Essays On Macroeconomic Effects Of International Trade Barriers

"This dissertation is comprised of three essays regarding the role of trade barriers for international capital flows and prices. The study aims to understand the effect of changes in trade costs at various aspects: cross-country differentials, global integration, and within-country distributional effects. The first chapter studies the drivers of the US real exchange rate (RER), with a particular focus on its comovement with net trade flows. We consider the entire spectrum of frequencies, as the low-frequency movements account for 83% of the RER's unconditional variance. We introduce a model with heterogeneous firms facing sunk costs of exporting, financial shocks, and trade shocks. The model can fully capture the comovement of the RER and net trade flows at all frequencies, without compromising other major moments at the business cycle frequency. While financial shocks are necessary to capture the RER movements at higher frequencies, trade shocks are essential for lower frequency variation. The second chapter studies the factors accounting for the large, coincident increases in international borrowing and lending and international trade from 1970 to the present. We focus on the rise in annual changes in borrowing and lending across countries as summarized by the rise in the dispersion of the trade balance as a share of GDP. We show that these two salient features - a rise in net and gross international trade - are largely a consequence of a reduction in intratemporal trade barriers rather than a substantial reduction in the frictions on intertemporal trade or greater asymmetries in business cycles. Beyond explaining changes in the distribution of gross and net trade, the fall in frictions on intratemporal trade are consistent with the reduction in dispersion in other key macro time series such as the real exchange rate, terms of trade, and export-import ratio. The third chapter studies the dynamic effect of trade liberalization on wages and consumption, exploiting cross-region variation in the United States at the state level after the U.S.-Korea Free Trade Agreement. A key feature is a theoretically sound measurement of a regional exposure that takes into account the elasticity of substitution and covers all potential channels of tariff impacts. Using the measures for the Local Projection Method, I find that less protection at home is associated with a persistent negative impact: by the 8th quarter, a state at the upper quartile of the barrier cut experienced a decline in wage and consumption that is 1.56 and 1.04 percentage points larger, respectively, than a state at the lower quartile. However, cheaper access to imported inputs has a positive but temporary impact: by the 8th quarter, an upper quartile state experienced an increase in wage and consumption that is 1.62 and 1.45 percentage points larger, respectively. More opportunities to export have little effect."--Pages viii-ix.

"This dissertation is comprised of two essays regarding the way that aggregate economies respond to changes in international trade policy. Both chapters use quantitative models to determine the predicted effects of changes in either tariffs or trade costs on several aggregate variables. In the first chapter, I develop a multi-country heterogeneous firm model to study the aggregate effects of multilateral trade policy over time. The model captures the slow evolution of production and trade networks in response to trade policy as firms make durable and irreversible investments in sourcespecific productive capacity and destination-specific exporting capacity. It also incorporates capital, international assets, firms, and endogenous labor supply while still matching world geography. The model is calibrated to match size and trade flows of the US and its major trade partners as well as the split of trade between consumption, capital, and material goods. I find that the short run fluctuations in the economy following a policy change are a key determinant of the overall gains from trade and that transitions are not simply represented by gradual convergence to a new steady state. Futhermore, I find that the long-run effects of trade are poorly approximated by quantitative models without dynamics. While all the model features are important, the behavior of the domestic economy in the short- and long-run relies most on the semi-fixed trade networks and intertemporal trade incentives. The model is used to evaluate the effects on the US of being left out permanently or temporarily from a world trade liberalization. Being left out is quite costly, with losses in utility concentrated in the initial periods of the liberalization. The second chapter studies the importance of expectations and news regarding trade policy on the macroeconomy. We evaluate the aggregate effects of changes in trade barriers in a model in which trade responds gradually to changes in trade policy and trade policy changes are gradual. Our model offers insights into how changing trade barriers affects the economy and how business cycle shocks can affect trade. We find that a fall in current trade barriers has an expansionary effect while a decline in future trade costs can be recessionary on impact due to a wealth effect. Furthermore, canceling agreed upon declines in barriers is expansionary in the short-run but substantially lowers growth over the medium run. We also find that even controlling for composition, trade tends to lag the recovery in demand for tradables. We propose a method to separately identify expected and unexpected movements in trade costs. A dynamic model of trade requires both aggregate and forward-looking data to accurately identify the source of trade cost variation"--Pages vi-vii.

