Summary of the 5th InsTED Workshop at Syracuse University

We would like to thank The Department of Economics and the Maxwell School of Citizenship and Public Affairs, Syracuse University, for hosting and sponsoring the 5th InsTED Workshop.  We are also grateful for sponsorship and organizational support from the Moynihan Institute of Global Affairs, as well as sponsorship from the Program for the Advancement of Research on Conflict and Collaboration (PARCC) and the University of Exeter Business School.  The workshop took place at the Maxwell School from May 15th-16th 2018.  Special thanks go to Kristy Buzard and Devashish Mitra as joint chairs of the local organizing committee, and Juanita Horan for her extremely helpful interactions with everyone.

The program comprised of 18 papers ranging over four broad topics at the intersection of institutions, trade and economic development.  The first was global value chains, focusing on how they are determined at the firm level, and what their implications are for economic outcomes, especially in the developing world.  The second topic examined ongoing concerns about the implications of trade integration for income distribution, with emphasis on a developing country perspective.   The third concerned the interaction between trade integration or other institutional reform and resource allocation.  The fourth was on institutional constraints on international trade policy, including a look at the implications of restrictions imposed by the World Trade Organization.  There now follows a summary of all the papers presented at the workshop, organized under these four topic headings.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors.  This information is contained in the bibliography.

Global Value Chains: Their Determinants and Implications

The spread of global value chains (GVCs) over the last thirty years or so has been a key new feature of the current wave of globalization, and important for the integration of developing countries into the world economy.  At the broadest level, the spread of GVCs has been facilitated by innovations in information and communication technology, the deepening of trade liberalization and ongoing reduction in transport costs, and political developments principally involving the fall of the iron curtain.  But in this globally more integrated environment, there is growing appreciation that firm-level decisions play a critical role in the determination of how global value chains actually form.  The outcome of these decisions has been characterized in terms of GVCs forming either as ‘spiders’, where a central ‘body’ imports inputs for assembly from various ‘legs’ that originate in different countries, or where a product is assembled sequentially along the length of a ‘snake’.  Such trade in intermediate inputs now accounts for 70% of global trade, spanning not just developed but developing countries as well.

The keynote address by Pol Antràs discussed his research project to model how firm-level extensive margin sourcing decisions are made, that give rise to the formation of GVCs.  His motivation of the need for a new model was that the canonical Melitz model renders firm export decisions tractable by assuming constant (exogenous) marginal costs, while firm import decisions are made specifically to lower marginal costs which are therefore endogenous.  The interdependence in a firm’s extensive margin import decisions complicates the firm’s problem considerably.  In the case of a spider, this involves a combinatorial problem with 2J possible choices, where J denotes the number of possible source countries.  In the case of a snake, the problem is similarly complex.

Antràs presented two papers, which provide tractable ways to model firm decisions in the cases of spiders and snakes respectively in ways that can be estimated structurally in the data.  In the case of spiders, the modelling approach is to apply an iterative algorithm that exploits complementarities in the decision of a firm to import from particular markets, and uses lattice theory to reduce the dimensionality of the firm’s optimal sourcing strategy problem.  The results show that while the ‘China shock’ resulted in an overall decline in domestic sourcing by US firms, the most productive firms actually increased domestic sourcing due to the cost savings derived through sourcing from China.  In the case of snakes, where the value chain is sequential, Antràs showed that the lead firm’s problem becomes one of solving the least cost path through a sequence of suppliers.  By applying a different algorithm the paper shows that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central locations.  He then discussed counterfactual exercises that illustrate how changes in trade barriers affect the extent to which various countries participate in domestic, regional or global value chains, and traces the real income consequences of these changes.  Using this approach, substantial income gains are shown to arise from the increased participation of low-income countries in GVCs.

A key question motivating the literature on the extensive margins of trade is whether better firm performance gives rise to exporting or, conversely, exporting improves firm performance.  A particular form of this question is as follows: if offered the opportunity to export through a marketing arrangement in a developed country, can firms in developing countries upgrade the quality of the goods they produce and export, thereby increasing their incomes?  Rocco Macchiavello presented a paper on the case of the Nespresso sustainable quality program in Colombia.  The dataset constructed for the paper matches detailed administrative data on the universe of Colombian Coffee farmers with transaction-level data along three stages in the coffee chain, from the export gate to the farm gate.  Machiavello and his collaborators find that the program induced farmers to upgrade their coffee plantations, expand their farms as well as production, increase the quality of the coffee produced, and the loyalty of their marketing arrangement.  Most notably, a price premium of approximately 5-8% is fully transmitted along the supply chain, from the export gate to the farm gate, thereby bringing significant income gains to farmers in the developing world.  This paper therefore adds to the evidence supporting the view that gaining the opportunity to export can indeed enhance firm performance.

While GVCs can potentially increase incomes by creating cost advantages and quality improvements, there is widespread concern that cost advantages may be gained through lax environmental and labor regulation in countries where suppliers are located.  Sebastian Krautheim presented a paper studying this issue both theoretically and empirically.  In the model of his paper, a Northern firm can save costs by outsourcing to a Southern supplier that uses a cost-saving but unethical technology.  Contracts are incomplete, so that a firm has limited control over unethical technology choices of suppliers along the value chain.  The technology is a credence characteristic, in that consumers care about it but cannot know what it is.  However, the model features a non-governmental organization (NGO) that can reveal the technology being used.  Using the unethical technology creates an incentive to increase scale, but this also increases the probability of being detected by the NGO.  The paper provides empirical support for the model’s prediction that a high cost advantage of ‘unethical’ production in an industry and a low regulatory stringency in the supplier’s country favor international outsourcing as opposed to vertical FDI.

Trade Integration and Income Distribution

There has long been a concern that deeper trade integration causes an increase in inequality.  This is the focus of the famous Stolper-Samuelson Theorem, which arises directly from the classic Hecksher-Ohlin model and in a wider set of settings as well.  It predicts that if, compared to the South, skilled labor is relatively abundant in the North while unskilled labor is relatively scarce, then deeper trade integration will drive an increase in inequality in the North and a decrease in the South.  Previous academic debates tended to focus on the rise in inequality in the North, and the extent to which trade integration with the South was ‘to blame’.

In her keynote address, Nina Pavcnik presented her literature review that assesses the current state of evidence on how international trade shapes inequality and poverty.  Her review focuses mainly on developing countries, reflecting the fact that there is now more evidence in that context, but her discussion drew parallels to the empirical evidence on developed countries as well.  Her review also discusses perceptions about international trade in over 40 countries at different levels of development, including perceptions on trade’s overall benefits for the economy, trade’s effect on the livelihood of workers through wages and jobs, and trade’s contribution to inequality.  In framing the review, she noted that while most studies of developed countries focus on import shocks, studies of developing countries present evidence on export shocks as well to provide a more nuanced picture.

One insight that emerges from Pavcnik’s review is that losers from trade liberalization tend to be geographically concentrated and persistent over time because the costs are large.  Another insight is that worker-firm affiliation matters for how individuals are affected by trade liberalization.  Better performing firms tend to be better equipped to respond to the opportunities arising from trade liberalization.  Declines in industry employment from import competition are concentrated in less productive firms and workers.    A third insight is that one cannot ignore the effects of the informal sector in developing countries.  In some cases, international trade supports economic development by promoting the transfer of labor from inefficient informal firms to more efficient formal firms.  In others, especially where labor markets are poorly functioning or government support for those displaced from employment by trade is absent, the informal sector can serve as a coping mechanism for trade shocks.  Pavcnik noted that these outcomes are in some cases at significant variance to the predictions derived from the classic H-O model, especially because it does not have a role for firms.  The main policy recommendation to come out of her review was that governments must support workers and not jobs, because it is inevitable that the gains from trade are realized through the destruction of jobs, and the costs to workers are substantial.

