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Summary

Trade Under Lockdown
Author(s):
Antoine Berthou, Banque de France
Sebastian Stumpner, Banque de France
Abstract:

The Covid-19 pandemic and the measures of lockdown that have been implemented in many countries in the early months of 2020 have strongly impacted global economic activity. This paper studies the role of lockdowns on international trade. Berthou and Stumpner use trade data for 31 reporting countries detailed by product and partner, combined with data on the intensity of lockdowns in a large number of countries. This data covers a period up to November 2020 and is updated on a monthly basis. The researchers estimate trade equations to identify the impact of lockdown stringency implemented in exporting and importing countries on trade flows. They find that both exporter and importer lockdowns had a strong effect on bilateral trade. Implementing a lockdown of maximum stringency reduces bilateral exports by 11-22% and bilateral imports by about 15-22%. However, the magnitude of these effects has been declining over time. Berthou and Stumpner then show that lockdowns had very heterogeneous effects across sectors, and they study the role of third country shocks through trade diversion/deflection effects and global value chains.

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Trade, Firm-Delocation, and Optimal Climate Policy
Author(s):
Farid Farrokhi, Purdue University
Ahmad Lashkaripour, Indiana University
Abstract:

To what extent can trade policy help reduce global carbon emissions? Farrokhi and Lashkaripour examine this question using a multi-country multi-industry general equilibrium trade model with transboundary carbon externalities. Their framework accommodates firm-delocation in response to policy, multilateral carbon leakage, and returns to scale in production and abatement. Their central result is a set of simple formulas for unilaterally optimal trade and carbon taxes in an open economy. The optimal policy consists of (i ) a uniform carbon tax across all industries; (ii ) industry-level production subsidies that restore marginal-cost-pricing independent of the industry's carbon intensity; (iii ) industry-level import taxes that penalize carbon-intensive imports but less so in high-returns-toscale industries; and (vi ) industry-level export subsidies that, in addition to improving the terms of trade, promote clean exports against carbon-intensive foreign competition. Mapping their formulas to data, Farrokhi and Lashkaripour find that trade taxes can replicate only around 3% of the carbon reduction attainable under (first-best) cooperative global carbon taxes. This lack of effectiveness is partly driven by a tension between the carbon-reducing and terms-of-trade rationales for trade taxation under scale economies. Trade taxes, however, can be remarkably effective at enforcing international climate agreements even in the presence of scale economies and firm-delocation effects.

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Automation, Trade and Multinational Activity: Micro Evidence from Spain
Author(s):
Katherine A. Stapleton, University of Oxford
Michael Webb, Stanford University
Abstract:

Stapleton and Webb use a rich dataset of Spanish manufacturing firms from 1990 to 2016 to shed new light on how automation in a high-income country affects trade and multinational activity involving lower-income countries. They exploit supply-side improvements in the capabilities of robots, as described in the text of robotics patents, that made it become technologically feasible over time to automate some specific tasks and not others. The researchers show that, contrary to the speculation that automation in high-income countries will cause the reshoring of production, the use of robots in Spanish firms actually had a positive impact on their imports from, and number of affiliates in, lower-income countries. Robot adoption caused firms to expand production and increase labour productivity and TFP. For firms that had not yet offshored production to lower-income countries, robot adoption caused them to actually start newly doing so. By contrast, for firms that were already offshoring to lower-income countries, robot adoption had no impact on their offshoring. Stapleton and Webb show that these findings can be explained in a framework that incorporates firm heterogeneity, the choice between automation, offshoring and performing tasks at home and where automation and offshoring both involve upfront fixed costs, such that their sequencing matters.

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Misallocation and Capital Market Integration: Evidence From India
Author(s):
Natalie Bau, University of California, Los Angeles and NBER
Adrien Matray, Princeton University
Abstract:

Bau and Matray show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms' input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 25%, physical capital by 57%, wage bills by 27%, and reduces MRPK by 35% relative to low MRPK firms. There are no effects on low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that foreign capital partially substitutes for an efficient banking sector. Finally, Bau and Matray develop a novel method to use natural experiments to bound the effect of changes in misallocation on treated industries' aggregate productivity. Treated industries' Solow residual increases by 4-17%.