Non-Tariff Barriers, Regionalism and Poverty is a collection of key articles in three important areas of applied international trade research: measuring non-tariff barriers and their effects, the consequences of regional trading arrangements, especially on the countries excluded from them, and the connection between international trade and poverty. Drawing from 30 years of research and experience, L Alan Winters illustrates the development of techniques of this field and his continued commitment to answering real policy questions at the times at which they are debated. The collection shows the ways in which economic and econometric analysis can be used to answer real-world problems rigorously in the area of international trade and trade policy. Readers will find that some of the research included is of current methodological relevance and some of more historical significance. This volume is invaluable to anyone who is keen on developing their knowledge on trade policy, regionalism or poverty — three pressing issues in today's globalized world.

This thesis includes three essays related to international economics and financial economics. The first essay presents a model of trade in the presence of multinationals, asymmetric trade barriers, and international differences in production costs. The first part of the essay presents the model's implications for bilateral trade. The estimation reveals more reasonable parameters for elasticity of substitution and trade costs than that suggested by previous research. The simulation indicates that tariff liberalization will shift trade from rich countries to poor countries and from preferential trading areas to inter-continental trading partners. The second part of the essay derives the multinational production and export equations implied by the model and estimates these equations simultaneously by recognizing the cross-equation restrictions on parameters and error terms. It suggests that the elimination of tariffs would substantially increase U.S. exports, but would not affect U.S. production abroad. The second essay models general equilibrium product price effects using the CES monopolistic competition model in international trade. We then estimate the model and, mimicking computable general equilibrium (CGE) models, use the model to estimate the compensating variation associated with trade liberalization. We find gains from trade liberalization that are much larger than those usually reported. In addition, extensive specification testing is conducted to evaluate the performances of this model and its alternatives. The results point to the types of model specifications needed before the model can usefully be applied to policy questions. The third essay studies the properties of Canadian interest rates relative to those of U.S. In sharp contrast to the U.S. evidence, the conditional variances of Canadian macroeconomics variables are found to be insignificant predictors of term premia in the Canadian T-bill term structure. However, the conditional variances of U.S. macroeconomic variables are found to be important determinants of Canadian premia.

In this dissertation, I focus on studying three questions about international trade including the interactions between trade and immigration, how trade liberalization influences skill upgrading decisions and the linkages between health investment and trade openness. In the first chapter, I develop a two-country dynamic stochastic general equilibrium model featuring endogenous firm entry, heterogeneous firms and endogenous labor migration to study whether trade and immigration are substitutes or complements and investigate the macroeconomic consequences of low barriers to labor mobility with emphasizing the roles of the extensive margins of production and trade in shaping immigration dynamics. First, the model predicts that trade and immigration potentially act as substitutes, which is consistent with the derivation from the Heckscher-Ohlin model of trade. Second, high-skilled labor migration makes the labor-sending country worse off due to less output and firm entry, and changes in migration costs create asymmetric welfare effects on high-skilled and low-skilled households. Third, the firm entry channel provides new insights into immigration dynamics: (i) more firm establishments demand more immigrants, and (ii) inflows of immigrants induce firm entry and result in higher labor costs in the long run. The second chapter is a joint work with Castiel Chen Zhuang and Qiliang Chen. We observe that India’s average applied effective tariff declines by about 15 percentage points and exports to the Indian market by Chinese manufacturing firms increase a lot from 2004 to 2007, but the change in the average tariff in the rest of the world is nearly zero during the same period. Motivated by this fact, we examine the impact of an Asian trade agreement, APTA, on skill upgrading by Chinese manufacturers. First, we develop a general equilibrium model of trade with heterogeneous firms and endogenous export and employee training decisions to explain firm performance following trade liberalization. Second, we test the theoretical model based on general difference-in-differences estimations, showing that firms facing higher reductions in India’s tariffs increase investment in on-the-job training faster. The effects of trade openness on export participation and training spending of firms are the largest in the middle range of productivity, which is consistent to our model prediction. In the third chapter, my co-author, Qiliang Chen, and I study the interactive effects of trade openness and health investment. There is a positive correlation between trade and health outcomes, and increased exports or imports encourage more healthcare spending. However, there are only few theoretical studies addressing the questions that if trade integration is good for health and if health improvement encourages more trade. We develop a two- country dynamic stochastic general equilibrium model with heterogeneous firms, health capital accumulation and endogenous firm entry and labor supply to analyze what channels affect the interconnection between trade and health. Three main results emerge. First, there is positive association between trade openness and health investment. An increase in health investment boosts both the number of exporters and export values as health improvement stimulates economic growth and increases income. Trade openness increases healthcare spending and the stock of health capital because of the income and product variety effects. Second, the dynamic impacts of changes in aggregate productivity on key variables could be underestimated if workers’ health status and health investment decisions are neglected. Third, health investment could crowd out physical capital investment and new firm entrants.