The program featured two papers that studied the effects of trade policy in India.  The paper presented by Beyza Ural Marchand studies the distributional implications, with a particular focus on the poor, by asking: ‘what would be the distributional effects of eliminating the current protectionist structure?’  Thus her focus is on the welfare implications of a move from current trade policies to free trade.  The welfare effects are estimated through household expenditure and earnings effects of liberalization. The results indicate that Indian trade policy is pro-poor through the earnings channel, as its elimination leads to higher welfare losses for poorer households. But it is pro-rich through the expenditure channel, as its elimination leads to higher welfare gains for poorer households.  On balance, surprisingly, Marchand finds that Indian trade policy is regressive overall.

The paper presented by Ariel Weinberger investigates the liberalization episode in India during the 1990’s, which has been characterized by large and unexpected changes in trade and foreign investment policies.  Contrary to what might have been expected, given the secular decline in labor shares since the 1980s, his paper finds that trade reforms mostly raised the labor-to-capital relative factor shares in India. A reduction in capital tariffs and liberalization of FDI raise the share of income paid to labor relative to capital. His results reveal access to foreign capital as a new mechanism through which openness affects factor shares: imported capital augments technical change and potentially reduces rental rates, both of which raise the relative labor share.  Weinberger and his collaborator attribute the observed overall decline in the labor share to domestic deregulation policies and credit expansion.

Richard Chisik reversed the direction of enquiry relative to the papers above.  Rather than look at the effects of trade on inequality, his paper considers the effect of inequality on trade.  The prior literature notes that a foreign transfer may generate a ‘Dutch disease’ type effect in the recipient country: a transfer brings about a real exchange rate appreciation via an increase in wages that can reduce the size of the manufacturing sector.  This may reduce manufacturing exports or even eliminate a comparative advantage in manufacturing altogether.  In this literature, remittances have been considered isomorphic to foreign aid in causing the Dutch disease. Chisik’s paper questions this apparent similarity.  His paper argues that, whereas aid generates a Dutch disease effect, remittances can lead to growth of manufacturing.  The reason is that (ironically) aid tends to go to wealthier individuals who spend the money on non-traded services, which does appreciate the real exchange rate and shrinks the manufacturing sector, while remittances tend to go to poorer individuals who spend on manufactures which tends to increase the size of that sector.  The differing effects on the relative size of the manufacturing sector have, in turn, different bearings on comparative advantage.  The paper presents econometric results supportive of their model.

Rather than focus directly on trade and inequality, Ben Zissimos looked at how the inequality created by international trade can threaten the survival of dictatorships, especially in the face of world price shocks.  In his paper, the survival of dictatorships is taken to be a bad thing because they tend to support extractive economic institutions that fail to promote economic development.  The theory developed in the paper predicts that, in food exporting dictatorships, a world food price spike can provoke the threat of revolution.  Dictatorships are predicted to respond by making transfers using export taxes, hence defusing the threat of revolution and forestalling democratization.  The prior literature on institutions and development has tended to focus on the use of domestic redistributive taxation for the purposes of defusing the threat of revolution.  But the paper presented by Zissimos draws on evidence to suggest that dictatorships do not install domestic redistributive capacity for fear that it will be used to tax away their wealth.  Trade taxes, which are available to dictators, are used instead for this purpose.  Hence the paper proposes a new motive for the use of trade policy.  It also provides econometric results supportive of the predictions of the model.

Trade and Resource Reallocation Effects of Trade Integration and Institutional Reform

As tariffs have been reduced through multilateral trade rounds and the formation of free trade agreements, attention has shifted to other measures such as product standards, intellectual property protection, and infrastructure in an effort to facilitate integration where appropriate.

The paper presented by Walter Steingress quantifies the heterogeneous trade effects of harmonizing standards on product entry and exit as well as export sales.  Using a novel and comprehensive database on cross-country standard equivalences, the paper identifies standard harmonization events.  To track harmonization events, the paper presents a new correspondence table between the International Classification for Standards (ICS) and Harmonized System (HS) codes.  The results Steingress reported show that, on average, standard harmonization leads to a 0.5% increase in export sales. This effect is driven by an increase in the intensive margin, a decrease in prices and an increase in the quantities sold.  The paper argues that these results are compatible with a theoretical framework where standard harmonization leads to higher fixed costs as companies have to adapt to the new standards, but simultaneously reduced variable costs, thus increasing overall trade flows.

In her paper, Magdalene Silberberger broaches the impact of trade liberalization on health, safety and environmental (HSE) standards.  She and her collaborator ask whether tariff liberalization causes ‘regulatory chill’, meaning that countries are reluctant to implement HSE standards, or instead causes a race to the top as governments seek to use standards as non-tariff barriers to trade.  Her paper analyzes annual country-by-industry data on notifications of changes in sanitary and phytosanitary standards by WTO members. The results suggest that the impact of increased trade pressure depends on whether domestic producers are likely to gain or lose from a change in standards. Regulatory chill is the dominant response in most countries, but countries in which producers can adapt to standards relatively cheaply appear to race to the top.  Consequently, that paper concludes that tariff liberalization is associated with a divergence in standards across countries.

Shifting the focus from standards to patents, Tom Zylkin explored the effects of cross-border patents on international trade.  His paper highlights an ambiguity as to what one might expect here.  On the one hand, a firm might file a patent in another country because it wants to protect a good that it plans to export there.  On the other hand, the reason for filing a patent in another country might be that the firm wants to produce a good there instead of exporting it.  So, he argued, cross-border patents could be complements or substitutes to trade.  Using a highly disaggregated database of all patents filed in and out of developed and developing countries, his paper provides the first systematic analysis of how bilateral trade responds to bilateral filings.  It reports results suggesting large roles for geographic as well as industry-level heterogeneity, suggestive of competing motivations for cross-border patenting.  Patents promote bilateral exports—and negate bilateral imports—in high-demand elasticity industries, but can have the opposite effect in industries where the products are primarily used as intermediate inputs and/or between countries that are not far apart geographically.

The final two papers in this section consider the effects on economic performance of fundamental changes to the domestic economic and political environment.  Mingzhi (Jimmy) Xu‘s paper studies the aggregate and distributional impacts of China’s high-speed railway (HSR) network.  China’s HSR is a passenger rail network that covers 29 of the country’s 33 provincial-level administrative divisions and exceeds 25,000 km/16,000 miles in total length, accounting for about two-thirds of the world’s high-speed rail tracks in commercial service.  Xu argued that HSR connection generates productivity gains by improving firm-to-firm matching efficiency and leading firms to search more efficiently for suppliers.  His paper first provides reduced-form evidence that access to HSR in China significantly promotes exports at the prefecture level.  It then constructs and calibrates a quantitative spatial equilibrium model to perform counterfactuals, taking into account trade, migration, and outsourcing. The quantitative exercise reveals that the construction of HSR between 2007 and 2015 increased China’s overall welfare by 0.46%, but was also associated with an increase in national inequality. In addition, the paper finds that gains from HSR are larger when labor migration costs are higher, implying that the HSR project is well suited to a country like China, which features high internal migration barriers.

Ama Baafra Abeberese’s paper considers the implications of democratic reform for firm productivity, and in particular the impact of President Suharto’s unexpected resignation from the Presidency of Indonesia in 1998, after more than three decades in the post.  The basic idea underpinning the paper is that politicians can create high entry barriers for firms in order to collect rents from those that do enter.  Arguably, since this concentrates the gains from economic activity, democratically elected politicians will be less able to create such barriers without being displaced from office, and so the environment under democracy should be more competitive.  However, the effect on firm productivity is ambiguous since a more competitive environment may make it more difficult for firms to become established.  Baafra’s paper uses the fact that, in Indonesia, local mayors’ terms were asynchronous.  This asynchronicity of terms means that the paper can identify variation in the productivity of firms operating under mayors appointed by Pres. Suharto versus mayors who were democratically elected after Suharto stepped down.  The main result Baafra presented was that democratization did in fact boost productivity, and more so in industries that were shown to be politically connected to the Suharto regime and hence presumably more sheltered when he was in office.

