Paper Abstract for Tri-continental International Trade Policy Forum

1. Speaker: Keith Head 
Paper title:  Moving Parts: When more restrictive content rules backfire

Abstract:

Free trade agreements have rules of origin (ROO) that determine whether imports are eligible for tariff preferences. While necessary to prevent goods made outside the area from evading the normal tariffs, such rules may also have protectionist intent. A case in point is  the 2020 revision to the North American Free Trade Agreement known as the USMCA. The acknowledged purpose of the USMCA was to promote production within the region, especially in the auto industry, where the main changes were introduced.   But rules of origin impede cost minimization, making the region less attractive for assembly. In a continuum-of-inputs model a ROO Laffer curve arises naturally:  stricter content requirements initially expand production, but  contract it when set a too high levels.  We adapt the model to the case of auto parts, focusing on  the two most high-value inputs: engines and transmissions.  Estimates of the sourcing decision point to the roles of cost differences and geographic impediments as push and pull forces. We simulate increases in regional content requirements to determine whether it is empirically likely that the USMCA will put the regional industry on the wrong side of the Laffer curve.

2. Speaker: Hongsong Zhang
Paper title: Input Prices, Productivity, and Trade Dynamics: Long-Run Effects of Liberalization on Chinese Paint Manufacturers

Abstract:

We develop a dynamic structural model to analyze the impact of input tariff liberalization on input prices, trading decisions, productivity, and firm performance. While input tariff liberalization directly affects input price benefits of importing, its impact on trade participation generates indirect benefits through additional channels, such as productivity improvements and complementarity between importing and exporting. To disentangle these effects, our model separately measures importing's effect on intermediate input prices and productivity. We apply the model to examine the reaction of Chinese paint manufacturers to input tariff cuts related to China's accession to the World Trade Organization (WTO). We find a mild short-term effect of input tariff liberalization in the industry. However, the effect is amplified in the long run by induced trade participation, resulting in even higher aggregate productivity and lower input prices.

3. Speaker: Zhiyuan Li    
Paper title: Market Penetration and Trade Liberalization: Micro Evidence through Trademarks

Abstract:

This paper applies the framework from Arkolakis (2010) to study Chinese firms' behavior on market penetration. In this framework other than prices, firms endogenously choose how much efforts they spend on market penetration. The model predicts that as a country's output tariff reduces, more firms start exporting and previous exporters export more triggered by their better position in the labor market, as domestic firms' outputs reduce driven by import competition. All firms adjust their marketing efforts, measured the trademarks that they hold domestically and overseas. We take Chinese firms' overseas trademarks to establish the effect that market penetration takes in channeling trade liberalization to international trade. Making use of China's accession to the WTO in 2001, we provide clear empirical evidence for the model. Chinese firms in sectors with larger import tariff reductions apply for more foreign trademarks.

4. Speaker: April Jie Cai
Paper title: Trade, Immigration, Intergenerational Occupational Mobility and Inequality of Opportunity

Abstract:

We combine spatial economics and the intergenerational career choice into a multi-sector, multi-occupation and multi-region general equilibrium model. We then calibrates the model using China Household Survey 2005 and inter-regional trade data. We are the first one to calibrate the intergenerational transmission of skill endowment across occupations, which is the root of intergenerational income correlation and hinders intergenerational occupation mobility. In counterfactual experiments, we find that education reform that give all children same expected talent distribution generates the largest intergenerational occupation mobility, lowest intergenerational income correlation and income inequality. Trade liberalization alone reduces the intergenerational mobility across occupations and regions, increase intergenerational income elasticity and income inequality. A sufficiently strong inter-regional immigration reform alone increases cross region mobility but reduces intergenerational occupational mobility, because some offsprings that choose to switch occupations within region in the Baseline now immigrate to other regions but stay in parents’ occupation to match with more productive firms. Overall income inequality and intergenerational income elasticity are smaller under immigration reform.

5. Speaker: Chenying Yang 
Paper title:  Location Choices of Multi-plant Oligopolists: Theory and Evidence from the Cement Industry

Abstract:

I develop a quantitative model of multi-plant oligopolists where each firm decides where to locate the set of plants and how to serve each market, taking into account cannibalization across its own plants as well as competition with others. In contrast to canonical trade models with multinational firms where neither spatial interdependency of decisions nor oligopoly is considered, I advance the existing research by allowing for interdependent entry, oligopolistic rivalry, and variable markups. Despite having a high-dimensional discrete choice problem, I provide an estimation toolkit for the model in a three-step procedure, and present simulation-based evidence to show that neglecting interdependencies among plant locations of a multi-plant firm introduces quantitatively relevant differences in estimation. I use the model to quantify responses of cement firms to changes of carbon pricing in North America, and highlight the welfare implications of having multi-plant production. Results indicate that a carbon tax of $50/tCO2 on emissions from fuel combustion in Canada will generate carbon leakage to the US which offsets 18% of the domestic emissions abatement, and also exacerbate the market distortion in the presence of multi-plant oligopolists. Neglecting the spatial interdependency of multi-plant firms overpredicts the carbon leakage rate by 2%.

