David Hummels

The Nature and Growth of Vertical Specialization in World Trade

Dramatic changes are occurring in the nature of international trade. Production processes increasingly involve a sequential, vertical trading chain stretching across many countries, with each country specializing in particular stages of a goods production sequence. We document a key aspect of these vertical linkages--the use of imported inputs in producing goods that are exported -- which we call vertical specialization. Using input-output tables from the OECD and emerging market countries we estimate that vertical specialization accounts for up to 30 percent of world exports, and has grown as much as 40 percent in the last twenty-five years. The key insight about why vertical specialization has grown so much lies with the fact that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods-in-process cross multiple borders. Hence, even small reductions in tariffs and transport costs can lead to extensive vertical specialization, large trade growth, and large gains from trade. We formally illustrate these points by developing an extension of the Dornbusch-Fischer-Samuelson ricardian trade model.

The Variety and Quality of a Nation's Exports

Large economies export more in absolute terms than do small economies. We use data on shipments by 126 exporting countries to 59 importing countries in 5,000 product categories to answer the question: How? Do big economies export larger quantities of each good (the intensive margin), a wider set of goods (the extensive margin), or higher-quality goods? We find that the extensive margin accounts for around 60 percent of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. We compare these findings to some workhorse trade models. Models with Armington national product differentiation have no extensive margin, and incorrectly predict lower prices for the exports of larger economies. Models with Krugman firm-level product differentiation do feature a prominent extensive margin, but overpredict the rate at which variety responds to exporter size. Models with quality differentiation, meanwhile, can match the price facts. Finally, models with fixed costs of exporting to a given market might explain the tendency of larger economies to export a given product to more countries.

Toward a Geography of Trade Costs

What are the barriers that separate nations? While recent work provides intriguing clues, we have remarkably little concrete evidence as to the nature, size, and shape of barriers. This paper offers direct and indirect evidence on trade barriers, moving us toward a comprehensive geography of trade costs. There are three main contributions. One, we provide detailed data on freight rates for a number of importers. Rates vary substantially over exporters, and aggregate expenditures on freight are at the low end of the observed range. This suggests import choices are made so as to minimize transportation costs. Two, we estimate the technological relationship between freight rates and distance and use this to interpret the trade barriers equivalents of common trade barrier proxies taken from the literature. The calculation reveals implausibly large barriers. Three, we use a multi-sector model of trade to isolate channels through which trade barriers affect trade volumes. The model motivates an estimation technique that delivers direct estimates of substitution elasticities. This allows a complete characterization of the trade costs implied by trade flows and a partition of those costs into three components: explicitly measured costs (tariffs and freight), costs associated with common proxy variables, and costs that are implied but unmeasured. Acknowledgments: Thanks for the gracious provision of data go to Jon Haveman, Rob Feenstra, Azita Amjadi and the ALADI secretariat. Thanks for helpful suggestions on previous drafts go to seminar participants at the Universities of Chicago, Michigan, and Texas, Boston University, NBER and the 4th Annual EIIT Conference at Purdue University. Finally, Julia Grebelsky and Dawn Conner provided outstanding research assistance. This research was funded by a grant from the University of Chicago’s Graduate School of Business.

Shipping the Good Apples Out? An Empirical Confirmation of the Alchian‐Allen Conjecture

Alchian and Allen show that a per unit transactions cost lowers the relative price of, and raises the relative demand for, high‐quality goods. We extend their theory, deriving a relationship between per unit and ad valorem trade costs and the quality composition of trade. Detailed international trade data for many importers and exporters are used to test these predictions. Within a narrowly defined commodity classification, exporters charge destination‐varying prices that covary positively with shipping costs and negatively with tariffs. These results provide a clear rejection of the iceberg assumption on transportation costs and a strong confirmation of the classical Alchian‐Allen hypothesis. We show that these results cannot be explained by monopoly pricing‐to‐market behavior.

Gender effects in laboratory public goods contribution : Do individuals put their money where their mouth is?