My thesis consists of three chapters. The aim of the first two chapters is to investigate the linkages between trade and the cross-country comovement and volatility of GDP growth, while the last chapter is an independent study on how the optimal design of monetary policy depends on the share of labour- and capital-intensive sectors. The first chapter develops a framework to study the effects of international trade on GDP comovement. Using a standard trade-theoretical approach, I first show how the comovement between any pair of countries is linked to shocks affecting both the two countries bilaterally and all other countries. Secondly, I use a calibrated version of the model to assess the importance of the bilateral channel relative to the role of linkages with all other countries. The second chapter investigates whether and how openness to trade may affect macroeconomic volatility. While greater openness provides a powerful channel for transmission of foreign disturbances, it also lowers the exposure to domestic shocks. My co-authors and I show that as long as the volatility of trading partners and covariance of shocks across countries are not too large, trade can act as a channel for the diversification of country-specific shocks and in that way contribute to lower volatility. The third chapter examines what is the optimal measure of inflation in a two-sector economy with nominal frictions, where sectors differ in labour intensity. I find that a welfare-oriented central bank should follow more closely the developments in the less labour-intensive sector. The source of this bias is traced back to a greater sensitivity of the marginal product of labour in that sector, so that output dispersion caused by nominal rigidities generates higher efficiency losses where labour is relatively less abundant.

The term OC economic globalizationOCO has been discussed extensively in the popular press, by business executives and by policy-makers all over the world. While academic economists have made some excellent contributions to specific, technical aspects of economic globalization, there appears to be a need for economists to discuss the broader aspects of the issue in a more accessible manner. Failing this, the general debate will be informed only by the writings of non-economists. That is the motivation for this book, which is a collection of essays on various aspects of economic globalization in general, but with specific reference to Asia. Contents: Economic Globalization: Finance, Trade and Taxation: Economic Globalization and Small and Open Economies: Finance, Trade and Taxation; International Monetary and Financial Issues in East Asia: International Capital Flows and Regional Contagion: Boom and Bust in East Asia in the 1990s; Liquidity-Enhancing Measures and Monetary Cooperation in East Asia: Rationale and Progress; Choosing the Right Exchange Rate Regime for Small and Open Economies in East Asia; International Trade Issues in Asia: The Nexus Between Trade Liberalization and Poverty in Asia; India''s Decade-Long Trade Reforms: How Does It Compare with Its East Asian Neighbours? (with Rahul Sen); Singapore''s Drive to Form Cross-Regional Trade Pacts: Rationale and Implications (with Rahul Sen); International Trade in Infrastructural Services in East Asia: Telecommunications and Finance; International Tax Issues in Asia: Economic Globalization and Taxation: With Particular Reference to Southeast Asia (with Mukul Asher). Readership: Policy-makers, businessmen, professionals and others with an interest in international economic affairs and international economic policy."

I examine the dynamic effects of trade liberalization on wealth inequality and welfare. In the first essay, I develop a heterogeneous agent model with an incomplete asset market, small open economy with two production sectors, specific-factor trade model with costly-switching sector-specific labor and perfectly mobile capital across sector and border, and iceberg cost as the trade barrier. Trade liberalization, defined as the elimination of trade barrier, leads to the change in the relative prices, the demand and supply for each good, as well as the relative wages and factor allocations in each sector. Households maximize their lifetime value using the accumulated wealth as means of switching to the more productive sector. In the second essay, I perform counterfactual analyses using the calibrated model constructed in the first essay. Measured by the Gini coefficient of wealth, trade liberalization initially increases wealth inequality before tapering towards a more equitable wealth distribution in the long run, despite the increase in between-sector wage inequality. The counterfactual analysis demonstrates a peak increase in wealth inequality of 0.7% at 3 years after the policy implementation, but a 0.3% decrease in the long run. Comparing the steady states, trade liberalization leads to an average of 1.3% welfare improvement across all households, measured by the consumption equivalent variation. However, not all households benefit from the trade liberalization policy. In the third essay, I investigate the implication between the core and headline inflation in three aspects. First, while theories suggest the use of core inflation in forecasting total inflation as it represents the persistent components of the price level, I find from the data that core inflation is not necessarily a good forecasting measure in all countries. Second, I find the pass-through effect from total price level to core prices, suggesting the transmission from transitory components to persistent components of the price level. Third, I analyze the baseline Aoki (2001) model with sticky-price and flexible-price sectors. Although numerical result confirms the theoretical findings that core inflation targeting is the optimal monetary policy, the welfare loss resulting from the use of headline inflation as the target is small.