International Trade Policy and Institutions

International Trade Policy and Institutions

An NBER conference on International Trade Policy and Institutions Conference took place online September 11-12. Research Associates Stephen J. Redding of Princeton University and Robert W. Staiger of Dartmouth College organized the meeting, sponsored by the Smith Richardson Foundation. These researchers' papers were presented and discussed:

Samuel S. Kortum, Yale University and NBER; David Weisbach, University of Chicago; and Michael Wang, Northwestern Medical School

Optimal Unilateral Carbon Policy (slides)

Kortum, Weisbach, and Wang consider climate policy in a world with international trade and a global externality from the use of energy. They assume that one region imposes a climate policy and the rest of the world does not, thereby generating concerns about leakage and shifts in the location of production and other activities. The researchers derive the optimal unilateral policy and show how it can be implemented through a tax on extraction, a partial border adjustment on the import and export of energy and on the import of goods, along with an export policy designed to expand the export margin. A novel feature of the optimal policy is that the pricing region exploits international trade in goods to expand the reach of its climate policy. The researchers calibrate and simulate the model to illustrate how the optimal policy compares to more traditional policies.

George A. Alessandria, University of Rochester and NBER; Shafaat Y. Khan, The World Bank; and Armen Khederlarian, University of Rochester

Taking Stock of Trade Policy Uncertainty:Evidence from China’s Pre-WTO Accession (slides)

Alessandria, Khan, and Khederlarian study the effects on trade from the annual tariff uncertainty about China's MFN status renewal prior to joining the WTO. They have four main findings. First, in monthly data trade increases significantly in anticipation of uncertain future increases in tariffs. Second, the probability of a tariff increase was perceived to be relatively small, with an average annual probability of non-renewal of about 6 percent. Third, what matters more is the expected future tariff rather than the uncertainty around it. The researchers identify these effects using within-year variation in the risk of trade policy changes around the renewal vote and trade flows. They show that an (s, s) inventory model generates this behavior and that variation in the strength of the stockpiling in advance of the vote is increasing in the storability of goods. Fourth, the costs associated with within year trade policy induced stockpiling account for around 30% of the trade dampening effects of uncertainty found in annual data. The results explain why trade may hold up in advance of a prospective policy change such as Brexit or the US-China escalating tariff war of 2018-19, but may fall off sharply even if expected tariff increases do not materialize.

Jiwon Choi, Princeton University; Ilyana Kuziemko, Princeton University and NBER; Ebonya L. Washington, Yale University and NBER; and Gavin Wright, Stanford University

Local Employment and Political Effects of Trade Deals: Evidence from NAFTA (slides)

Counties whose employment in 1990 depended on industries vulnerable to Mexican import competition via the 1994 North American Free Trade Agreement (NAFTA) suffer large employment losses (relative to the bottom quartile of counties, counties in the top quartile of NAFTA exposure see 5-8 log-point declines in employment by 2000), concentrated in manufacturing. Despite economic decline, the researchers can reject even modest population declines. Trade-adjustment-aid application approvals rise, but cover a tiny share of the job losses documented, and Disability Insurance in fact displays a much larger response. Exposed counties (many in the upper South) begin the period more Democratic in terms of votes in House elections, but as NAFTA is debated in 1992-1994 they shift in the Republican direction and by 2000 vote majority-Republican in House elections. Choi, Kuziemko, Washington, and Wright show with a variety of microdata, including 1992-1994 respondent-level panel data, that opposition to free trade explains shifts in political identity in the GOP direction even after controlling for demographics and views on a variety of other issues.

Beata Javorcik, Katherine A. Stapleton, and Ben Kett, University of Oxford; and Layla O'Kane, Burning Glass Technologies

Unravelling Deep Integration: Local Labour Market Effects of the Brexit Vote (slides)

Javorcik, Stapleton, Kett, and O'Kane use high frequency data on the near universe of job adverts posted online in the UK to study the impact of the Brexit referendum on labour demand between January 2015 and December 2019. They develop measures of local labour market exposure to the threat of trade barriers on both goods and services exports if the UK were to leave the EU without a trade deal. The researchers find that regions that were more exposed to potential barriers on professional services exports saw a differential decline in online job adverts in the period after the referendum, particularly for higher skilled jobs. This effect was distinct from the impact of the exchange rate depreciation, uncertainty surrounding future immigration policy and the threat of future barriers on trade in goods.

Brian McCaig, Wilfrid Laurier University; Nina Pavcnik, Dartmouth College and NBER; and Woan Foong Wong, University of Oregon

Export Markets and Long-run Industry Adjustment: State, Private, and Foreign Firms in Vietnam (slides)

McCaig, Pavcnik, and Wong investigate the long-run impacts of trade policy on manufacturing firms in the presence of foreign investment and a large state-owned sector in a low-income country, Vietnam. They find that reductions in US tariffs on imports from Vietnam, as mandated by the 2001 US-Vietnam Bilateral Trade Agreement, caused an immediate surge in Vietnamese exports which flattens out in the medium run but continues to grow. The US tariff reductions are associated with an increase in industry size, as measured by number of firms, employment, and revenue. While the number of foreign and domestic private firms responds immediately, state firms have a delayed response. Within industries, employment shares shift strongly to new entrants in response to tariff cuts. Counter to the predictions of stylized heterogeneous firm trade models, the researchers find that tariff cuts lead to disproportional increases in employment shares of entrants over incumbents. In addition, firm-type matters as tariff cuts favorably impact employment share of foreign firms over private domestic firms, with no net response by state-owned enterprises. The growth in employment share among entrants is predominantly due to foreign entrants.

