Borderline Goods
The imperial roots of global trade
Gunes Gokmen, Wessel Vermeulen & Pierre-Louis Vézina
Journal of Economic Growth, March 2020, Pages 87–145
Abstract:
Throughout history empires facilitated trade within their territories by building and securing trade and migration routes, and by imposing common norms, languages, religions, and legal systems, all of which led to the accumulation of imperial capital. In this paper, we collect novel data on the rise and fall of empires over the last 5000 years, construct a measure of accumulated imperial capital between countries, and estimate its relationship with trade patterns today. Our measure of imperial capital has a positive and significant effect on trade beyond potential historical legacies such as sharing a language, a religion, a legal system, or links via natural trade and invasion routes. This suggests a persistent and previously unexplored influence of long-gone empires on current trade.
Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens
Antonio Coppola et al.
NBER Working Paper, March 2020
Abstract:
Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their nationality in aggregate statistics. We associate the universe of traded securities with their issuer's ultimate parent and restate bilateral investment positions to better reflect the true financial linkages connecting countries around the world. We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly $600 billion, while China's official net creditor position to the rest of the world is overstated by about 50 percent. We additionally show how taking account of offshore issuance is important for our understanding of the currency composition of external liabilities, the nature of foreign direct investment, and the growth of financial globalization.
The Global Financial Resource Curse
Gianluca Benigno, Luca Fornaro & Martin Wolf
Federal Reserve Working Paper, February 2020
Abstract:
Since the late 1990s, the United States have received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods. This induces a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. We dub this effect the global financial resource curse. The model thus offers a new perspective on the consequences of financial globalization, and on the appropriate policy interventions to manage it.
The Impact of Economic Coercion on Public Opinion: The Case of US–China Currency Relations
Dimitar Gueorguiev, Daniel McDowell & David Steinberg
Journal of Conflict Resolution, forthcoming
Abstract:
In recent years, the United States has increasingly tried to change other governments’ economic policies by threatening to punish those countries if they do not change course. To better understand the political consequences of these tactics, this paper examines how external threats influence public support for policy change in targeted states. We consider three mechanisms through which economic coercion might alter public opinion: by changing individuals’ interests, by activating their national identities, and by providing them with new information about a policy’s distributive effects. To test these rival explanations, we focus on the case of China–US currency relations. Using data from a survey experiment of Chinese internet users, we find strong support for the informational updating theory. Our evidence suggests that economic coercion can reduce support for policy change because it leads individuals to update their beliefs about who wins and loses from economic policy changes.
Bad Trade: The Loss of Variety
John Morgan, Justin Tumlinson & Felix Várdy
University of California Working Paper, April 2020
Abstract:
We reconsider Krugman's (1979) model of trade. We show that the initiation of trade leaves both countries strictly worse off. The reason is that the gains from trade are second-order, while the associated welfare loss from a drop in domestic varieties is first-order. Hence, even if free and costless trade is better than autarky, a bit of trade is worse than either of the two. In fact, for asymmetric countries, we show that the low-cost country may be better off in autarky than under free trade.
Trump’s New Trade Tariffs: A Response to Voters’ Demands?
Ignacio Bartesaghi & Natalia Melgar
American Journal of Economics and Sociology, January 2020, Pages 245-263
Abstract:
President Trump has dramatically changed U.S. trade policy through the adoption of steep tariffs. We argue in this article that even when there are significant geopolitical reasons, Trump’s actions on trade are a response to internal demands resonant with a long history of protectionism. We provide clear evidence of the impacts of social demographics on U.S. trade policy and show that individuals from capital‐intense regions with high educational attainment tend to support protectionism.
Why is the Mass Public Not More Supportive of Free Trade? Evidence from the United States
David Bearce & Samantha Moya
International Studies Quarterly, forthcoming
Abstract:
This article explores why citizens favor protection despite the economic case for free trade. It argues that due to a lack of training and in an environment of stable prices, many individuals are not aware of the consumption benefits. Even when they are aware, citizens tend to discount these benefits due to media coverage of the employment costs and loss aversion. The article presents survey evidence from an American sample, showing that a belief in lost jobs is more strongly associated with trade preferences than a belief in lower prices. Given that the former pushes citizens toward less favorable trade attitudes, it also presents evidence from a priming experiment, testing if attitudes can be moved in a more favorable direction with positive information. Factual information about the consumer benefits has no effect, but information about the employment effects shifts attitudes positively. In the present environment, it thus appears more effective to prime pro-trade attitudes by appealing to jobs than to prices.