Institutional Constraints on Trade Policy

While it might be collectively rational for countries to adopt free trade, it is often individually rational for a government to adopt some degree of trade protection.  This observation has been used to provide motivation for why governments sign up to institutional measures that constrain their abilities to set trade policy unilaterally, often in the form of a trade agreement.  This way of thinking forms the basis for the literatures on the purpose of the General Agreement on Tariffs and Trade (GATT), now absorbed into the Articles of the World Trade Organization (WTO), as well as the purpose of preferential trade agreements.

David DeRemer opened the discussion of these issues at the workshop with a paper that provides a new framework for thinking about international trade agreements in modern trade environments such as those involving offshoring, and rent seeking by foreign governments.  These are environments that extend beyond those which standard models of trade agreements are set up to consider.  His presentation started out by taking a stance on what distinguishes modern trade negotiation environments from the earlier era.  The new framework he developed focuses on how trade agreements help countries to escape from prisoner’s dilemmas in which each government disregards the effects of local price, as opposed to world price, changes on trading partners.  He argued that, typically, these local prices matter because they affect foreigners’ producer surplus or value-added.

His paper considers trade agreements that achieve the stable end-point of reciprocal negotiations, meaning a situation where neither government can gain from policy changes that affect net export value equally.  The paper shows this end point is Pareto efficient for governments, so it is a suitable prediction for the trade negotiation outcome.  This stable and efficient outcome for modern trade environments yields new predictions that are consistent with empirical evidence.  For example, more politically organized exporters with large supply elasticities compel governments to undertake greater reductions in cooperative import tariffs from trade negotiations.  In this setting, governments jointly pursue gains for exporters to the extent that they would assess losses for domestic firms from import competition to be outweighing gains for consumers.

Woan Foong Wong’s paper focused specifically on the main WTO rules that govern free trade agreement (FTA) formation.  Her paper is based on a three country ‘competing exporters model’, where any two countries compete to export a given product to the third country.  An FTA can then be formed between two countries, leaving the third one out, or all three countries can adopt global free trade, with the outcome being endogenously determined.  FTA formation under Article 24 of the GATT/WTO requires that external tariffs not be raised, and all internal tariffs be removed.  Wong’s paper examines the implications of the requirement to remove internal tariffs by comparing the outcome when this requirement is adhered to with when it is relaxed.  She showed that requiring FTAs to eliminate internal tariffs makes the non-member better off although it simultaneously reduces the likelihood of achieving global free trade by encouraging free-riding on its part.  The reason is that setting lower internal tariffs creates an incentive for members to set lower external tariffs, since they compete more aggressively for the third market, which benefits the non-member.  This problem is avoided by customs union members who, unlike FTA members, coordinate their external tariff.  Therefore, surprisingly, in the case of FTA formation removing the ‘free internal trade requirement’ increases the parameter space where global free trade is a stable outcome.

Other papers at the workshop undertook econometric work to explore the implications of trade agreement formation.  The paper presented by Kishore Gawande undertook the first econometric test of the commitment-based theory of trade agreements.  The idea of this theory is that import-competing sectors where industry interest groups know they can lobby the government for protection will end up with tariffs set above efficient levels and over-investment in capital.  But if governments realize that they cannot receive sufficient compensation for such long-run distortions, they may choose to sign a trade agreement and thus tie their hands to efficient trade policy, thereby shutting down lobbying altogether.  Gawande’s presentation reported econometric results testing this theory against industry-level and firm-level data, and found supportive evidence for the model in the data.

Yifan Zhang‘s paper investigates the impacts of trade liberalization on household behavior and other outcomes in urban China resulting from that country’s entry to the WTO in 2001.  The identification strategy employed in the paper exploits regional variation in the exposure to the resulting tariff cuts.  The paper finds that workers in regions initially specialized in industries facing larger tariff cuts experienced relative declines in wages. Households responded to these income shocks in several ways. First, household members were found to work more, especially if they moved into the non-tradable sector. Second, young adults were more likely to live longer in the parental household, and so average household size increased. Third, households tended to save less. These changes in bahavior were interpreted as being motivated by attempts by households to buffer themselves against the negative wage shocks induced by trade liberalization.

There is a long-held view in the trade policy literature that traditional tariff instruments and temporary protection (TP) measures such as anti-dumping and countervailing duties are substitutes. However, David J. Kuenzel argued in his presentation that there is only mixed empirical evidence for a link between tariff reductions and the usage pattern of antidumping, safeguard and countervailing duties. Based on recent theoretical advances, his paper argues that the relevant trade policy margin for implementing TP measures is instead the difference between WTO bound and applied tariffs, or ‘tariff overhang’ as it is often known. Lower tariff overhangs constrain countries’ abilities to raise their MFN applied rates without legal repercussions, independent of past tariff changes. Using detailed sectoral data for a sample of 30 WTO member countries during the period 1996-2014, Kuenzel finds strong evidence for an inverse link between tariff overhangs and TP activity. This result implies that tariff overhangs and TP measures are substitutes.  Based on this finding, he argues that this indicates the importance of existing tariff commitments as a key determinant of alternative TP instruments.

Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee “Firms Under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Aisbett, E., and M. Silberberger “Tariff Liberalisation and Protective Product Standards.”

Antràs, P., T.C. Fort and F. Tintelnot, “The Margins of Global Courcing: Theory and Evidence from US Firms.

Antràs, P., and A. de Gortari, “On the Geography of Global Value Chains.

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee, “Firms under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Baccini, L., H. Cheng, K. Gawande, and H. Jo, “The Political Economy of Trade Agreements: A Test of a Theory.”

Behzadan, N., and R. ChisikThe Paradox of Transfers: Distribution and the Dutch

Brunel, C., and T. ZylkinDo Cross-Border Patents Promote Trade?

Dai, M., W. Huang, and Y. Zhang,How Do Households Adjust to Trade Liberalization? Evidence from China’s WTO Accession.

DeRemer, D.R., “The Principle of Reciprocity in the 21st Century: New Predictions for Trade Agreement Outcomes.

Gawande, K., and B. Zissimos,How Dictators Forestall Democratization Using International Trade Policy.”

Herkenhoff, P., and S. Krautheim, The International Organization of Production in the Regulatory Void.

Kuenzel, D.J., WTO Tariff Commitments and Temporary Protection: Complements or Substitutes?

Leblebicioglu, A., and A. Weinberger, “Openness and Factor Shares: Is Globalization Always Bad for Labor?”

Machiavello, R., and M. Florensa, “Improving Export Quality and What Else? Nespresso in Colombia.”

Marchand, B.U.,Inequality and Trade Policy: Pro-Poor Bias of India’s Contemporary Trade Restrictions.”

Pavcnik, N., “The Impact of Trade on Inequality in Developing Countries.”

Saggi, K., W.F. Wong, and H.M. Yildiz, “Preferential Trade Agreements and Rules of the Multilateral Trading System.”

Schmidt, J., and W. Steingress, “No Double Standards: Quantifying the Impact of the Standard Harmonization on Trade.”

Xu, M., “Riding on the New Silk Road: Quantifying the Welfare Gain from High-Speed Railways.”

