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In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327–377] stated that the answer to the fundamental question “Why has world trade grown?” remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [Helpman, E., 1987. Imperfect competition and international trade: Evidence from fourteen industrial countries. Journal of the Japanese and International Economies 1 (1) 62–81] and Hummels and Levinsohn (1995) [Hummels, D., Levinsohn, J., 1995. Monopolistic competition and international trade: Reconsidering the evidence. Quarterly Journal of Economics 110 (3) 799–836] is increased similarity of countries’ incomes. The purpose of this study is to disentangle from one another (and from income growth) the relative effects of transport-cost reductions, tariff liberalization, and income convergence on the growth of world trade among several OECD countries between the late 1950s and the late 1980s. In the context of the model, the empirical results suggest that income growth explains about 67%, tariff-rate reductions about 25%, transport-cost declines about 8%, and income convergence virtually none of the average world trade growth of our post World War II sample.

This paper examines the role of infrastructure in a bilateral trade model with transport costs. Transport costs are assumed to depend inversely on the level of infrastructure. The accumulation of infrastructure, however, is subject to a resource cost technology which includes both fixed and variable components. It is shown that, depending on geography and endowments, equilibria with or without infrastructure can be obtained. For pairs of countries for which investment in infrastructure is optimal, the model predicts a positive relationship between the level of infrastructure and the volume of trade. The paper offers empirical evidence, utilising an augmented gravity model and data from European countries, which strongly supports this prediction of the theory.

The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.

This paper studies the impact of trade liberalization when monopolistically competitive and oligopolistic firms coexist in the same market. The model is characterized by a group of multi-product firms which behave strategically and take their impact on market aggregates into account (e.g. the average price, and total output) and by a monopolistically competitive fringe. This difference in behavior leads large firms to charge higher markups. Conditions are derived for the coexistence of both types of firms: heterogeneity in production efficiency, captured by economies of scope for large firms, appears as a necessary condition for them to coexist at equilibrium. Turning to international trade, free trade increases social welfare, as both large and small firms become more competitive. However, when only large firms are able to cover the fixed costs to export, bilateral trade liberalization fosters the exit of small firms, and increases product variety, but it also lowers consumer surplus through a higher average price. Social welfare increases under linear or isoelastic demand but is generally ambiguous.

This paper extends the structural gravity model to incorporate scale effects and exchange rate passthrough. Bilateral scale effects in cross-border trade are inferred from the difference in distance elasticities between cross border and inter-provincial bilateral trade in a majority of 28 goods and services sectors for Canada's provinces. Bilateral-specific relationship investment is a possible explanation. Incomplete passthrough of large exchange rate changes from 1997 to 2007, amplified by scale effects, produces direct effects on bilateral trade for 12 of 19 goods sectors but none of 9 services sectors.

This paper tests an implication of the hypothesis that hegemons provide increased global stability and thus promote international commerce. Specifically, we measure the influence of naval power projections on global trade during the latter 19th and early 20th centuries, a time of relative peace and robust commercial activity. We use archival data on the navies of Britain, France, the United States and Germany, capturing longitudinal measures of ship deployment, tonnage, and ship personnel. First we develop an empirical naval arms race model, and demonstrate that the navies of Britain and France in particular responded rigorously to each other. We then use our estimates of naval power projected around the world by Britain and France to measure their effects on bilateral trade in a panel-data gravity model. Results indicate that while navies had some positive impact on their own nation's trade, other nations' trade suffered. Our results show that rather than bolster globalization, the first global arms race damaged commercial interests and lowered trade potential around the world.

This paper infers the terms of trade effects of free trade agreements (FTAs) implemented in the 1990s. We estimate large FTA effects on bilateral trade volume in 2 digit manufacturing goods from 1990–2002, using panel data gravity methods to resolve two way causality. The terms of trade changes implied by these volume effects are deduced for 40 countries plus a rest-of-the-world aggregate using an endowments general equilibrium model. Some countries gain over 5% of real manufacturing income, some lose less than 0.3%. Global efficiency of manufactures trade rises 0.9% based on a distance function measure of iceberg melting.

In addition to the theory of comparative advantage and the theory of economies of scale with product differentiation, this paper formalizes a third reason of trade, namely the differences in nonrenewable resource endowments of two trading parties. The paper also examines the division of the gains in trade in a dynamic bargaining framework which requires consistent action by both bargaining parties. A contribution of this paper is to provide a special case under which dynamic bargaining results in efficient resource utilization in bilateral trade.

