Policies encouraging processing trade are common in developing countries and are thought to encourage integration into global markets. Agents engaged in processing production import intermediate inputs and capital equipment duty free but are often not allowed to sell these goods or the resulting output on the domestic market. For ordinary production, the reverse holds: imports are subject to tariffs but domestic sales are allowed. This paper studies the welfare effects of these policies using Chinese data for 109 industries for 2000-2007. Counterfactual policy experiments imply large welfare losses (≈ 3 − 7%) to Chinese agents from not being allowed to buy processing output on the domestic market. There are small welfare gains (< 1%) from the duty free status of processing imports. Li, Brandt, and Morrow also develop a new method to estimate correlation parameters for multivariate Fréchet distributions with trade models that deliver multiplicative gravity equations.
Technological change, from the advent of robots to expanded trade opportunities, tends to create winners and losers. How should government policy respond? And how should the overall welfare impact of technological change on society be valued? Costinot and Werning provide a general theory of optimal technology regulation in a second best world, with rich heterogeneity across households, linear taxes on the subset of firms affected by technological change, and a nonlinear tax on labor income. The researcher's first result consists of three optimal tax formulas, with minimal structural assumptions, involving sufficient statistics that can be implemented using evidence on the distributional impact of new technologies, such as robots and trade. Their second result is a comparative static exercise illustrating that while distributional concerns create a rationale for non-zero taxes on robots and trade, the magnitude of these taxes may decrease as the process of automation and globalization deepens and inequality increases. Costinot and Werning's final result shows that, despite limited tax instruments, technological progress is always welcome and valued in the same way as in a first best world.
Schott, Greenland, Ion, and Lopresti propose using average abnormal equity returns (AAR) to identify firm sensitivity to trade liberalization. This approach captures the net impact of all avenues of exposure and yields estimates for both goods-producing and service firms, provided they are publicly traded. Applying their method to a specific change in U.S. trade policy, the researchers find that AARs vary substantially across firms within narrowly defined industries and that they are correlated with, but provide explanatory power beyond, standard measures of import competition in predicting firm outcomes.
Does ownership matter for firm performance? Canonical theories of the firm argue that firms allocate ownership over production facilities to minimize the inefficiencies arising from contractual frictions. But the size of these inefficiencies is unknown. Ma and Eppinger provide a first quantification of the gains from optimal ownership by exploiting a major liberalization of China's policy restrictions on foreign ownership. The reform allowed multinationals to reoptimize their control over Chinese firms. The researchers find that optimal ownership restructuring induced firm-level output gains of up to 34% within only two years. These effects are stronger and accompanied by productivity gains over the medium term. Ma and Eppinger rationalize their findings by an extended property-rights theory of the multinational firm.
Using the Japanese firm/establishment level census data, Urata, Hayakawa, and Ito investigate the impact of the Chinese import penetration on employment in Japan. The researchers have found little or slightly negative impact in total employment level, but found that employment through exit has been reinforced by the Chinese import penetration and the impact on exit was stronger for the small and medium enterprises. Log level of employment and sales value for Japanese firms on average has little to do with the Chinese penetration ratio, but it is negatively associated for the SMEs.
Kim and Lee provide empirical analysis on the impact of Chinese imports on Korean manufacturing plants, using Korea's plant-level data for the period of 1996-2013. While many studies find negative impacts of Chinese imports (especially on employment) in developed countries, Kim and Lee find the opposite in South Korea. They show that the rising Chinese import competition has a significantly positive impact on Korean plants' productivity and employment. Importantly, the researchers separately define 'output' and 'input' import penetration rates, and examine their impacts on plants' productivity, markup, and employment. Interestingly, they find that the rising Chinese 'input' import competition has much larger and significantly more positive impacts on Korean plant productivity and employment, compared to the 'output' one. Additionally, Kim and Lee find that Chinese 'output' import penetration has a positive effect on Korean plant markups, while the 'input' one has no effect.
Lai, Qi, and Tang employ data from the World Input-Output Database (WIOD) to document the evolution of the domestic content in exports, as measured by the domestic value added to gross exports ratio (DVAR), across countries and sectors over the period 1995-2008. The researchers develop a multiple-sector general equilibrium model of Eaton and Kortum (2002) with domestic and global input-output linkages (a la Caliendo and Parro (2015)) to provide structural interpretations of individual countries’ DVAR. They use the calibrated version of the model to fully decompose the time-series changes of the global DVAR and selected countries’ DVAR into separate parts that are due to changes in technology, bilateral trade frictions, unilateral export fixed costs, and other exogenous factors such as changes in factor endowments and trade balances. Lai, Qi, and Tang find that while the partial effects of both technology and trade costs are negative, there is a positive and significant interactive effect from the two. Taking into account the interactive effects, they find that the total effect of technology, which has been either overlooked or misinterpreted in the existing analyses of the evolution of global value chains, is significantly positive, while the total effect of trade frictions is far from capable of explaining the changes in DVAR over the sample period. The contributions of other determinants are quantitatively very small.