Foreign Investment Boosts Sophistication of Domestic Manufacturing: New Evidence from Turkey

By Beata Javorcik (University of Oxford), Alessia Lo Turco, (Marche Polytechnic University), Daniela Maggioni (University of Catania)

Recently, there has been a renewal of interest in industrial policy across the world. Advanced economies promise to use industrial policy to revive their declining manufacturing, while emerging markets hope that industrial policies will help them upgrade their production structure and in this way stimulate economic growth. Yet, little is known about the micro determinants of product upgrading.

The existing research suggests that inflows of foreign direct investment (FDI) can foster host countries’ production upgrading, where upgrading is measured in terms of the unit values of exports (Harding and Javorcik,  2012).[1]

In our recent work, we move away from unit values – a highly imperfect proxy for product quality –  and examine the link between FDI and product upgrading, as captured by complexity of new products introduced by domestic firms.[2] We focus on manufacturing firms in Turkey, a country that has experienced a spectacular surge in FDI inflows during the 2000s and dramatically increased the sophistication of its productive structure in the last decades.[3]

Anecdotal evidence

Anecdotal evidence suggests that foreign affiliates stimulate product upgrading among their suppliers. For example, Indesit Company, an Italian white good producer – recently acquired by Whirlpool – has produced refrigerators in Turkey since the 1990s. In 2012, Indesit built a new plant to produce washing machines. To become a supplier of this new plant, a local company purchased new presses and automated its production process. This allowed it to start producing a new and more sophisticated product, a washing machine flange, and to increase efficiency and production volumes. The flange is a very complex product as it needs to be produced with no aesthetic defects by an 800-1,000 tonne metal presses. It also needs to withstand the stress of between 1,000 and 1,400 revolutions per minute while remaining within a certain range of vibration and noisiness. Indesit has shared essential tacit knowledge, information processes, instructions and control procedures with the local company, thus stimulating and supporting the supplier’s complexity upgrading.

Inspired by the anecdotal evidence, our study examines the link between the presence of foreign affiliates and production upgrading by Turkish firms located in the same region and active in the input-supplying industries.

Measuring product complexity

To capture product complexity we use a measure proposed by César Hidalgo and Ricardo Hausmann, who relate the concept of product complexity to the extent and exclusivity of capabilities needed to produce a given product.[4] It is easiest to explain this measure using a Lego analogy. Think of a country as a bucket of Lego pieces with each piece representing the capabilities available there. The set of products (i.e., Lego models) a country can produce depends on the diversity and exclusiveness of the Lego pieces in the bucket. A Lego bucket that contains pieces that can only be used to build a toy bicycle probably does not contain the pieces to create a toy car. However, a Lego bucket that contains pieces that can build a toy car may also have the necessary pieces needed to build a toy bicycle.  While two Lego buckets may be capable of building the same number of models, these may be completely different sets of models. Thus, determining the complexity of an economy by looking at the products it produces amounts to determining the diversity and exclusivity of the pieces in a Lego bucket by simply looking at the Lego models it can build.

Our findings

Our analysis suggests that the presence of foreign affiliates does not affect the propensity of Turkish firms to innovate. However, the presence of foreign affiliates is positively correlated with the complexity level of products newly introduced by Turkish firms active in the supplying industries and located in the same region.

The estimated effect is economically meaningful. A 10 percentage point increase in foreign presence implies moving about half of the way from the production of pot scourers to producing stainless sinks. An increase of about 17 percentage points in FDI in the relevant sectors would be necessary in order to move from the production of stainless sinks to the production of the washing machine flanges.


Our findings matter for policy. Dani Rodrik argues that enhancing an economy’s productive capabilities over an increasing range of manufactured goods can be considered an integral part of economic development.[5] As foreign affiliates facilitate the upgrading of the host country’s productive capabilities, our results, then, imply that FDI inflows can act as an important stimulus for economic growth. Thus, there is room for investment promotion activities, a policy that is quite effective in developing countries.[6] In contrast to many other industrial policies, investment promotion is relatively inexpensive and causes few distortions. Therefore, there is little downside when the government gets it wrong.


Harding, T. and Javorcik, B.S. (2011). ‘Roll out the red carpet and they will come: investment promotion and FDI inflows’, Economic Journal, vol. 121(557), pp. 1445–1476.

Harding, T. and Javorcik, B.S. (2012). ‘Foreign direct investment and export upgrading’, The Review of Economics and Statistics, vol. 94(4), pp. 964–980.

Hidalgo, C.A. and Hausmann, R.(2009). ‘The building blocks of economic complexity’, Proc. Natl. Acad. Sci., vol. 106, pp. 10570–10575.

Javorcik, B.S., Lo Turco, A., Maggioni, D. ‘New and Improved: Does FDI Boost Production Complexity in Host Countries?‘ Economic Journal, forthcoming.

Rodrik, D. (2006). ‘Industrial development: stylized facts and policies’, Kennedy School of Government.


[1] See Harding and Javorcik (2012).

[2] Javorcik, Lo Turco and Maggioni (forthcoming).

[3] See Hidalgo (2009).

[4] See Hidalgo and Hausmann (2009)

[5] See Rodrik (2006)

[6] Harding and Javorcik (2011)

Self-Enforcing Trade Agreements and Lobbying

By Kristy Buzard (Syracuse University)

Going back to the mid-1980s, the repeated prisoner’s dilemma has been used to model the absence of strong external enforcement mechanisms for trade agreements.[1] Cooperation is enforced by promises of future punishment for any deviation from the agreement, and the amount of cooperation that can be achieved depends on the severity of the chosen punishments. The strongest incentive-compatible punishment is often the grim trigger strategy in which all players play the static Nash equilibrium forever when any of them defects.

More recent work shows that grim trigger punishments can be improved upon in some circumstances. Jee-Hyeong Park, for instance, has demonstrated that the presence of asymmetric information and imperfect monitoring can make it more efficient to choose shorter punishments.[2] In a similar setting, Alberto Martin and Wouter Vergote show that retaliation — i.e. delayed punishment — dominates reciprocity.[3]

In a recent paper, I identify a different rationale for limiting punishments: endogenous politics.[4] This paper is the first to incorporate endogenous lobbying along the lines of the classic Grossman-Helpman “Protection for Sale” model — the standard model for endogenizing politics in trade policy — into a repeated-game setting. In place of a unitary government, this model has two branches of government who share policy-making power.[5] By endogenizing the political economy weights, one can address questions about the commitment value of trade agreements, and examine the implications of self-enforcement constraints for the design of trade agreements.

I assume that the social-welfare maximizing executives of two countries choose trade agreement tariffs that must then be implemented by politically-susceptible legislatures.[6] For simplicity, only the import-competing industry is represented by a lobby. The weight the legislature puts on the import-competing industry’s profits increases in lobbying effort, which can be thought of as including campaign contributions as well as broader measures of lobbying activity. The lobby will choose its effort level to optimally influence the legislature’s decisions about whether to abide by the trade agreement and how to set tariffs in the absence of an agreement. Assuming there is no uncertainty about the effect of lobbying effort on the outcome of the political process, the lobby either exerts the minimum effort needed to derail the agreement or exerts no effort at all. The executives maximize social welfare by choosing the lowest tariffs that make it unattractive for the lobbies to provoke the legislature to violate the trade agreement. There will thus be no trade disputes in equilibrium, but the out-of-equilibrium threat that a lobby might provoke one is crucial in determining the equilibrium trade agreement structure.

Adding a lobby to the usual repeated-game model adds a new constraint. The constraint on the legislature is loosened by an exogenous increase in the length of the punishment: defections become relatively more unattractive as the punishment becomes more severe as in the standard prisoner’s dilemma. However, the new constraint due to the presence of lobbying becomes tighter because the lobby prefers punishment periods. The higher tariffs during punishment periods give the lobby increased incentive to exert effort as the punishment lengthens. In the face of this heightened lobbying incentive, the executives must raise the trade agreement tariff to avoid a trade dispute.