In this paper I quantitatively address the role of trade barriers in explaining why prices of services relative to tradables are positively correlated with levels of development across countries. I argue that trade barriers play a crucial role in shaping the cross-country pattern of specialization across many tradable goods. I construct a multi-country, general equilibrium model of trade and derive tractable predictions that show how specialization affects relative prices. I calibrate the model to match the patterns of prices, levels of development, and bilateral trade across 103 countries. Through counterfactuals I find that removing trade barriers eliminates more than half of the gap in the relative price of services between rich and poor countries with only a minimal systematic effect on the absolute price of tradables.

The proliferation of preferential trade agreements has resulted in a complex system of preferences in which market access conditions are often discriminatory. In this paper we investigate how market access conditions have evolved between 2000 and 2009, and how this has affected international trade. Our results show that the proliferation of preferential access has increased bilateral trade not only due to lower tariffs but also because preferential access often resulted in higher preferential margins vis-a-vis foreign competitors. The results also indicate that the evolution of the system of preferences has been disadvantageous for countries that did not actively engage in forming new trade agreements.

A large class of models with CES utility and iceberg trade costs are now known to generate isomorphic “gravity equations.” Economic interpretations of these gravity equations vary in terms of two basic elements: the exporter's “mass” variable and the elasticity of trade with respect to true ad valorem “trade costs.” In this paper, we offer three potential contributions. First, we formulate and estimate a structural gravity equation based on the standard Krugman model of monopolistic competition and increasing returns. In the context of this model, a key parameter, the elasticity of substitution in consumption (σ), can be estimated precisely – even without observable true ad valorem trade-cost measures – using exporter's population and observable variables that influence trade costs. Second, in the empirical context of the well-known McCallum Canadian–U.S. “border puzzle,” our approach – allowing estimation of σ – yields considerably different general equilibrium comparative static trade-flow and economic welfare effects than those in an Armington endowment economy and assumed values of σ. Moreover, our predicted trade flows and GDPs are highly correlated with their respective observed values in the case of bilaterally symmetric or asymmetric Canadian–U.S. border effects. Third, a Monte Carlo analysis confirms unbiased and precise estimates of all coefficients, the elasticity of substitution, and comparative statics using our approach.

This paper models interstate trade patterns of U.S. states using a partial equilibrium trade model. The theoretical model deviates from the existing gravity literature by employing trade estimations in ratio form, with the ratio of imports from different sources, rather than the level of bilateral trade between two locations. Using this specification, together with considering the production side through technology levels, the elasticity of substitution across goods, the elasticity of substitution across varieties of each good, and the good specific elasticity of distance measures are all identified in the empirical analysis, which is not the case in gravity type studies. The ratio transformation also effectively eliminates any proportional distribution margin, international trade, or overstatement of distance measures from the theoretical trade equation. Compared to empirical international trade literature, the elasticity of substitution is estimated to be lower, while the elasticity of distance is estimated to be higher intranationally.

This paper reexamines the GATT/WTO membership efiect on bilateral trade ∞ows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Together, these methods provide an estimation framework that is robust to misspeciflcation biases, allows general forms of heterogeneous treatment efiects, and addresses potential hidden selection biases. This is in contrast to most conventional parametric studies on this issue. Our results suggest large GATT/WTO trade-promoting efiects, robust to various restricted matching criteria, alternative indicators for GATT/WTO involvement, different matching methodologies, non-random incidence of positive trade ∞ows, and inclusion of multilateral resistance terms.

This paper develops an approach for quantifying the importance of different sources of comparative advantage for country welfare. To explain patterns of specialization, I present a multi-country trade model that extends Eaton and Kortum (2002) to predict industry trade ows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments and institutional strengths. I estimate the model parameters on a large dataset of bilateral trade flows, presenting results from both a baseline OLS approach, as well as a simulated method of moments (SMM) procedure to account for the prevalence of zero trade fl ows in the data. I apply the model to explore various quantitative questions, in particular how much distance, Ricardian productivity, factor endowments, and institutional conditions each matter for country welfare in the global trade equilibrium. I also illustrate the shift in industry composition and the accompanying welfare gains in policy experiments where a country raises its factor endowments or improves the quality of its institutions.

International trade increasingly involves trade in goods being produced in fragmentation arrangements across countries, with each country specializing in different stages of a production sequence. This paper examines empirically whether pairs of countries with more bilateral production fragmentation arrangements tend to have more correlated business cycles. Using cross-country data from 30 countries, we find that bilateral production fragmentation has a positive effect while the standard bilateral trade intensity indicator has a negative impact on business-cycle comovement. We also find that the positive effect of trade in complements (captured by bilateral production fragmentation) dominates the negative effect of trade in substitutes (explained by bilateral trade intensity), resulting in an overall positive impact of trade. Hence, bilateral production fragmentation plays a key role underlying the positive response of business-cycle comovement to increases in trade.

A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.

A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high-quality goods.

