Foreign Costs

Kevin Lewis

July 21, 2021

(Mis)Attributing the Causes of American Job Loss: The Consequences of Getting it Wrong
Diana Mutz
Public Opinion Quarterly, forthcoming


What difference does it make if people attribute the loss of manufacturing jobs to trade as opposed to automation? Attributions of responsibility for social problems help shape mass opinion. In this study I use two experiments, including one nationally representative probability survey-experiment, to examine the consequences of attributing job loss to trade versus automation. Findings suggest that as of 2018, public discourse attributes manufacturing job loss in America primarily to trade. When I experimentally manipulate attributions of responsibility for job loss, I find important consequences for levels of mass support for international trade, the extent of negative emotions arising from job loss, and beliefs that trade restrictions and tariffs can bring back manufacturing jobs. Finally, job loss that is attributed to trade -- even when it is a single job loss -- also serves as a threat to the national ingroup, which triggers a heightened sense of national superiority among white Americans.

Technological Change and the International System
Helen Milner & Sondre Ulvund Solstad
World Politics, July 2021, Pages 545-589


Do world politics affect the adoption of new technology? States overwhelmingly rely on technology invented abroad, and their differential intensity of technology use accounts for many of their differences in economic development. Much of the literature on technology adoption focuses on domestic conditions. The authors argue instead that the structure of the international system is critical because it affects the level of competition among states, which in turn affects leaders' willingness to enact policies that speed technology adoption. Countries adopt new technology as they seek to avoid being vulnerable to attack or coercion by other countries. By systematically examining states' adoption of technology over the past two hundred years, the authors find that countries adopt new technologies faster when the international system is less concentrated, that changes in systemic concentration have a temporally causal effect on technology adoption, and that government policies to promote technology adoption are related to concerns about rising international competition. A competitive international system is an important incentive for technological change and may underlie global technology waves.

Ancestry and international trade
Irene Fensore, Stefan Legge & Lukas Schmid
Journal of Comparative Economics, forthcoming


This paper examines whether the relatedness of populations across the world shapes international trade flows. Using data on common ancestry for 172 countries covering more than 99% of global trade, we document that country pairs with weaker ancestral relationships are less likely to trade with each other (extensive margin) and, if they do trade, they exchange fewer goods and smaller volumes (intensive margin). The effect of ancestry is robust to a vast array of micro-geographic control variables and mitigated, yet still sizable and significant, when controlling for other measures of cultural distance as well as for current migrant stocks.

Trading Places, Trading Platforms: The Geography of Trade Policy Realignment
Bryan Schonfeld
International Organization, forthcoming


What motivates politicians and political parties to shift their positioning on an issue? Focusing on the case of trade policy in countries with advanced economies and plurality electoral systems, I argue that the relative positioning of parties on an existing issue can change even when the preferences of the key actors (voters and politicians) are held constant, and even when party leaders continue to represent the same constituencies. In advanced plurality countries, college-educated voters support free trade, and high-density constituencies are predominantly represented by Left incumbents. As college-educated workers migrate to high-density constituencies in pursuit of higher wages, Left incumbents increasingly embrace free trade, while Right incumbents take more protectionist positions. I provide empirical support for several observable implications of my theory.

Size, Trade, Technology and the Division of Labor
Nuno Limão & Yang Xu
NBER Working Paper, June 2021


We model the implications of the classical ideas that larger markets allow for a finer division of labor and this division feeds back into larger market size. Market size affects specialization due to firm-level increasing returns to scale arising from fixed costs of adopting intermediate-intensive technologies. The impacts are magnified in general equilibrium by an endogenous multiplier -- due to input-output linkages in a roundabout structure -- and a selection effect due to heterogeneous fundamental productivity and entry costs. Market size expansions imply (i) larger real income gains than under fixed specialization; (ii) an increase in the aggregate variable cost share for intermediates and a decrease for labor; (iii) increased concentration; (iv) increased average productivity for survivors; and (v) an increase in the intermediate trade share. We derive similar results for intermediate productivity improvements. The effects in (ii)-(v) are absent in a similar model with exogenous specialization. In a calibration to U.S. manufacturing in 1987-2007 we isolate trade and intermediate productivity shocks, quantify their effects. Trade cost reductions increased effective market size by 7 log points (lp) and generated (i) a real income gain 1.4 times higher than under exogenous specialization; (ii) increases in the intermediate share in production and trade of 2 lp and a reduction in the labor share of value added of similar magnitude. Two counterfactuals highlight the importance of industrial and trade policy. First, a tax that induces firms to specialize increases real income; so the initial equilibrium is inefficient. Second, an increase in trade costs of 16 lp -- similar to the recent trade war -- reduces market size and real income substantially: almost half way to trade autarky.

Labor Market Volatility, Gender, and Trade Preferences
Ryan Brutger & Alexandra Guisinger
Journal of Experimental Political Science, forthcoming


What explains divides in the public's support for trade protection? Traditional economic arguments primarily focus on individuals' expectations for increased or decreased wages in the face of greater economic openness, yet studies testing such wage-based concerns identify a different divide as well: even after accounting for wage effects, women are typically more supportive of trade protection. We argue that trade-induced employment volatility and the resulting concerns for employment stability are overlooked factors that help explain the gender divide in attitudes. Due to both structural discrimination and societal norms, we theorize that working women are more responsive to the threat of trade-related employment instability than male counterparts. Using an experiment fielded on national samples in the USA and Canada, we find that most respondents have weak reactions to volatility, but volatility has a significant effect on women who are the most vulnerable to trade's disruptive effects - those working in import-competing industries and those with limited education.