The optimal Nash-reversion punishment strikes a balance between these two competing forces, so adding endogenous politics suggests an optimal length for punishments: it is  finite for most values of the political weighting function and can be derived directly from the players’ incentive constraints.[7] Shortening the punishment in models with uncertainty serves to increase welfare by minimizing time spent in punishment periods. Since there is no uncertainty in this model, the players remain in the cooperative state in all periods.[8] Here, social welfare improves because shorter punishments weaken the lobby’s incentive to exert effort and this allows the executives to reduce the trade agreement tariffs.

For a given punishment length, increases in the patience of the legislature mean the lobby must exert more effort to induce the legislature to endure the punishment. The executive can thus reduce trade agreement tariffs without fear that the agreement will be broken. Increases in the lobby’s patience and the lobby’s ability to influence the legislature (as measured by the political weighting function) work in the opposite direction: they allow the lobby to exert less effort to provoke a trade dispute, and therefore higher equilibrium trade agreement tariffs are necessary to avoid a dispute.

The optimal punishment length itself also depends on how readily special interests are able to influence the political process. If the lobby is weak, the optimal punishment converges to that of the model without a lobby: longer punishments are better because the key constraint is the legislature’s. As the lobby becomes more influential, the optimal punishment becomes shorter because the lobby’s incentive becomes more important. That the optimal length of punishments is a function of the influence of the lobbies reinforces the idea that endogenizing politics can be critically important for institutional design questions.


Bagwell, K., and R.W. Staiger, (2005); “Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause.Journal of Legal Studies, 34(2): 471–513.

Buzard, K., (2017a); “Self-Enforcing Trade Agreements and Lobbying.Journal of International Economics, 108(1): 226–242.

Buzard, K., (2017b); “Trade Agreements in the Shadow of Lobbying.” Review of International Economics, 25(1): 21–43.

Dixit, A., (1987); “Strategic Aspects of Trade Policy.” in: T.F. Bewley (ed.), Advances in Economic Theory: Fifth World Congress. Cambridge University Press, pp. 329–362.

Maggi, G., and A. Rodríguez-Clare, (2007); “A Political-Economy Theory of Trade Agreements.” The American Economic Review, 97(4): 1374–1406.

Martin, A., and W. Vergote, (2008); “On the Role of Retaliation in Trade Agreements.” Journal of International Economics, 76(1): 61–77.

Milner, H.V., and B.P. Rosendorff, (1997); “Democratic Politics and International Trade Negotiations: Elections and Divided Government as Constraints on Trade Liberalization.” Journal of Conflict Resolution, 41(1): 117–146.

Park, J.-H., (2011); “Enforcing International Trade Agreements with Imperfect Private Monitoring.” Review of Economic Studies, 78(3): 1102–1134.


[1] See for example Dixit (1987).

[2] Park (2011).

[3] Martin and Vergote (2008).

[4] Buzard (2017a).

[5] This approach follows Milner and Rosendorff (1997).

[6] The model admits an interpretation in which the same branch of government both negotiates the trade agreement and decides on the applied tariff ex-post, and thus the one-shot game shares much in common with Maggi and Rodríguez-Clare (2007).

[7] In Park (2011), the finite punishment length is due to imperfect monitoring and/or uncertainty.

[8] In Buzard (2017b), I show how uncertainty can be incorporated into this model.

6th Annual CIRANO-Sam M. Walton College of Business Workshop on Networks in Trade and Finance Call For Papers

On behalf of CIRANO and the Sam M. Walton College of Business at the University of Arkansas, the organizers invite papers for the 6th Annual Workshop on Networks in Trade and Finance to be held Friday September 29 and Saturday September 30, 2017 in Montreal, Canada. This conference builds on the successful CIRANO Workshops on Networks in Trade and Finance that have taken place in Montreal and Fayetteville, Arkansas over the last five years. The program for the workshop in October 2016 can be viewed at

THEME: Networks are everywhere. Global trade, supply chains, financial markets, the World Wide Web, professional and social communities are examples of interconnected systems that are important to the structure and function of the modern world. Networks are a general yet powerful means of representing patterns of connections or interactions between parts of such systems. The network approach facilitates an understanding of mechanisms and reveals patterns in the data that are difficult to see using other approaches. Of particular recent interest is the role of networks in facilitating the development and dissemination of innovation and new technologies. With this as the leitmotiv, this workshop aims to bring together a group of researchers in the related areas of trade, finance, economic development, sociology, and business, with the following goals:
– Demonstrate the value of the network approach for generating novel insights into these areas.
– Foster a cross-disciplinary exchange of ideas and methods within the field of researchers in these areas.
– Explore the potential for real-world applications of the network approach that will be of value to practitioners in various fields of business and government, such as finance, logistics, healthcare, transportation, communication, economic development, and social media.

Both theoretical and applied studies are welcomed.

PAPER SUBMISSION PROCEDURE: Extended abstracts or papers (completed papers preferred) should be sent to the e-mail address before July 15, 2017. The workshop program will be determined by July 30. For general questions regarding the conference email

SUPPORT: There will be no registration or other fees. For those on the workshop program the organizers will provide accommodation for two nights in Montreal. Lunch and dinner during the workshop will be provided for all registered participants. The conference will take place from 9am to 5pm on Friday September 29 and from 9am to 1pm on Saturday September 30. The conference dinner will be on Friday September 29.

Raja Kali, University of Arkansas and CIRANO
Ari Van Assche, HEC Montreal and CIRANO
Ekaterina Turkina, HEC Montreal
Arya Gaduh, University of Arkansas
Andrea Civelli, University of Arkansas

Research Fellowships UNSW SYDNEY

Economics – Resources
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At UNSW, we pride ourselves on being a workplace where the best people come to do their best work.

UNSW is already at the cutting edge of academia with a strong and growing international reputation. A global leader in discovery, innovation, impact, education and thought leadership, can make an enormous differences to the lives of people in Australia and around the world. The announcement of our largest-ever academic recruitment initiative is a key step in augmenting our existing world-leading research capabilities.

About the role

Appointment level will be negotiable at either academic levels A, B C or D prior to appointment.

The UNSW Scientia Fellowship Program is one of the cornerstones of UNSW’s 2025 Strategy. The project’s aim is to attract and retain the best and brightest people, with outstanding research track records, to UNSW. A primary goal of the scheme is to enhance UNSW research performance by attracting and retaining exceptional researchers at the highest level of performance.

About the successful applicant

To be successful in this role you will:

  • be a researcher performing at the highest level of the equivalent academic level in the relevant discipline (relative to opportunity) – Levels A-D
  • undertake significant, innovative research which is aligned with the research areas identified for the 2018 round
  • be aligned with the strategic goals of UNSW’s 2025 Strategy

For general information about the scheme, including guidelines and FAQs please visit

For any general enquiries about the scheme not covered by the guidelines and FAQs please contact:

Jul. 12, 2017

Diversity and Inclusion at UNSW

UNSW’s 2025 Strategy states that our aspiration is to be recognised as an international exemplar in equity, diversity and inclusion and an employer of choice for people from diverse backgrounds. Our aim is to achieve this by embracing the diversity and cultural richness of our communities; ensuring that our staff and students can achieve their full potential in a supportive and inclusive work environment. Our diversity commitment aligns to our strong sense of social responsibility and our belief that a diverse workforce enhances our ability to deliver world class research, teaching excellence and thought leadership.

