Trading goods and bads

Kevin Lewis

September 16, 2019

The Textbook Case for Industrial Policy: Theory Meets Data
Dominick Bartelme et al.
NBER Working Paper, August 2019

The textbook case for industrial policy is well understood. If some sectors are subject to external economies of scale, whereas others are not, a government should subsidize the first group of sectors at the expense of the second. The empirical relevance of this argument, however, remains unclear. In this paper we develop a strategy to estimate sector-level economies of scale and evaluate the gains from such policy interventions in an open economy. Our benchmark results point towards significant and heterogeneous economies of scale across manufacturing sectors, but only modest gains from industrial policy, below 1% of GDP on average. Though these gains can be larger in some of the alternative environments that we consider, they are always smaller than the gains from optimal trade policy.

Existential Risk and Growth
Leopold Aschenbrenner
Columbia University Working Paper, September 2019

Technological innovation can create or mitigate risks of catastrophes - such as nuclear war, extreme climate change, or powerful artificial intelligence run amok - that could imperil human civilization. What is the relationship between economic growth and these existential risks? In a model of endogenous and directed technical change, with moderate parameters, existential risk follows a Kuznets-style inverted U-shape. This suggests we could be living in a unique “time of perils,” having developed technologies advanced enough to threaten our permanent destruction, but not having grown wealthy enough yet to be willing to spend much on safety. Accelerating growth during this “time of perils” initially increases risk, but improves the chances of humanity’s survival in the long run. Conversely, even short-term stagnation could substantially curtail the future of humanity. Nevertheless, if the scale effect of existential risk is large and the returns to research diminish rapidly, it may be impossible to avert an eventual existential catastrophe.

Long‐distance effects of epidemics: Assessing the link between the 2014 West Africa Ebola outbreak and U.S. exports and employment
Deliana Kostova et al.
Health Economics, forthcoming

Although the economic consequences of epidemic outbreaks to affected areas are often well documented, little is known about how these might carry over into the economies of unaffected regions. In the absence of direct pathogen transmission, global trade is one mechanism through which geographically distant epidemics could reverberate to unaffected countries. This study explores the link between global public health events and U.S. economic outcomes by evaluating the role of the 2014 West Africa Ebola outbreak in U.S. exports and exports‐supported U.S. jobs, 2005-2016. Estimates were obtained using difference‐in‐differences models where sub‐Saharan Africa countries were assigned to treatment and comparison groups based on their Ebola transmission status, with controls for observed and unobserved time‐variant factors that may independently influence trends in trade. Multiple model specification checks were performed to ensure analytic robustness. The year of peak transmission, 2014, was estimated to result in $1.08 billion relative reduction in U.S. merchandise exports to Ebola‐affected countries, whereas estimated losses in exports‐supported U.S. jobs exceeded 1,200 in 2014 and 11,000 in 2015. These findings suggest that remote disruptions in health security might play a role in U.S. economic indicators, demonstrating the interconnectedness between global health and aspects of the global economy and informing the relevance of health security efforts.

The Impact of Socioeconomic and Cultural Differences on Online Trade
Daniel Elfenbein, Raymond Fisman & Brian McManus
NBER Working Paper, August 2019

We use U.S. eBay data to investigate how trade is influenced by differences in socioeconomic characteristics, tastes, and trust. States’ similarity in cultural characteristics (ethnicity, religious affiliations, and political behavior) is predictive of online trade; cultural similarity similarly predicts trade between finer (three-digit zip code) geographies. The culture-trade relationship is mediated in part by consumers’ tastes, and is stronger for transactions with sellers who lack extensive reputations or certification, suggesting that consumers infer seller trustworthiness from cultural similarity. There is no correlation between cultural similarity and buyer satisfaction, consistent with perceived differences in trustworthiness not being validated by actual transactions.

Putting Global Governance in its Place
Dani Rodrik
NBER Working Paper, August 2019

In a world economy that is highly integrated, most policies produce effects across the border. This is often believed to be an argument for greater global governance, but the logic requires scrutiny. There remains strong revealed demand for policy and institutional diversity among nations, rooted in differences in historical, cultural, or development trajectories. The canonical case for global governance is based on two set of circumstances. The first occurs when there is global public good (GPG) and the second under “beggar-thy-neighbor” (BTN) policies. However, the world economy is not a global commons, and virtually no economic policy has the nature of a global public good (or bad). And while there are some important BTN policies, much of our current discussions deal with policies that are not true BTNs. The policy failures that exist arise not from weaknesses of global governance, but from distortions of domestic governance. As a general rule, these domestic failures cannot be fixed through international agreements or multilateral cooperation. The paper closes by discussing an alternative model of global governance called “democracy-enhancing global governance.”

The Dark Side of Cooperation: International Organizations and Member Corruption
Emilie Hafner-Burton & Christina Schneider
International Studies Quarterly, forthcoming

Political corruption is rampant in - and destructive to - many parts of the world. A growing number of international organizations (IOs) claim to address the problem by encouraging good governance norms and rules, such as anti-corruption standards and practices. Whether membership in IOs dampens corruption, however, is unclear. Our central argument is that the characteristics of IO membership determine both whether corruption is tolerated and the extent to which formal anti-corruption rules effectively combat the problem. First, groups of corrupt states are reticent to enforce good governance norms or rules against other IO members, rendering punishment for corruption incredible. Second, leaders may witness the value of corruption to their IO peers and learn to act the same way. Using a variety of data sources and estimation strategies, including new data on IO anti-corruption mandates, we demonstrate that: (1) countries that participate in member-corrupted IOs are significantly more likely to engage in corruption themselves - and experience an increase in corruption over time - than are countries that participate in less corrupt IOs; and (2) this tolerance for corruption occurs even within IOs that have adopted formal anti-corruption mandates, rendering good governance rules largely cheap talk among organizations governed by corrupt principles.

