International Trade and Investment
The NBER's Program on International Trade and Investment held its spring meeting in Cambridge on March 31. Program Director Robert C. Feenstra, NBER and University of California, Davis, chose these papers for discussion:
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Harrigan and Zakrajsek study the relationship between specialization and relative factor supplies. Using a panel of 23 countries over 23 years, they show that factor endowments do help to predict specialization, particularly in large industrial sectors which are not natural-resource based. Their conclusion is that relative factor endowments have a large influence on specialization. However, there is still a great degree of country-specific idiosyncrasy in specialization patterns. A fuller account of specialization probably will include roles for history, geography, technology, and economic policy -- but such an account definitely will include a role for relative factor supplies.
Using actual technology matrices, Davis and Weinstein show that true net factor service trade of wealthy countries typically is not zero but rather is 10 to12 percent of national endowments; between 38 and 49 percent of these countries' endowments are devoted to tradables. Moreover, the authors demonstrate that for half of the countries in their sample, intra-industry trade is actually a more important conduit for net factor service trade than inter-industry trade. Finally, Davis and Weinstein show that endowments are an important determinant of bilateral trade, even among wealthy countries. Taken together, these results undermine the notion that North-North trade is largely devoid of factor content and that the prevalence of intra-industry trade is a puzzle for models of comparative advantage.
Bernard and Jensen examine the role of international trade and exchange rates in the shutdown of manufacturing plants. Using 20 years of data on the entire U.S. manufacturing sector, they show that the least efficient, least capital-intensive, least skill-intensive plants are the most likely to close down. Increases in regional capital and skill intensity also are associated with higher probabilities of shutdown, especially for plants with low initial capital and skill intensities. Exporting plants are less likely to close, but plants owned by U.S. multinationals are more likely to shut down. Large exchange rate appreciations also increase the probability of plant failure, especially for plants owned by U.S. multinationals.
Blonigen examines the tariff-jumping response of all firm and product combinations subject to U.S. antidumping investigations from 1980-90. He shows that tariff-jumping is realistic only for multinational firms from industrialized countries. Because this excludes so many firms, tariff-jumping of U.S. antidumping protection is relatively modest. This may explain why developing countries have shown more concern over addressing antidumping protection in the World Trade Organization than industrialized countries have. The raw numbers show a high tariff-response rate for Japanese firms, but this is almost solely because these firms have substantial multinational experience, not because of any Japanese-specific response per se.
Aizenman attempts to explain the reluctance of developing countries to open up their capital markets to foreigners and the conditions inducing an emerging market economy to switch its policies. In an economy initially characterized by a one-sided openness to the capital market, domestic agents can borrow internationally, but foreign agents cannot hold domestic equity. Emerging markets capitalists would oppose financial reform, for example, if "green-field" investment by multinationals would bid up real wages, thereby reducing the rents of domestic capitalists. A financial crisis that raises the domestic interest rate and causes a real exchange rate depreciation may induce these emerging markets capitalists to support opening up the economy to foreign direct investment (FDI). This switch in attitude is more likely to occur with a larger debt overhang, lower borrowing constraints, and weaker market power among foreign entrepreneurs. Even in these circumstances, though, the emerging markets capitalists would prefer a partial reform to a comprehensive one: they would prefer to maintain the restrictions on green-field FDI.