Summary of the 4th InsTED / 9th EESP-FGV Workshop

IMG_3897 (2)

We would like to thank the Sao Paulo School of Economics at The Getulio Vargas Foundation (EESP-FGV) for hosting the 4th InsTED Workshop jointly with their 9th Sao Paulo School of Economics Conference.  We are grateful to them, and also to the Swiss Programme for Research on Global Issues for Development, and the “Firms, Markets, and Values” cluster at the University of Exeter Business School, for sponsoring this event.  The workshop took place at EESP-FGV from May 17th-18th 2017.  Special thanks go to our joint-organizers, Emanuel Ornelas and Vladimir Ponczek, as well as Hully Rolemberg for her extremely helpful and patient interactions with everyone.

The program comprised of 18 papers that ranged over four broad topics at the intersection of institutions, trade and economic development.  The first focused on the interactions between international trade and economic development, through the environment, technological change, and institutions.  The second was on the interaction between international trade and labor market institutions, and hence the distributive implications of trade liberalization.  The third concerned analyses of supply chains, their institutional determinants, and how they affect allocative efficiency and hence development.  The fourth was on institutions that shape commercial policy and economic development.  There now follows a summary of all the papers presented at the workshop, organised under these four topic headings.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors.  This information is contained in the bibliography.

Interactions between International Trade and Economic Development

The idea that international trade liberalization goes hand in hand with economic growth and development goes all the way back to Adam Smith’s Wealth of Nations.  But data and research methods to identify the direction of causality between international trade and the various facets of economic development have been developed only relatively recently.  So there is currently an active debate over the directions of causality of these effects and their magnitudes.

The keynote address by Scott Taylor identified an extremely promising new research area focusing on the relationship between international trade and the environment.  He began by taking an overview of the existing body of research in this area, and identified two main concerns: the emergence of pollution havens, and the environmental impact of rapid growth in the developing world driven in part by trade liberalization.  Existing research is based essentially on economy- and industry-level considerations of comparative advantage.  He argued that today’s concerns about the effect of trade liberalization and growth on the environment differ little from those of the past, but the literature has been comparatively slow (relative to other research areas) to adopt a firm-level and plant-level perspective.  Taylor’s presentation then developed tools to facilitate this shift in perspective.  The first tool is a decomposition that allows emissions to be attributed not just at the economy and industry levels, as in past research, but at the more granular firm and plant levels as well.  The second tool is a partial equilibrium model of firm behavior.  The decomposition identifies a set of possible adjustments to trade liberalization that will have environmental implications, while the model allows causal connections to be made between these adjustments.  Finally, Taylor developed a set of new hypotheses to evaluate new environmental predictions derived from models with firm-level heterogeneity. The ‘Pollution Reduction by Rationalization Hypothesis’ links market share reallocations and selection effects in the Melitz model to changes in industry emissions. The ‘Distressed and Dirty Industry Hypothesis’ links changes in abatement and emission intensities to heightened foreign competition brought about by trade liberalization. The ‘Pollution Offshoring Hypothesis’ is a natural analogue to the pollution haven hypothesis of the existing literature, but explicitly links firm level decisions to offshore dirty intermediate inputs to trade liberalization.  Surprisingly, there is as yet no empirical work testing these hypotheses, although a number of existing studies are related.

The keynote address by Amit Khandelwal examined another area of active debate, regarding the relationship between international trade and firm performance in terms of productivity.  There is a long held belief that export-led development strategies improve technical efficiency.  But two difficulties arise with finding evidence of this in the data.  First, what appears to be higher productivity among exporters may in fact be attributable to self-selection by more productive firms into exporting.  Second, information needed to isolate increases in firm-level efficiency arising from trade liberalization is typically not available outside the firm.  In his keynote address, Khandelwal discussed a randomized control trial (RCT) that he and his collaborators had undertaken to address both of these issues.  To address the first, an RCT was undertaken on a group of rug manufacturers in Egypt, whereby the opportunity to export to high-income markets was randomly assigned to some of the firms through a non-governmental organization (NGO) and an Egyptian intermediary.  To address the second, the firms (both those assigned an export opportunity and those who were not) were tested by a skilled quality assessor to measure the quality of the rugs that they produced.  Quality was measured along 11 dimensions, capturing a combination of codifiable specifications and hard-to-codify attributes that depend on the technical skill of the firm.  The results are quite striking.  The opportunity to export raises the profitability of firms by 16-26 percent, arising from the production of higher quality products but at a lower rate.  Adding further nuance to the results, failure to account appropriately for the rise in quality appears to imply that productivity has fallen as a result of the opportunity to export.  In addition, multiple rounds of testing provide evidence of a ‘learning curve’, suggesting an outward movement of firms’ production possibility frontiers (PPFs) rather than a simple shift around the PPF from lower to higher quality rugs.  In conclusion, the application of experimental methods appears to offer compelling evidence that the opportunity to export does indeed increase firm performance.

The program featured two other papers that used experimental methods to assess the effects of trade liberalization.  The paper presented by Tibor Besedes used the eruption of Iceland’s Eyjafjallajökull volcano in 2010 as an unusually clean natural experiment to understand the role that transportation plays in trade and production.  The findings reveal a surprisingly inelastic relationship between this disruption and trade flows.  Air freight volumes from Europe to the US declined by 7 to 10 percent as a result of the week-long disruption, possibly due to the short duration of the airspace closures, but also the flexibility of the airlines in accommodating backlogs.  Michiel Gerritse switched focus to look at the role of trade liberalization in the determination of contracting institutions.  It has been argued that specialization through trade in primary product-based sectors that rely on poor contracting institutions can actually stand in the way of industrial development that requires good contract enforcement.  Gerittse’s paper exploits the closure of the Suez Canal between 1967 to 1975, arising from an unanticipated conflict between Israel and its neighboring Arab nations, as a quasi-natural experiment to assess how trade affects institutional development.  He found that, surprisingly, closure to trade through the Suez gave rise to a fall in institutionally intensive production in affected African nations.  One possible conclusion is that greater openness may give rise to a broader favorable impact on contracting institutions that dominates the corrosive effects on them of specialization in sectors that do not traditionally rely on them.

Reversing the direction of causality, the paper presented by Ana Abelianksky is perhaps the first to consider the effects of 3D printing, regarded as a type of technological innovation, on international trade.  As she explained, the advantage of 3D printing is that it has the potential to significantly reduce the marginal costs of certain types of production.  The drawback is that, especially since it is a relatively new technology, the fixed set-up cost are relatively high.  By seeing 3D printing in this way, she was able to incorporate it naturally into a Helpman-Melitz-Yeaple model, whereby only the most productive firms, and those who face relatively high transport costs, will find it worthwhile to absorb the relatively high fixed costs of 3D printing in order to take advantage of the relatively low marginal costs.  Here paper finds supportive evidence for this in the data.  The intriguing prediction of her model is that as the fixed costs of 3D printing fall, it will eventually displace FDI based on more conventional production line methods, and may ultimately even displace exporting.

Interaction Between International Trade and Labor Market Institutions

When considering the effects of trade liberalization, the interaction with labor markets and the institutions that govern them is of particular interest because these have a critical bearing on the distributional implications.  Joao Paulo Pessoa’s paper captured these interactions by constructing and structurally estimating a dynamic multi-country, multi-sector Ricardian trade model, extended to incorporate both search frictions and labor mobility frictions.  He uses this framework to quantify the effects of China’s integration into the global economy, both in terms of the gains to consumers but also the possible losses to workers through job displacement.  He finds that, while overall welfare gains in Northern countries are positive, in import competing sectors workers bear a costly transition, experiencing lower wages and a rise in unemployment.  The paper presented by Lorenzo Rotunno examined the distributional implications of trade liberalization using a generalized Hecksher-Ohlin (GHO) model.  The generalization arises from imperfect substitutability between home and foreign varieties, and creates inelasticity of demand in labor markets and thus helps explain why relative wages vary with skill supplies in open economies.  In this framework, Rotunno’s paper finds that relative wages in open economies vary with relative skill supplies, as labour economists believe.  But it also finds that the response of wages to variation in skill supplies is smaller in countries with lower barriers to trade, and in very open economies this comes close to the simplest trade economist view that wages are unaffected by endowments.