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The Darwinian Returns to Scale
Author(s):
David Baqaee, University of California, Los Angeles and NBER
Abstract:

How does an increase in the size of the market, say due to fertility, immigration, or globalization, affect welfare? Baqaee and Farhi study this question using a model with heterogeneous firms, Kimball preferences, fixed costs, and monopolistic competition. The researchers decompose changes in welfare from increased scale into changes in technical efficiency and changes in allocative efficiency due to reallocation. Baqaee and Farhi non-parametrically identify residual demand curves with firm-level data from Belgian manufacturing firms and, using these estimates, quantify their theoretical results. Baqaee and Farhi find that around 80% of the aggregate returns to scale are due to changes in allocative efficiency. As markets get bigger, competition intensifies and triggers Darwinian reallocations: socially-valuable firms expand, small firms shrink and exit, and new firms enter. However, important as they are, improvements in allocative efficiency are not driven by reductions in markups or deaths of unproductive firms. Instead, they are caused by a composition effect that reallocates resources from low- to high-markup firms.

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Globalization and Pandemics
Author(s):
Pol Antràs, Harvard University and NBER
Stephen J. Redding, Princeton University and NBER
Esteban Rossi-Hansberg, Princeton University and NBER
Abstract:

Antràs, Redding, and Rossi-Hansberg develop a model of human interaction to analyze the relationship between globalization and pandemics. Their framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. The ressearchers show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade.

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Outsourcing, Inequality and Aggregate Output
Author(s):
Adrien Bilal, Harvard University and NBER
Hugo Lhuillier, Princeton University
Abstract:

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, Bilal and Lhuillier contribute a framework in which more productive firms either post higher wages along a job ladder to sustain a larger in-house workforce, comprised of many imperfectly substitutable worker types and subject to decreasing returns to scale, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise: more productive firms are more likely to outsource to save on higher wage premia; outsourcing raises output at the firm level; labor service providers endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, Bilal and Lhuillier find empirical support for all three predictions in French administrative data. After structurally estimating the model, the researchers find that the rise in outsourcing in France between 1997 and 2007 contributed to raise aggregate output by 1% and reduce the labor share by 3 percentage points. A small minimum wage increase can make outsourcing Pareto-improving and stabilize the labor share.

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Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers
Author(s):
Ufuk Akcigit, University of Chicago and NBER
Sina T. Ates, Federal Reserve Board
Josh Lerner, Harvard University and NBER
Richard R. Townsend, University of California, San Diego and NBER
Yulia Zhestkova, University of Chicago
Abstract:

The treatment of foreign investors has been a contentious topic in U.S. entrepreneurship policy in recent years. This paper examines foreign corporate investments in Silicon Valley from a theoretical and empirical perspective. Akcigit, Ates, Lerner, Townsend, and Zhestkova model a setting where such funding may allow U.S. entrepreneurs to pursue technologies that they could not otherwise, but may also lead to spillovers to the overseas firm providing the financing and the nation where it is based. The researchers show that despite the benefits from such inbound investments for U.S. firms, it may be optimal for the U.S. government to raise their costs to deter investments. Using as comprehensive as possible a sample of investments by non-U.S. corporate investors in U.S. startups between 1976 and 2015, Akcigit, Ates, Lerner, Townsend, and Zhestkova find evidence consistent with the presence of knowledge spill-overs to foreign investors.

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In addition to the conference paper, the research was distributed as NBER Working Paper w27828, which may be a more recent version.

Global Supply Chains in the Pandemic
Author(s):
Barthélémy Bonadio, University of Michigan
Zhen Huo, Yale University
Andrei A. Levchenko, University of Michigan and NBER
Nitya Pandalai-Nayar, University of Texas at Austin and NBER
Abstract:

Bonadio, Huo, Levchenko, and Pandalai-Nayar study the role of global supply chains in the impact of the Covid-19 pandemic on GDP growth using a multi-sector quantitative framework implemented on 64 countries. The researchers discipline the labor supply shock across sectors and countries using the fraction of work in the sector that can be done from home, interacted with the stringency with which countries imposed lockdown measures. The model's predictions for declines in industrial production and employment fit nontargeted data well. One quarter of the total model-implied real GDP decline is due to transmission through global supply chains. However, "renationalization" of global supply chains does not in general make countries more resilient to pandemic-induced contractions in labor supply. This is because eliminating reliance on foreign inputs increases reliance on the domestic inputs, which are also disrupted due to nationwide lockdowns. In fact, trade can insulate a country imposing a stringent lockdown from the pandemic-shock, as its foreign inputs are less disrupted than its domestic ones. Finally, unilateral lifting of the lockdowns in the largest economies can contribute as much as 2.5% to GDP growth in some of their smaller trade partners.