Geopolitics and International Trade Infrastructure
Sebastian Galiani, José Manuel Paz y Miño & Gustavo Torrens
NBER Working Paper, July 2021


We develop a simple (incumbent versus entrant) strategic deterrence model to study the economic and geopolitical interactions underlying international trade-related infrastructure projects such as the Panama Canal. We study the incentives for global geopolitical players to support allied satellite countries where these projects are or could potentially be built. We show that even if no effective competitor emerges, the appearance of a geopolitical challenger capable of credibly supporting the entrant has a pro-competition economic effect which benefits consumers all over the world.

Financial Dollarization in Emerging Markets: Efficient Risk Sharing or Prescription for Disaster?
Lawrence Christiano, Hüsnü Dalgic & Armen Nurbekyan
NBER Working Paper, July 2021


This paper pushes back against two views about the effects of dollarization. First, there is a view that the dollar is a device by which rich countries provide business cycle insurance to emerging market (EME) countries. We find that the dollar is important for risk sharing, but the evidence suggests that it is primarily a device to shift business cycle risk across different people within individual EMEs and within rich countries rather than across countries. Second, there is a widespread view that dollarization raises the risk of systemic banking and other crises. Although we identify sources of fragility in some aspects of dollarization, the common view that financial dollarization is a source of fragility is over-stated. Our insurance view about financial dollarization and the lack of risks to financial stability emerges from a study of a large cross-country dataset, as well as case studies for Peru and Armenia. We develop a simple model which formalizes the insurance view, which is consistent with the key cross-country facts on interest rate differentials, deposit dollarization and exchange rate depreciations in recessions.

Risk Is Relative: Heterogeneous Responses to Institutional Risks for Foreign Investment
Quintin Beazer & Daniel Blake
International Studies Quarterly, forthcoming


Are economic actors equally sensitive to institutional conditions? While existing research recognizes that institutions can have varying effects on actors' interests, the implicit assumption is that actors are homogeneous in how sensitive they are to their institutional environment. We investigate this assumption in the context of foreign direct investment, arguing that actors from countries with weaker institutions will be less affected by information about host country institutional conditions - both good and bad. We test this argument using survey data from a diverse group of managers-in-training at an international business school. We find that when asked to evaluate a potential foreign investment location, respondents from developing countries are significantly less sensitive to information about the host country's courts than their counterparts from developed economies. In contrast, we find that economic actors from both developed and developing countries respond similarly to information about the stability of economic policies. The findings suggest that sensitivity to the risks and safeguards of certain institutional conditions vary systematically across actors, depending on both the home environment to which economic actors have been exposed and the type of host institution.

Delayed Creative Destruction: How Uncertainty Shapes Corporate Assets
Murillo Campello, Gaurav Kankanhalli & Hyunseob Kim
NBER Working Paper, June 2021


We show how uncertainty shapes the asset allocation, composition, productivity, and value of capital-intensive firms. We do so using detailed, near-universal data on shipping firms' new orders, secondary-market transactions, and demolition of ships. Firms curtail both the acquisition and disposal of vessels in response to heightened uncertainty. The mechanism operates primarily through cuts in new ship orders and demolition of older ships - decisions that are costlier to reverse vis-à-vis deals in the used ship market. These dynamics are more pronounced when secondary ship markets are illiquid, as firms face stronger incentives to delay their decisions. The rise of Somali pirate attacks in 2009-2011 is used as a shock to well-defined shipping sectors to corroborate our findings. Critically, uncertainty prompts firms to concentrate their fleets into narrower, less productive portfolios, leading to value losses. Our work is novel in showing that uncertainty hampers "creative destruction," slowing both the adoption of innovation embodied in new capital and the disposal of old capital.

How Do Third Parties Affect Compliance in the Trade Regime?
Jeffrey Kucik & Lauren Peritz
Journal of Politics, July 2021, Pages 1184-1189


A core insight of the literature on dispute settlement at the World Trade Organization (WTO) is that third party countries help enforce the organization's multilateral objectives, including the fundamental principle of nondiscrimination. Little is known, however, about when countries comply with WTO rulings and whether these bystander states play a role. We introduce new data on compliance, measured as whether losing countries make tangible domestic reforms to bring policy in line with WTO rulings. We show that compliance is significantly less likely in disputes with more third parties. Using a variety of estimation techniques, including controlling for nonrandom selection into legal rulings, we demonstrate a robust correlation between third party participation and noncompliance. Our findings highlight a risk of stringent enforcement and suggest that compliance problems threaten to undercut the operation of the multilateral trade regime.

Does too much finance suppress a country's participation in the global value chains?
Songlin Zeng et al.
Applied Economics Letters, forthcoming


Using a dynamic panel threshold model, we find a nonlinear effect of financial development on participation in the global value chains for 92 countries. The effect is positive below a threshold and turns negative above it. We provide evidence supporting our explanation that when a country's financial system develops to a certain level, it serves foreign buyers by engaging more in outward foreign direct investments instead of enhancing its participation in the global value chains.


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