In his presentation, Sotiris Blanas challenged the perception that foreign firms exploit African workers.  He looked at how variation in country-level institutional factors affect labor market outcomes in Sub-Saharan Africa, differentiating between the quality of jobs offered by foreign-owned and domestic firms.  His paper finds that they foreign-owned firms offer more stable and secure jobs than domestic firms.  The job stability and security advantage of foreign-owned firms is smaller in countries with higher firing costs and governance quality.  But this appears to be because domestic firms are induced to offer more stable and secure jobs, rather than resulting from poorer standards adopted by foreign-owned firms.

Supply Chains: Their Institutional Determinants and Effects on Resource Allocation Efficiency              

An exciting new (or perhaps revived) research topic is how distortions accumulate and are magnified along supply chains, potentially undermining economic development.  Johannes Boehm and Heiwai Tang presented different but complementary extensions of the Hsieh-Klenow methodology to explore this issue.   Boehm’s paper modelled the sophistication of input-output networks across Indian states in terms of variation in the quality of contract enforcement.  The data show that poorer states have slower courts.  To capture distortions, he structurally estimates ‘wedge parameters’ from firms’ expenditure shares on region-specific intermediate inputs.  He finds that the size of the identified wedges on relationship-specific intermediate inputs is strongly correlated with the length of backlogs in regional courts.  His estimates for the wedges imply that the costs of misallocation along supply chains are economically significant.  Moreover, some of this misallocation is attributable to the slow enforcement of contracts in the courts, implying that reforms aimed at reducing court congestion could have large effects on aggregate productivity.  The paper presented by Tang studies firms’ decisions to source inputs, but focuses on the role of global versus domestic sourcing decisions in the determination of total factor productivity (TFP).  Solving the general equilibrium model with industry linkages reveals that an economy’s aggregate TFP losses due to distortions should be equal to the geometric mean of sector-level TFP losses, implying that weights are equal to the sectors’ Domar weights (i.e., the ratio of gross output to total manufacturing value added).  The fact that the sum of the Domar weights across sectors is always larger than one implies that the aggregate TFP loss due to resource misallocation may have been underestimated in the literature.  Using this approach, he finds that China’s TFP losses are smaller than those for India, which seems significant for their respective development paths.

There is a growing consensus that, to understand the implications of trade policy, one must look not so much at its effects on final goods but on traded intermediates.  Emanuel Ornelas showed, in his paper, that preferential trade agreements (PTAs) can help to overcome weak contract enforcement over inputs, and hence tackle inefficiencies that arise along supply chains.  All else equal, PTA trading partners share a higher surplus on every unit traded, relative to what they could obtain by dealing with alternative producers in non-member countries.  This propels firms to trade more, which in turn induces them to increase their relationship-specific investments in inputs.  Since the investment yields greater value to every unit traded, this relationship-strengthening effect is stronger, the more units the firms initially trade.  Since without the PTA there is underinvestment due to a hold-up problem, the PTA-induced investment will generally improve efficiency.  This beneficial effect is more likely to overcome any negative effect of tariff discrimination the higher are trade volumes initially.

Most economists have had their attention drawn to Special Economic Zones (SEZs) through their extensive use by China in recent years.  But Matthew Grant made the compelling case that SEZs are much more prevalent around the world than most would have realized, and provided a framework for their analysis.  Their key feature is that they can be used to discriminate across importers of intermediate inputs.  Grant provides a theoretical framework in which tariff discrimination across importers is optimal policy for a government motivated by both political and welfare considerations. He shows that optimal policy follows a simple two-tiered tariff rule, in which some importers are charged the prevailing tariff, and other firms are charged a reduced tariff. This policy is implemented in practice through selective permission to produce in SEZs. Using a novel data set that he constructed from public records covering the universe of active SEZs in the United States, he shows that the model’s predictions about the size and industrial composition of SEZs are consistent with the way they are implemented in practice.

Rick Bond’s presentation about the ‘destination based cash flow tax’ further reinforced the idea that the effects of policy on trade should increasingly be understood in terms of its effects on intermediates.  As Bond’s presentation explained, the implementation of this policy has been referred to as a ‘border tax adjustment’ because it exempts export sales from the tax but does not allow firms to deduct purchases of imported intermediates from the taxable cash flow.  The aim of this tax, which would replace the current US corporate tax system, is to remove the incentive of multinational firms to locate part of their operations in low-tax jurisdictions.  Proponents of the tax have argued that the distributional implications are neutral.  But Bond showed that under plausible assumptions of a specific-factors model the tax would effectively raise the return to import-competing goods relative to exportables, resulting in a flow of resources out of the exportable sector.

Institutions That Shape Commercial Policy and Economic Development

Considerable strides have been taken over the last twenty years to provide an ‘optimal trade policy rationale’ for the World Trade Organization, as an institution whose members have an incentive to engage in mutual trade liberalization in the face of a unilateral incentive to protect.  Over a similar timeframe, the gravity model has become the mainstay of empirical work on international trade, but has made very little contact with the literature on optimal trade policy.  The paper presented by Mostafa Beshkar takes a decisive step to build a bridge between these literatures.  The model of the paper is based on an Eaton-Kortum-Armington framework, making it possible to study trade policy across sectors that have very different trade elasticities and degrees of product differentiation.  A striking result in this framework is that import and export policies are complements rather than being substitutes as per the Lerner-Symmetry theorem.  This provides a new rationale for ‘banning’ export policies at the WTO because this provides an immediate impetus to lower import tariffs.

The rising tide of nationalism around the world has highlighted the inherent uncertainty in the ratification of trade agreements in domestic legislatures.  The paper presented by Ben Zissimos develops a framework that puts the uncertainty of ratification at the center of the stage.  To create ratification uncertainty, the framework features a contest that takes place in each country between interest groups who are ‘for’ and ‘against’ the agreement respectively.  This framework extends the traditional contest framework wherein there is only one decision-maker, in this context a national government, to where there can be more than one.  A key prediction of the framework is that lobbying drives trade liberalization, while it is governments’ protectionist concerns (not those of lobbies) that hold liberalization back.  This reverses the logic that prevails in the literature but is consistent with recent econometric findings.

On a related theme, Kristy Buzard asked whether there could be a motive for the gradual reduction of trade policy through trade agreements that relied purely on political-economy motives.  Previous papers in the gradualism literature have tended to focus on underlying features of the economy rather than politics.  These include stickiness in the movement of factors between sectors, or stickiness in the adjustment of trade policy introduced by WTO rules.  Buzard’s motivation for gradualism is a political economy shock, leading to the ousting from office of a key politician on whom protectionist policy relies.  This gives rise to a ratcheting effect whereby resources move out of the import-competing sector, yielding fewer resources to support politicians and, in turn, further losses of office and further reductions in protection.

While economic globalization, supported by the WTO, is leading to a liberal markets around the world, Bernardo Guimaraes argued that ‘politics seems to be immune from this trend’.  The ‘liberalization’ of political institutions is more limited, and while the rule of law can be taken for granted in many places, authoritarianism is still prevalent despite its negative consequences.  The paper that he presented develops a theory of political specialization to understand how an increasingly interconnected world can nonetheless sustain diametrically opposed systems of government.  According to the theory, some countries will uphold the rule of law with a commitment to property rights, while others will consciously choose not to do so.  This political specialization relies on an interplay between two key factors: diminishing marginal benefits to good government at the world level but not at the country level; and diminishing marginal costs of good government at the country level.  The theory implies that political specialization is to be expected even if all countries are ex ante identical, which means good governance everywhere is a remote prospect.

