically, the study examines the most effective free trade area in existence, i.e., the India-Sri Lanka Free Trade Area, and evaluates the developments under the South Asian Preferential Trade Area (SAPTA). The paper concludes that, considered in isolation, the economic case for SAFTA is quite weak. When compared with the rest of the world, the region is tiny both in terms of economic size as measured by GDP (and per capita incomes) and the share in the world trade. It is argued that prima facie, these facts make it likely that trade diversion would be dominant as a result of SAFTA. This point is reinforced by the presence of high levels of protection in the region and the tendency of the member countries to establish highly restrictive 'sectoral exceptions/sensitive lists' and stringent 'rules of origin'. We argue that SAFTA makes sense only in the context of a much broader strategy of creating a larger preferential trade area in the region that specifically would encompass China and the member nations of the Association of South East Asian Nations. In turn, the case for the latter is strategic: the pursuit of regionalism in the Americas and Europe has created increasing discrimination against Asian exports to those regions, which must inevitably impact the region's terms of trade adversely. An Asian bloc could be a potential instrument of changing incentives for the trade blocs in the Americas and Europe and forcing multilateral freeing of trade. Assuming that the SAFTA Agreement is here to stay, the paper also suggests steps to ensure that the Agreement can be made more effective in promoting intra-regional trade, while minimizing the likely trade-diversion costs and maximizing the potential benefits.

Doha Merchandise Trade Reform: What Is at Stake for Developing Countries?

Abstract: This paper provides new estimates of the global gains from multilateral trade reform and their distribution among developing countries in the presence of trade preferences. Particular attention is given to agriculture, as farmers constitute the poorest households in developing countries but are the most assisted in rich countries. The latest GTAP database (Version 6.05) and the LINKAGE model of the global economy are used to examine the impact first of current merchandise trade barriers and agricultural subsidies, and then of possible reform outcomes from the WTO's Doha Development Agenda. The results suggest moving to free global merchandise trade would boost real incomes in Sub-Saharan Africa proportionately more than in other developing countries or high-income countries, despite a terms of trade loss in parts of that region. Net farm incomes would rise substantially in that and other developing country regions, thereby alleviating rural poverty. A Doha partial liberalization could move the world some way toward those desirable outcomes, but more so the more developing countries themselves cut applied tariffs, particularly on agricultural imports.

South - South Trade: Geography matters

Abstract: Intra-subsaharan African trade appears to be very limited, an outcome that is often justified on the grounds of the size of the exporting and the importing economies. If that were the explanation, there would be no untapped trade potential. We argue instead that the main determinant of this ‘missing trade' is geography. Being landlocked (and poor) translates into very high trade costs. In this paper, we try to measure the impact of geographical impediments on South–South trade. We focus on the intra and extra regional trade of the countries belonging to the West African Economic and Monetary Union, which have been involved in an integration process since the early days of their independence. We derive and estimate an Armington-based model highlighting the impact of geography and infrastructures on bilateral trade flows within this region.

COMESA trade potential: a gravity approach

Abstract: The aim of this study is twofold: first, to find out whether COMESA is a building or stumbling bloc; and second, to estimate trade potentials within the COMESA region for COMESA members. In addressing the issue of regionalism, the gravity model can be used to simulate trade potentials corresponding to any regional integration scheme. This study uses a panel data analysis to estimate export flows from 147 exporting countries for a period of 21 years (1980–2001). The equation is estimated using a Tobit model. The coefficients on the observable effects determining bilateral trade, except real effective exchange rate, are as expected and highly significant. COMESA seems to be a building bloc; that is, the bloc liberalized trade more internally than it diverted trade from the rest of the world. These results suggest that COMESA's trade potential within the region is limited. In fact, the results suggest that members of COMESA trading bloc are overtrading within the region. Potentials for more trade exist for A...

The impact of regional trade agreements and trade facilitation in the Middle East and North Africa region

Abstract: The Middle East and North Africa (MENA) region's trade performance over the past two decades has been disappointing. Efforts to boost trade through a plethora of regional trade agreements (RTAs) are underway. This study examines the potential contribution of regional trade agreements, as well as trade facilitation improvements, in enhancing the development prospects of the region. Using the Global Trade Analysis Project (GTAP) model and database, both intra-regional integration and integration with the European Union are observed to have a favorable impact on welfare in the MENA region. The welfare gains from integrating with the European Union are observed to be at least twice as much as intra-regional integration. Furthermore, these welfare gains are observed to at least triple when the implementation of the RTAs is complemented with trade facilitation improvements.