6. Speaker: Kailin Gao
Paper title:  Signaling and Quality Upgrading: Evidence from E-commerce Certification in China

Abstract:

E-commerce certification, as a signaling technology, distinguishes high-quality firms from low-quality ones. It reduces information frictions and incentivizes firms to upgrade their quality. This paper studies the effect of certification on quality upgrading both econometrically and using a novel dynamic structural model. To this end, we collected data from Alibaba.com, the world’s leading global B2B (Business-to-Business) platform, which launched its certification policy “Gold Supplier" in 2000. Combining the Alibaba.com data with the 2000-2015 Chinese Customs Data, we show that firm export quality increases by 1% after becoming a Gold Supplier and the effect is greater for smaller firms. Using the Simulated Method of Moments (SMM), we estimate a dynamic structural model that embeds information asymmetry, signaling and quality upgrading. The counterfactual analysis shows that a 30% reduction in the signaling cost increases firm investment and total export by 10% respectively. Moreover, when the signaling cost increases to a prohibitively high level, the economy moves from a partially separating equilibrium to a pooling equilibrium.

7. Speaker: Natalie Chen
Paper title:  Markups, quality, and trade costs

Abstract:

This paper examines how trade costs induced by geographic distance or bilateral tariffs impact the markups of firm-level exports differentiated by quality. We rely on a unique data set that combines Argentinean firm-level wine exports with experts' wine ratings as a measure of quality. We find that exporters price discriminate across destinations by raising their markups in more distant markets, and by lowering them in high-tariff countries. However, these effects are heterogeneous and weaker for higher quality exports. We show that these empirical patterns can be predicted by trade models featuring demand functions more convex than log-concave, but less than superconvex. Our results demonstrate that the variation in firm-level export unit values across markets is not only driven by quality differences but also by markup variation conditional on quality.

8. Speaker: Lerong Li
Paper title:  Trade Policy Shocks and Consumer Prices

Abstract:

How do trade policy shocks affect consumer prices? By constructing a novel dataset with both US import prices and barcode-level consumer prices, I examine the pass-through of import prices into consumer prices and its heterogeneity across consumers. I find that the pass-through of import prices to consumer prices is incomplete: a 1% increase in import prices leads to a 0.3 to 0.4% increase in consumer prices. Moreover, the pass-through is heterogeneous: it is higher for consumers with lower income and in markets with higher retail industry competition. To explain these findings, I build on Burstein and Gopinath(2014) to model the retail margin with variable markups and extend it to allow for consumer price heterogeneity. I show that the differential pass-through rates across consumers are largely driven by the differences in expenditure shares across varieties with heterogeneous pass-through rates. Lastly, a quantitative exercise shows that if the U.S. impose a 25% tariffs on all consumer goods from China, the consumer prices of affected product category would increase 1-2% on average.

9. Speaker: Dennis Novy
Paper title:  Import Liberalization as Export Destruction? Evidence from the United States

Abstract:

How does import protection affect export performance? In trade models with scale economies, import liberalization can reduce an industry’s exports by cutting domestic production. We find this export destruction mechanism reduced US export growth following the normalization of trade relations with China (PNTR). But there was also an offsetting boost to exports from lower input costs. We use our empirical results to calibrate the strength of scale economies in a quantitative trade model. Counterfactual analysis implies that while PNTR increased aggregate US exports relative to GDP, exports declined in the most exposed industries because of the export destruction effect. On aggregate, the US and China both gain from PNTR, but the gains are larger for China.
 

10. Speaker: Guijun Lin
Paper title:  Special and Differential Treatment of Developing Countries: Fundamental Issues and Direction of Reform

Abstract:

Special and Differentail Treatment （SDT） is a subject of intense debates in the history of the multilateral trading system. The debates cover a wide range of issues such as definition of developing countries, “graduation”, effectiveness of SDT provisions, unity of developing countries and technical assistance.After Donald Trump became the U.S. President in 2017, the U.S. unilaterally requested the large and high-income developing countries to forego blanket SDT benefits. A direct motivation of the U.S. proposal is to pave the way to engage in liberalization negotiations with these “advanced” developing countries on a reciprocal basis in the future. The US proposal would have several negative effects on the multilateral trade system, including undermining the unity of developing countries, changing the direction of the SDT reform set out by the Doha Ministerial Conference in 2001, terminating the long-time practice by each GATT/WTO member to self-designate its developing country status and landing the large and high-income developing countries as net losers of the game. Today, the SDT reform is trapped in a deadlock. To keep the WTO wheels moving, the paper suggests that China take a differentiated position from that of the traditional developing countires and, act innovatively and constructively. In particular, China should make the fairness the core of its proposals. The paper argues that the varied types of Trade Facilitation Agreement model that respects self-dertermination of developing countries may represent a promising direction. More specifically, these proposals should be needs-oriented and implementation modes be designed flexibly in accordance with the features of agreements, with technical assistance being linked to capacity building.