The remarkable thing about the keynote address by Gianmarco Ottaviano, the final presentation, was the way that it spanned so many of the topics that had been discussed throughout the workshop.  The paper that he presented asked how multilateral trade policy should be designed in a world with two key features.  First, countries differ in terms of market access and technology.  And second, firms with market power differ in terms of productivity.  The framework he developed to address this question extends the Melitz-Ottaviano framework to one of multilateral trade, in which variable markups that increase in firm size are a key source of misallocation across firms and countries.  The framework makes it possible to answer a number of key questions.  For example, how should multilateral trade policy be designed in a world in which firms with market power differ in terms of productivity?  Should worse performing (national) firms be protected from better performing (foreign) rivals? Should national product diversity be shielded against the potentially disruptive effects of cheaper imported goods?  In the canonical models of this literature, based on CES demands, constant marginal costs, and a Pareto distribution for firm productivities, free trade is efficient and multilateral trade policy ‘should’ reflect this.  The main purpose of the paper is to show that this efficient outcome ceases to hold when the CES assumption is removed, giving rise to new implications for multilateral trade policy aimed at maximizing the joint welfare of all trade partners.  To do this, the paper focuses on demands that satisfy Marshall’s Second Law of Demand, according to which demand becomes more inelastic with consumption.  The outcomes under this comparatively modest modification are strikingly different.  First, from a welfare point of view, too large a range of products is sold to larger markets, while too small a range is sold to smaller markets.  Second, conditional on range, relatively too many high cost products are sold to any country. This inefficiency is, however, more severe for smaller countries. Third, conditional on range and selection, the quantities of high cost products sold to any country are too large and those of low cost products are too small.  Also, this inefficiency is more severe for smaller countries. As a result, the free market provides an inefficiently high degree of welfare inequality between large and small countries. There is, therefore, room for welfare improving multilateral policy intervention that: increases sales of low cost firms to all countries but especially to smaller ones; decreases sales of high cost firms to all countries but especially to smaller ones; reduces firm entry in all countries but especially in smaller ones.  This work has important implications for the optimal trade policy literature in terms of introducing considerations of firm heterogeneity that have not been discussed previously.  It also has implications for work based on the Hseih-Klenow methodology by providing a more nuanced perspective on the estimation of wedges in a world where demand is non-CES, and therefore free trade does not necessarily increase welfare.

 Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Abeliansky, A., I. Martínez-Zarzoso, and K. Prettner, “How Does 3D Printing Affect Globalization?

Atkin, D., A. Khandelwal, and A. Osman, “Exporting and Firm Performance: Evidence from a Randomized Experiment.

Besedes, T., and A. Murshid, “Experimenting with Ash: The Trade-Effects of Airspace Closures in the Aftermath of Eyjafjallajökull.

Beshkar, M., and A. Lashkaripour, “Interdependence of Trade Policies in General Equilibrium.

Bickwit, G., E. Ornelas, and J. Turner, “Preferential Trade Agreements and Global Sourcing.

Blanas, S., A. Seric, and C. Viegelahn, “Jobs, FDI and Institutions in Sub-Saharan Africa: Evidence from Firm-Level Data.

Boehm, J., and E. Oberfield “Misallocation in the Market for Inputs.”

Bond, E., and R. Driskill, “DBCFT, Border Adjustments, and Trade.”

Buzard, K., “Explaining Gradualism in Trade Liberalization: A Political Economy Approach.”

Cherniwchan, J., B.R. Copeland, and S. Taylor, “Trade and the Environment: New Methods, Measurements, and Results.”  CESifo working paper

Cole, M., J. Lake, and B. ZissimosContesting an International Trade Agreement.

Gerritse, M., “Does Trade Cause Unfortunate Specialization in Developing Economies? Evidence from Countries South of the Suez Canal.”

Grant, M., “Why Special Economic Zones? Using Trade Policy to Discriminate Across Importers.

Guimarães, B., and K. Sheedy “Political Specialization.

Krishna, P., and H. Tang, “Production Networks and Misallocation.

Nocco, A., G. Ottaviano, and M. Salto “Geography, Competition, and Optimal Multilateral Trade Policy.”

Pessoa, J.P., “International Competition and Labor Market Adjustment

Rotunno, L., and A. Wood, “Wage Inequality and Skill Supplies in a Globalized World

Welcome new members

We would like to welcome the following new members of the InsTED network.

Prof. Reshad Ahsan (University of Melbourne) His research interests are international trade, and development economics.

Prof. Amrit Amirapu (University of Kent) His primary fields are development economics, and applied microeconomics.

Prof. Daniel Bernhofen (American University)  His research interests are in international economics, global economic history, and applied microeconomics.

Prof. Nancy Chau (Cornell Universitry) Her research interests fall under international trade, regional economics, and economic development.

Prof. Paola Conconi ( Université Libre de Bruxelle) Her fields of interest are international trade, firm organization, and political economy.

Prof. Peri da Silva (Kansas State University) His research interests are in the political economy of trade, theory of preferential trade, and ways to distribute the gains generated from trade liberalization.

Prof. Leopoldo Fergusson (Universidad de los Andes) His areas of interest are political economy, development economics, and economic history.

Prof. Michael Gechter (Pennsylvania State University) His fields of interest are development economics, and econometrics.

Prof.Daniel Honig (John Hopkins University) His primary field is political economy.

Prof.Christopher Kilby (Villanova University) His research focus is on the political economy of foreign aid.

Prof. David Kuenzel (Wesleyan University) His research interests are international trade and economic growth.

Prof. Beyza Ural Marchand (University of Alberta) Her research fields are development economics, international trade, and  applied microeconomics

Prof. Priya Mukherjee (College of William and Mary) Her research interests include development economics, and political economy.

Prof. Takumi Naito (Waseda University)  His current work in progress are under the topics of “An asymmetric Melitz model of trade and growth” and “A larger country sets a lower optimal tariff”.

Prof. Abdulaziz B. Shifa (Syracuse University) His areas of interest cover economic growth and development, political economy, and macroeconomics.

Prof. Mototsugu Shintani (Vanderbilt University) His specializations include econometrics, macroeconomics, and international finance.

Prof. Soule Sow (Antalya International University) His fields of specialization are development economics, international trade, and urban economics.

Dr. Walter Steingress (Banque de France) His specializations are international trade, and international macroeconomics.

Dr. Ana Maria Tribin (Central Bank of Colombia) Her research interests are in political economy, development economics, and labor economics.

Prof. Tsung Yu Yang (Southwestern University) His fields of interest are applied econometrics, agricultural economics, international trade, and environmental economics.

Prof. Nicolas Van de Sijpe (University of Sheffield) His current research focuses mainly on the effects of foreign aid. 

2016 NOVAFRICA Conference on Economic Development in Africa, July 14th and 15th, 2016 Lisbon, Portugal.

We are looking for contributions on the broad theme of economic development in Africa. Topics of interest include, but are not limited to: mobile money and financial innovation; natural resource management; the quality of education and health; migration, remittances and the brain drain; the quality of public services and political economy; or entrepreneurship and management practices in the African context.

Keynote Presentations

Stefan Dercon
Professor of Economics at the University of Oxford

David McKenzie
Lead Economist at the World Bank

Edward Miguel
Professor of Economics at the University of California, Berkeley

Submission timetable:
Submissions of full papers (PDF files) are expected by April 4, 2016. Extended abstracts may also be submitted but priority will be given to full papers. Decisions will be made by April 14, 2016.

Submission guidelines:
Please email your submission to

Conference website