Pablo Fajgelbaum, Princeton University and NBER; Pinelopi K. Goldberg, Yale University and NBER; Patrick Kennedy, University of California, Berkeley; Amit Khandelwal, Columbia University and NBER; and Daria Taglioni, The World Bank

Global Reallocations in the 2018-2019 Trade War (slides)

Fajgelbaum, Goldberg, Kennedy, Khandelwal, and Taglioni examine how global trade responded to the U.S.-China trade war of 2018-19. Reduced form analysis reveals substantial reallocation of trade volumes as a result of tariff changes that is highly heterogenous across countries. Preliminary results indicate that many countries increased their exports not only to the U.S. and China, but also to the rest of the world, while reducing their prices. These patterns are suggestive of economies of scale. The researchers build a structural trade model that features heterogeneous elasticities of substitution across countries, potential reallocation frictions within economies, and potential economies of scale, and use exogenous tariff variation induced by the trade war to estimate the model parameters. Counterfactual simulations will be used to assess the welfare impacts of the trade war on the global economy.

Alberto Cavallo and Gita Gopinath, Harvard University and NBER; Brent Neiman, University of Chicago and NBER; and Jenny Tang, Federal Reserve Bank of Boston

Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy (slides)

The researchers use micro data collected at the border and the store to characterize the price impact of recent US trade policy on importers, exporters, and consumers. At the border, import tariff passthrough is much higher than exchange rate passthrough. Chinese exporters did not lower their dollar prices by much, despite the recent appreciation of the dollar. By contrast, US exporters significantly lowered prices affected by foreign retaliatory tariffs. In US stores, the price impact is more limited, suggesting that retail margins have fallen. The results imply that, so far, the tariffs' incidence has fallen in large part on US firms.

Kyle Handley, University of Michigan and NBER; Nuno Limão, University of Maryland and NBER; Rodney Ludema, Georgetown University; and Zhi Yu, Renmin University of China

Firm Input Choice Under Trade Policy Uncertainty

Handley, Limão, Ludema, and Yu examine the role of trade policy uncertainty in shaping the import decisions of firms. If the adoption of a new input requires a sunk cost investment, then the prospect of price increases in that input, e.g. due to trade barriers, reduces the adoption of that input (a substitution effect) and possibly other inputs (complementarity via lower profits). Thus trade policy uncertainty can affect a firm's entire input mix. The researchers provide a new model of input price uncertainty that captures both effects and derive its empirical implications. They test these using an important episode that lowered input price uncertainty: China's accession to the WTO and the associated commitment to bind its import tariffs. The researchers estimate large increases in the value and adoption of imported inputs by firms from accession -- the reduced uncertainty from commitment generates substitution effects larger than the reductions in applied tariffs in 2000-2006 and has significant profit effects.

Ohyun Kwon, Constantinos Syropoulos, and Yoto V. Yotov, Drexel University

Pain and Gain: The Short- and Long-run Effects of Economic Sanctions on Growth (slides)

Kwon, Syropoulos, and Yotov study the impact of sanctions on per capita GDP in target countries and make four contributions to the literature. First, they demonstrate that standard OLS estimates overstate the negative impact of sanctions and propose a novel instrumental variable (IV) strategy to address the issue of endogeneity. Second, the researchers find that the average estimates of the impact of sanctions contain significant heterogeneity and treat this issue by studying the differential effects of the types of sanctions considered (e.g., trade sanctions have significantly stronger negative impact on growth as compared to smart sanctions). Third, they quantify the effects of sanctions in the short and long runs and show that trade sanctions impede contemporaneous and, to a lesser degree, long-run growth. In contrast, smart sanctions have no impact on growth in the short run but, interestingly, they promote long-run growth. Fourth, the researchers explore possible mechanisms through which sanctions affect growth and unveil the presence of several intuitive patterns.

Ralph Ossa, University of Zurich; Robert W. Staiger, Dartmouth College and NBER; and Alan O. Sykes, Stanford University

Disputes in International Investment and Trade (NBER Working Paper No. 27012) (slides)

International investment agreements employ dispute settlement procedures that differ markedly from their counterparts in trade agreements along three key dimensions: standing (i.e., the right to file grievances), the nature of the remedy, and the remedial period. In the state-to-state dispute settlement procedures of a typical trade agreement, only governments have standing, while private investors also have standing in the investor-state dispute settlement procedures employed by investment agreements. Trade agreements typically employ tariff retaliation as the remedy for violation of the agreement, while the award of cash damages is the norm in investment disputes. And trade agreements typically provide for only prospective remedies covering harm done subsequent to a ruling, while the damages awarded in investment disputes routinely cover past as well as future harms. Ossa, Staiger, and Sykes develop parallel models of trade agreements and investment agreements and employ them to study these differences. The researchers argue that the differences can be understood as arising from the fundamentally different problems that trade and investment agreements are designed to solve.

Emily J. Blanchard, Dartmouth College; Chad P. Bown, Peterson Institute for International Economics; and Davin Chor, Dartmouth College and NBER

Did Trump's Trade War Impact the 2018 Election? (NBER Working Paper No. 26434) (slides)

Blanchard, Bown, and Chor find that Republican candidates lost support in the 2018 congressional election in counties more exposed to trade retaliation, but saw no commensurate electoral gains from US tariff protection. The electoral losses were driven by retaliatory tariffs on agricultural products, and were only partially mitigated by the US agricultural subsidies announced in summer 2018. Republicans also fared worse in counties that had seen recent gains in health insurance coverage, affirming the importance of health care as an election issue. A counterfactual calculation suggests that the trade war (respectively, health care) can account for five (eight) of Republicans' lost House seats.