Alejandro Cuñat

Can Comparative Advantage Explain the Growth of US Trade

We present a dynamic comparative advantage model in which moderate reductions in trade costs can generate sizable increases in trade volumes over time. A fall in trade costs has two effects on the volume of trade. First, for given factor endowments, it raises the degree of specialization of countries, leading to a larger volume of trade in the short run. Second, it raises the factor price of each country’s abundant production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. A simulation exercise shows that a fall in trade costs over time produces a non-linear increase in the trade share of output as in the data. Even when elasticities of substitution are not particularly high, moderate reductions in trade costs lead to large trade volumes over time. We present further empirical evidence in favour of our approach, documenting the link between trade liberalization and the cross-country divergence of investment shares.

Heckscher-Ohlin Business Cycles

This paper introduces Heckscher-Ohlin trade features into a two-country DSGE model, and studies how productivity shocks propagate through trade in goods. In comparison with standard models, (i) transitory shocks to productivity have permanent effects on country-level aggregate variables; (ii) aggregate productivity shocks have relevant effects on the sectoral allocation of production factors; (iii) the business cycle properties of our model are broadly compatible with the empirical evidence; (iv) under complete asset markets, the international correlation of consumption is lower than that of output.

Growth and Interdependence under Complete Specialization

We construct and numerically solve a dynamic Heckscher-Ohlin model in which the initial distribution of production factors in the world makes world-wide factor price equalization impossible, and leads countries to group in two diversification cones. We study the dynamics of income components and factor prices. Our results suggest that the Ramsey model under complete specialization (CS) overcomes several shortcomings of its autarchy and factor-price-equalization (FPE) counterparts. In comparison with the autarchy model, it can account for important cross-sectional differences in income per capita growth rates without generating too large rental-rate differentials across countries. Furthermore, the CS model generates cross-country convergence in growth rates and levels along the transition towards the steady-state. Finally, the CS model converges to FPE in the long run. Unlike the autarchy model, FPE does not necessarily yield convergence in levels; however, international trade is beneficial to both countries in terms of welfare.

Job Creation in Italy: Geography, Technology and Infrastructures

The recent dismal performance of overall job creation has left Italy, as of the end of the 90s, with very low participation and high unemployment rates. Moreover, Italy exhibits a large regional dispersion of those variables when compared to similar European Union economies. The present paper, using Census data on employment from 784 Local Labor Systems (LLSs), covering the whole Italian territory, analyzes job creation and its determinants for the 1981-1996 period. Local characteristics (input-output linkages, pool of local workers, technological spillovers), technological diffusion and infrastructure provision affect productivity in each LLS and, lacking wage flexibility, they determine differences in job creation across them. We analyze those characteristics across Italian LLSs and regions, developing measures for each of them and then we estimate their impact on job creation. The sizable (0.8% a year) difference in employment growth between the Northeast and the Southwest, as well as the overall differences across LLSs are explained up to one third by those characteristics. In particular, strong local input-output linkages across industries and fast growing transport infrastructures are shown to be important determinants of job creation. The southern Italian economy emerges in this analysis as rather differentiated within itself. Some parts of the Southeast show current characteristics compatible with good job creation, particularly if helped by investment in structures. Most of the Southwest, on the other hand, is still lacking local characteristics for self-sustained job creation and has been strongly penalized by the cut in public investment in the 90s.

Tariffs, Trade and Productivity: A Quantitative Evaluation of Heterogeneous Firm Models

We examine the quantitative predictions of heterogeneous firm models a la Melitz (2003) in the context of the Canada - US Free Trade Agreement (CUSFTA) of 1989. We compute predicted increases in trade flows and measured productivity across a range of standard models and compare them to the post-CUSFTA increases observed in the data. Our results point to a fundamental problem which most models we analyse face: predicted increases in measured productivity are too low by an order of magnitude relative to predicted increases in trade flows. Thus, most models are inherently incapable of simultaneously matching trade and productivity reactions to freer trade, raising doubts about the accuracy of the quantitative predictions of a large number of work-horse models in the literature. Using a multi-product firm extension of our baseline model as an example, we show that allowing for within-firm productivity increases has the potential to reconcile model predictions with the data.

Offshoring and Skill-Upgrading in French Manufacturing: A Heckscher-Ohlin-Melitz View

We present a factor-proportions trade model in which heterogeneous firms can offshore intermediate inputs subject to fixed offshoring costs. In the skill-abundant country, high-productivity firms offshore a larger range of labor-intensive inputs to the labor-abundant countries than low-productivity firms. Differently from the traditional versions of factor-proportions trade theory, Heckscher-Ohlin forces operate at the within-industry level, leading to endogenous variation in skill intensity across firms that is positively correlated with firm productivity. Using French firm-level data for the years 1996 to 2007, we provide empirical support for the factor proportions channel through which offshoring to labor-abundant countries affects the firm-level skill intensities of French manufacturers.

The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis

We evaluate manufacturing firms’ responses to changes in the real exchange rate (RER) using detailed firm-level data for a large set of countries for the period 2001-2010. We uncover the following stylized facts: In export-oriented emerging Asia, real depreciations are associated with faster growth of firm-level productivity, higher sales and cash-flow, and higher probabilities to engage in R&D and export. We find negative effects for firms in other emerging economies, which are relatively more import dependent, and no significant effects for firms in industrialized economies. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect demand, borrowingconstraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on productivity growth across regions into these channels. We estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements and conduct several robustness analyses. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric. JEL Codes: F, O.

Specialization Patterns and the Factor Bias of Technology

Development accounting exercises based on an aggregate production function find technology is biased in favor of a countrys abundant production factors. We provide an explanation for this finding based on the Heckscher-Ohlin model. Countries trade and specialize in the industries that use intensively the production factors they are abundantly endowed with. For given factor endowment ratios, this implies smaller international differences in factor price ratios than under autarky. Thus, when measuring the factor bias of technology with the same aggregate production function for all countries, they appear to have an abundant-factor bias in their technologies.