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Local Sectoral Specialization in a Warming World
Author(s):
Bruno Conte, Universitat Autonoma de Barcelona
Klaus Desmet, Southern Methodist University and NBER
Dávid Krisztián Nagy, CREI, Universitat Pompeu Fabra
Esteban Rossi-Hansberg, Princeton University and NBER
Abstract:

This paper quantitatively assesses the world's changing economic geography and sectoral specialization due to global warming. It proposes a two-sector dynamic spatial growth model that incorporates the relation between economic activity, carbon emissions, and temperature. The model is taken to the data at the 1◦ by 1◦ resolution for the entire world. Over a 200-year horizon, rising temperatures consistent with emissions under Representative Concentration Pathway 8.5 push people and economic activity northwards to Siberia, Canada, and Scandinavia. Compared to a world without climate change, clusters of agricultural specialization shift from Central Africa, Brazil, and India's Ganges Valley, to Central Asia, parts of China and northern Canada. Equatorial latitudes that lose agriculture specialize more in nonagriculture but, due to their persistently low productivity, lose population. By the year 2200, predicted losses in real GDP and utility are 6% and 15%, respectively. Higher trade costs make adaptation through changes in sectoral specialization more costly, leading to less geographic concentration in agriculture and larger climate-induced migration.

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In addition to the conference paper, the research was distributed as NBER Working Paper w28163, which may be a more recent version.

International Climate Agreements and the Scream of Greta
Author(s):
Giovanni Maggi, Yale University and NBER
Robert W. Staiger, Dartmouth College and NBER
Abstract:

The world appears to be in imminent peril, as countries are not doing enough to keep the Earth's temperature from rising to catastrophic levels, and various attempts at international cooperation have failed. Why is this problem so intractable? Can Maggi and Staiger expect an 11th -hour solution? Will some countries, or even all, succumb on the equilibrium path? They address these questions through a formal model that features the possibility of climate catastrophe and emphasizes the role of two critical issues: the international externalities that a country's policies exert on other countries, and the intertemporal externalities that current generations exert on future generations. Maggi and Staiger examine the interaction between these two issues and explore the extent to which international agreements can mitigate the problem of climate change in their presence.

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The Rise of Agribusinesses and its Distributional Consequences
Author(s):
Swati Dhingra, London School of Economics
Silvana Tenreyro, London School of Economics
Abstract:

Crops are often modelled as homogenous products that are exchanged in perfectly competitive markets. While this may be true of world commodity markets, smallholder farmers face high trade barriers in selling their crops at home and abroad. Selling to agribusinesses with better intermediation technologies can enable smallholder farmers to overcome these barriers. This has provided a rationale for policies encouraging agribusinesses. Dhingra and Tenreyro document the reliance of farmers on intermediaries and find that farmers selling to agribusinesses differ systematically from others. The researchers incorporate these stylised facts into a flexible theoretical framework to study the aggregate and distributional consequences of the rise of agribusinesses. The rise of agribusinesses brings productivity gains to farmers, but it also skews the distribution of buyers of farm produce towards larger firms with greater buyer power. Taking the theory to data, they quantify behind-the-border barriers to trade embedded in a national policy which encouraged agribusiness participation. Dhingra and Tenreyro combine this with microdata on household-crop incomes and find that the policy led to a reduction in incomes of small farmers. Losses were concentrated among farmers who sold to agribusinesses and in villages with a comparative advantage in policy-affected crops. On average, their incomes fell by 6 per cent with no offsetting gains in non-farm channels of income. Profit margins of agribusinesses specialised in policy-affected crops rose, in line with the theoretical channel. The findings contribute to the academic and policy debate on the impacts of integration and market power on the size and distribution of the welfare gains from trade.

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Participants

Antoine Berthou, Banque de France
Matthew Grant, Dartmouth College
Ahmad Lashkaripour, Indiana University
Hugo Lhuillier, Princeton University
Isabela Manelici, Princeton University
Patricia Mueller, USITC
Emanuel Ornelas, Sao Paulo School of Economics
Charly Porcher, Princeton University
Katherine A. Stapleton, University of Oxford
Sebastian Stumpner, Banque de France
Conor Walsh, Princeton University

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