Regional economic integration can help to increase the welfare of participating members, but they can also cause redistribution of income. According to the international trade theory, opening up the market will help to increase employment and income levels of an industrial sector with advantages in one country; while the employees in those sectors with no advantage would be negatively affected because the production resources would flow to the advantageous industries. However, from the perspective of the industrial supply chain, if a countries industry is dominated by foreign investors and the country shows advantages in part of the supply chain, what will be the impact on the industry under the situation of regional economic integration and MNEs' adjustment of global supply chain? Participating regional economic integration has been a certain policy in Taiwan. That is, Taiwan will actively establish closer trade and economic relations with international partners after the participation to WTO a few decades ago. It could then be expected that those industries with advantages in Taiwan would gain the benefit after Taiwan became a member of a regional partnership. However, the industries, such as the automobile industry, which has always been dominated by Japanese brands in Taiwan, may be negatively affected when Taiwan opens market and the Japanese automobile producers adjust their distribution of supply chain. If that happens, the upstream of automobiles would also be negatively affected due to the decreasing demand for automobiles production, even though Taiwan shows a relative advantage in the auto component sector. Therefore, by adopting the model proposed by Lewbel (2012), Wu, Hui-Tzu, Su, and Hu aim to estimate the price elasticity of imported vehicles, as well as the impact of eliminating imported vehicle tariffs on the sale of domestically produced automobiles and auto components, so as to figure out the policy implications for the development of the automobile industry in Taiwan.
Offshoring and participation in Global Value Chains (GVCs) are critical to understanding the rapid deindustrialization of G7 nations and the rapid industrialization of a handful of developing nations. Okubo and Baldwin distinguish between trade in final goods and trade in parts to track the shifting pattern of the location of manufacturing. They introduce a simple empirical measure of comparative advantage in parts on one hand and in final goods on the other. The researchers illustrate how this distinction can help organize thinking on the patterns of industrialization and deindustrialization—namely the “GVC journeys” of advanced and emerging economies. Okubo and Baldwin also provide one simple model. The model highlights the interactions of trade costs and the knowledge transfers to accompany offshoring of parts production and assembly, which they call trade-led versus knowledge-led globalization.
Wang and Wei develop a tractable growth model to show how a middle-income country (M) can be sandwiched by an innovating north country (N) and an imitating south country (S) through international trade. An increase in labor productivity of existing varieties (intensive margin) or in the number of varieties (extensive margin) produced in S may result in non-convergence of M to N, but this chasing effect from S disappears when S is sufficiently unproductive. Meanwhile, an increase in innovation in N not only enlarges the income gap between N and M (pressing effect from N) but also makes M more vulnerable to the chasing effect from S. The researchers characterize how M should optimally allocate its resources between production and R&D to respond to the chasing effect from S and pressing effect from N.
Stylized representations of recent U.S. and Chinese tax reforms, tariffs against imports and alternative Chinese monetary targeting are examined using a calibrated global macro model that embodies both trade and financial interdependencies. For both countries, unilateral capital tax relief and bilateral tariffs are shown to be “beggar thy neighbor” in consequence with tariffs most advantageous for the U.S. if revenue finances consumption tax relief. China is nonetheless a net loser when these policies are implemented unilaterally by the U.S., irrespective of its policy response, though a currency float is shown to cushion the effects on its GDP in the short run. Equilibria in normal form non-cooperative tariff games exhibit spill-overs that are substantial but insufficient to deter dominant strategies. The U.S. imposes tariffs while China liberalizes, sustaining fiscal balance via consumption tax relief in the U.S. and expenditure restraint in China.
Obashi and Kimura try to identify the impact of digital technologies on network trade, particularly in East Asia. A standard gravity exercise is conducted with the worldwide disaggregated data of network trade, which consists of trade in manufactured parts and components, capital goods, and consumable goods, in order to find possible influence of the introduction of digital technologies represented by the by-industry use of industrial robots, individual’s internet use, and imported digitally deliverable services. The researchers find that the introduction of robots, together with imported digitally deliverable services, seems to enhance trade in manufactured parts and components as well as consumable goods in East Asia, but not necessarily in other parts of the world. This suggests that the exploration of complementarity between machines and human resources in production blocks supported by better connectivity may allow newly developed economies to retain and expand the division of labor, rather than suffering from massive “reshoring” in which factories would go back to advanced economies.
Fort, Warzynski, Bernard, and Smeets exploit a direct measure of offshoring to study how the movement of production abroad affects the composition of firms' domestic employment and production, as well as their innovative activities. After offshoring begins, firms increase their imports of domestically produced goods, and retain -- rather than abandon -- domestic production of those goods. The researchers define a new measure of offshoring based on this relationship that enables them both to distinguish it from import competition and to identify new production cost saving opportunities in foreign countries. In response to such new offshoring opportunities, firms reallocate labor from production work to technology and innovation-related occupations. This reallocation of workers is accompanied by increases in offshoring firms' product development and R&D spending. The results suggest a link between offshoring and domestic innovation.