Trade Policy is Back in the News: Will Voters Care?
Alexandra Guisinger
The Forum: A Journal of Applied Research in Contemporary Politics, March 2020
Abstract:
During the 2016 election cycle, both Donald Trump and Bernie Sanders received roars of approval from supporters when discussing plans to roll back decades of trade liberalization and more specifically North American Free Trade Agreement (NAFTA). In the past, protectionist politicians who failed to follow through on promises paid little electoral cost, arguably because NAFTA received relatively little media or political attention after it was passed. Now in the spotlight, could trade policies cost President Trump voters in 2020? I argue that the highly partisan nature of today’s trade discourse – a new dimension for trade opinion – creates obstacles for electoral accountability because preferences follow rather than drive partisanship. Drawing on previous research and a 2017 survey experiment fielded before and after Trump’s trip to China, I show that the ability of trade messaging to cross party lines has weakened and that Trump’s followers strongly react to information cues from Trump but fail to react to information based accusations of flip flopping on his most prominent trade related promise: increased protection against China. The ability of politicians to shape preferences rather than respond to the will of constituents calls into question the electoral connection on critical government policies even when they become salient.
The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?
Paul Bergin & Giancarlo Corsetti
NBER Working Paper, April 2020
Abstract:
In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation -- contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates.
Heterogeneous Globalization: Offshoring and Reorganization
Andrew Bernard et al.
NBER Working Paper, March 2020
Abstract:
This paper exploits a unique offshoring survey to show that firms continue domestic production of the same goods they offshore to low-wage countries. This shift towards “produced-good imports” coincides with a reallocation of labor from physical production to innovation and technology occupations, and an increase in domestically-produced varieties' unit values. These responses suggest an additional, firm-level benefit of trade liberalization: the opportunity to offshore production of low-quality varieties, thereby freeing up domestic resources for the development, production, and marketing of higher-quality varieties. Firms’ reactions also motivate a new offshoring measure – produced-good imports – that is readily observed in most firm-level datasets.
Innovation in the Global Firm
Kamran Bilir & Eduardo Morales
Journal of Political Economy, April 2020, Pages 1566-1625
Abstract:
How global are the gains from innovation? When firms operate plants in multiple countries, technological improvements developed in one location may be shared with foreign sites for efficiency gain. We develop a model that accounts for such transfer and apply it to measure returns to R&D investment for a panel of US multinationals. Our estimates indicate that innovation increases performance at firm locations beyond the innovating site: the median multinational firm realizes abroad 20% of the return to its US R&D investment, revealing a spatial disconnect between the costs and potential gains of policies that encourage multinationals’ US innovation.
International Trade and Social Connectedness
Michael Bailey et al.
NBER Working Paper, April 2020
Abstract:
We use anonymized data from Facebook to construct a new measure of the pairwise social connectedness between 180 countries and 332 European regions. We find that two countries trade more with each other when they are more socially connected and when they share social connections with a similar set of other countries. The social connections that determine trade in each product are those between the regions where the product is produced in the exporting country and those where it is used in the importing country. Once we control for social connectedness, the estimated effect of geographic distance on trade declines substantially, and the effect of country borders disappears. Our findings suggest that social connectedness increases trade by reducing information asymmetries and by providing a substitute for both trust and formal mechanisms of contract enforcement. We also present evidence against omitted variables and reverse causality as alternative explanations for the observed relationships between social connectedness and trade flows.
Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations
Craig Doidge, Andrew Karolyi & René Stulz
NBER Working Paper, April 2020
Abstract:
For the last two decades, non-US firms have lower valuations than similar US firms. We study the evolution of this valuation gap to assess whether financial markets are less integrated after the 2008 global financial crisis (GFC). The valuation gap for firms from developed markets increases by 31% after the GFC – a reversal in financial globalization – while the gap for firms from emerging markets (excluding China) stays stable. There is no evidence of greater segmentation for non-US firms cross-listed on major US exchanges and the typical valuation premium of such firms relative to domestic counterparts stays unchanged. However, the number of such firms shrinks sharply, so that the importance of US cross-listings as a mechanism for market integration diminishes.