The Impact of Brexit on UK Firms
Nicholas Bloom et al.
NBER Working Paper, September 2019

We use a major new survey of UK firms, the Decision Maker Panel, to assess the impact of the June 2016 Brexit referendum. We identify three key results. First, the UK’s decision to leave the EU has generated a large, broad and long-lasting increase in uncertainty. Second, anticipation of Brexit is estimated to have gradually reduced investment by about 11% over the three years following the June 2016 vote. This fall in investment took longer to occur than predicted at the time of the referendum, suggesting that the size and persistence of this uncertainty may have delayed firms’ response to the Brexit vote. Finally, the Brexit process is estimated to have reduced UK productivity by between 2% and 5% over the three years after the referendum. Much of this drop is from negative within-firm effects, in part because firms are committing several hours per week of top-management time to Brexit planning. We also find evidence for smaller negative between-firm effects as more productive, internationally exposed, firms have been more negatively impacted than less productive domestic firms.

Uncertainty-Induced Reallocations and Growth
Ravi Bansal et al.
NBER Working Paper, September 2019

Focusing on both micro and aggregate U.S. data, we show the existence of a significant link between aggregate uncertainty and reallocation of resources away from R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented capital forecasts lower medium-term growth. In a multi-sector production economy in which (i) growth is endogenously supported by risky R&D investments, and (ii) the representative agent is volatility-risk averse and has access to other safer technologies that do not support growth, uncertainty shocks have a first-order negative impact on medium-term growth and welfare.

Extended Dependence: Trade, Alliances, and Peace
Frederick Chen
Journal of Politics, forthcoming

The commercial peace theory maintains that trade fosters peace because trade makes conflict more costly. However, focusing on dyadic trade or overall trade integration, previous studies provide an inaccurate picture of the material incentives that states face in the event of military conflict. Some, but not all, third parties create economic costs for combatants. In this article, I develop the idea of Extended Dependence. I argue that trade with a potential target's allies promotes peace because those states may reduce trade with the challenger following military interventions, punish it by imposing economic sanctions, or undermine its ability to access alternative markets. Empirical analyses that cover the period 1951-2010 strongly support my arguments. Trade dependence on the prospective target or on the target's nonaggression-pact partners, however, does not yield a similar effect. This article advances our understanding of how economic linkages and security institutions can work together to diminish interstate conflict.

The Effects of Foreign Multinationals on Workers and Firms in the United States
Bradley Setzler & Felix Tintelnot
NBER Working Paper, August 2019

Governments go to great lengths to attract foreign multinational enterprises because these enterprises are thought to raise the wages paid to their employees (direct effects) and to improve outcomes at incumbent local firms (indirect effects). We construct the first U.S. employer-employee dataset with foreign ownership information from tax records to measure these direct and indirect effects. We find the average direct effect of a foreign multinational firm on its U.S. workers is a 7 percent increase in wages. This premium is larger for higher skilled workers and for the employees of firms from high GDP per capita countries. We leverage the past spatial clustering of foreign-owned firms by country of ownership to identify the indirect effects. An expansion in the foreign multinational share of commuting zone employment substantially increases the employment, value added, and - for higher earning workers - wages at local domestic-owned firms. Per job created by a foreign multinational, our estimates suggest annual gains of 16,000 USD to the aggregate wages of local incumbents, of which about two-thirds is due to indirect effects. We compare our findings to the value of subsidy deals received by foreign multinationals.

Shareholder Wealth Effects of Border Adjustment Taxation
Fabio Gaertner, Jeffrey Hoopes & Edward Maydew
Journal of Law and Economics, May 2019, Pages 215-249

Following 2 decades of discussion, the border adjustment tax (BAT) briefly emerged as part of proposed US corporate tax reform in early 2017. While heavily debated, little empirical evidence exists regarding the BAT. We take advantage of the period during which the BAT was under strong consideration to examine its effects on shareholder value. We find that high-importing firms (measured using industry, aggregate government industry data, and firm-level shipping-container data) suffer negative returns on days the tax had a greater likelihood of adoption. We also find that firms lobbying for the BAT experience positive returns over that same time period.

The Causes and Effects of Leaks in International Negotiations
Matthew Castle & Krzysztof Pelc
International Studies Quarterly, forthcoming

International negotiations are founded on secrecy. Yet, unauthorized leaks of negotiating documents have grown common. What are the incentives behind leaks, and what are their effects on bargaining between states? Specifically, are leaks offensive or defensive: are they intended to spur parties to make more ambitious commitments, or are they more often intended to claw back commitments made? We examine these questions in the context of trade negotiations, the recurring form of which affords us rare empirical traction on an otherwise elusive issue. We assemble the first dataset of its kind, covering 120 discrete leaks from 2006 to 2015. We find that leaks are indeed rising in number. Leaks are clustered around novel legal provisions and appear to be disproportionately defensive: they serve those actors intent on limiting commitments made. The European Union (EU) appears responsible for the majority of leaks occurring worldwide. Using party manifesto data to track changing ideological positions within the EU, we find that the occurrence of leaks correlates with opposition to economic liberalization within the average EU political party. Moreover, leaks appear effective in shifting public debate. We examine trade officials’ internal communications and media coverage in the wake of a specific leak of negotiations between Canada and the EU. A given negotiating text attracts more negative coverage when it is leaked than when the same text is officially released. In sum, political actors leak information strategically to mobilize domestic audiences toward their preferred negotiating outcome.

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