In this paper, I show that the increasing similarity in GDPs among OECD country pairs leads to higher bilateral trade to GDP ratios. This finding provides some support for the prediction of Helpman [J. Jpn. Int. Econ. 1 (1987) 62], whose model explains intra-industry trade that is prevalent among developed countries. I also show that Helpman's prediction is rejected for non-OECD countries, among which intra-industry trade is not critical. This result contrasts with the findings of Hummels–Levinsohn [Q. J. Econ. 110 (1995) 799], which play an important role in the debate about whether or not New Trade Theory explains international trade patterns at the country level.

This paper analyzes dynamic bilateral trade liberalization between two large countries. Trade liberalization causes the importable sector of each country to shrink and thereby causes reallocation of labor between sectors. Assuming that each moving worker must pay a fixed adjustment cost, a country has to bear a total adjustment cost which is linear in the amount of moving workers. We derive the most-cooperative, self-enforcing trade liberalization path, and find that in general trade liberalization is gradual. We also find that trade adjustment assistance that compensates workers for relocation out of the protected sector will accelerate the pace of trade liberalization.

This paper assesses whether, how, and to what extent U.S. exports are sensitive to national differences in patent rights. I estimate bilateral trade equations that account for trade distortions related to patent rights using data on state-to-country manufacturing exports in 1992. I find that weak patent rights are a barrier to U.S. exports, but only to countries that pose a strong threat-of-imitation (e.g. China). The stronger patent rights required under the WTO agreement increase U.S. exports to these high-threat markets. Alternatively, strengthening patent rights in countries that pose a weak threat-of-imitation reinforces monopoly power and reduces U.S. exports to these markets.

This paper investigates the impact of restricting bilateral trade imbalances in a three country, three good model. Bilateral trade balances matter because, in the Nash equilibrium, each country will impose tariffs on countries with whom they have bilateral deficits or promote trade with countries with whom they have bilateral surpluses. All countries lose from a Nash country-bashing war. Each country loses from the unilateral elimination of its bilateral imbalances. But a country can gain from a bilateral agreement with its deficit partner provided that country has a surplus with a country devoted to free trade.

The paper investigates the role of exchange rate regimes on the process of trade adjustment. A two-period model of a duopoly with consumer switching costs is constructed. The perception of economic agents regarding exchange rate stability is explicitly introduced. The model is tested using bilateral trade prices data for flows inside and outside the European Monetary System (EMS). Results suggest that a system of pegged rates, like the EMS, although helpful, is not necessary to achieve a smooth process of trade adjustment. Rather than the type of exchange rate regime, it appears that misalignment is the crucial factor.

This paper considers optimal commercial policy for a trading economy which departs from neo-classical characteristics only in that a minimum-wage constraint gives rise to unemployment. Although for a flexible-wage fully employed economy the Baldwin envelope yields dominant domestic production-cum-trade possibilities, unilateral imposition of an optimum tariff is shown not necessarily to be optimal commercial policy for the minimum-wage economy. Rather, there exists an envelope, derived from foreigners' trade indifference and attained via bilateral trade policy, which dominates the Baldwin envelope when the optimum tariff is zero (as Brecher has shown it can be for a minimum-wage economy), and can still yield superior production-cum-trade possibilities when the optimum tariff is non-zero.

After arguing for a computational approach to the theory of international trade the paper presents an algorithm for solving a generalized Ricardian two-country model. The algorithm focuses on the ‘critical exchange ratios’ at which the pattern of specialization changes. In the absence of barriers to trade there is one exchange ratio (defined as the value of one country's labor in terms of the other country's labor) at which production of a good moves from one country to the other. With barriers to trade there are two critical ratios for each good, between which it is not traded. Taking the critical ratios in sequence the trade balance can be calculated as a discontinuous function of the exchange rate; where the balance equals zero (or some given transfer) the problem is solved. The method works with arbitrary demand functions and can handle intermediate products.

This paper tests for real exchange rate risk effects on U.S. bilateral trade flows during the floating period using several new as well as previously used risk measures. Significant negative effects occur in five of six U.S. import flows, and in two of six U.S. export flows, with one export flow showing a significant positive effect. These results are consistent with several previous findings for aggregate U.S. trade. Two risk measures using the forward exchange rate and assuming a time-varying risk premium provide marginally more significant results than the others.

In this paper we prove rigorously V.K. Ramaswami's proposition that in bilateral trade between two countries sharing the same technology represented by a strictly concave production function with positive marginal productivities of capital and labor, the policy-active country can gain more by importing monopsonistically the relatively scarce factor than by placing monopolistic restrictions on the export of the relatively abundant one. We show that what matters is not the location, but the constraints within which maximization takes place, hence the monopsonistic results can be replicated by appropriate export arrangements. The analysis is extended to consider the welfare implications to the policy-passive country.