Abstract Recent work by Carol Gilligan posits that females are more cooperative and community minded than males. We use a series of laboratory experiments to test for gender effects in individual contribution rates to a public good. Each member of a same sex group of four was given the opportunity to contribute his/her endowment to a group fund for a series of six rounds. We test for gender effects in contribution rates with a high and low group fund multiplier and with and without preplay interaction. We found significant gender, group fund multiplier and period effects and interaction between the preplay communication and the multiplier. Counter to Gilligans hypothesis, males contributed at higher rates than females.

Are Matched Partner Trade Statistics a Usable Measure of Transportation Costs

Data on transportation costs are difficult to obtain. In the absence of good data, many researchers have turned to indirect measures of transportation costs constructed using matched partner c.i.f./f.o.b. ratios from IMF and UN data. We investigate whether these data are usable, by comparing their levels and variation to directly measured transport costs for the US and New Zealand. We find that IMF c.i.f./f.o.b. ratios are badly error-ridden in levels, and contain no useful information for time-series or cross-commodity variation. However, the IMF data do appear to reveal some meaningful cross-exporter variation that might be usefully exploited by researchers.

Trade Elasticity Parameters for a Computable General Equilibrium Model

Computable general equilibrium (CGE) models of international trade typically rely on econometrically estimated trade elasticities as model inputs. These elasticities vary by as much as an order of magnitude and there is no consensus on which elasticities to use. We review the literature estimating trade elasticities, focusing on several key considerations. What are the identifying assumptions used to separate supply and demand parameters? What is the nature of the shock to prices employed in the econometrics? And what is the time horizon over which trade responds to this shock? This discussion ranges from older reduced form approaches that use time-series variation in prices, to more recent work that identifies demand elasticities from trade costs or by using instruments in cross-section or panel data, and finally to prominent applications that separately identify supply and demand parameters in the absence of instruments. We also discuss recent theoretical developments from the literature on heterogeneous firms that complicate the interpretation of all these parameter estimates. Finally, we briefly survey a literature on structural estimation and link this to recent attempts to incorporate such theories in CGE applications. By elucidating the differences and similarities in these approaches we hope to guide the CGE practitioner in choosing elasticity estimates. We favor elasticities taken from econometric exercises that employ identifying assumptions and exploit shocks that are similar in nature to those imposed in the model experiment.

Infrastructure’s Role in Lowering Asia’s Trade Costs

Contents:ForewordMasahiro Kawai1. Infrastructures Role in Lowering Asias Trade Costs Douglas H. Brooks2. Trends in Asian Trade: Implications for Transport Infrastructure and Trade Costs David Hummels3. Trade Infrastructure and Trade Costs: A Study of Select Asian Ports Jon Haveman, Adina Ardelean and Christopher Thornberg4. Empirical Estimates of Transport Costs: Options for Enhancing Asias Trade Prabir De5. Port Competitiveness: A Case Study of Semarang and Surabaya, Indonesia Arianto A. Patunru, Nanda Nurridzki and Rivayani6. Infrastructure and trade costs in Malaysia: the importance of FDI and exports Siew Yean Tham, Evelyn Devadason and Loke Wai Heng7. Infrastructure Development in a Fast Growing Economy - The Peoples Republic of China Liqiang Ma and Jinkang Zhang8. Trade Transportation Costs in South Asia: An Empirical Investigation Prabir De

Alternative Hypotheses and the Volume of Trade: Evidence on the Extent of Specialization

In this paper, we provide alternative hypotheses against which to evaluate the trade volume predictions of complete specialization models, which include monopolistic competition. This allows us to identify which model predictions are substantive and which empirical regularities are surprising. There are four main insights. First, the model implies that consumers highly value variety, importing all goods that are produced. Trade flow data shows that importers purchase a very small fraction of available varieties. Second, the model predicts multilateral trade volumes that are much larger than we observe or can explain with barriers of reasonable size. Third, the use of a welfare-based measure of model fit indicates that the model implies enormous unrealized gains from trade. In each instance, the data suggest that the simple model considerably overstates either the extent of specialization (the degree to which goods are differentiated) or the degree to which consumers value that differentiation. Fourth, we demonstrate that the gravity equation (the most celebrated prediction of complete specialization models) has no power to distinguish the null hypothesis that production is completely specialization from an alternative that production is determined by factor endowments and incompletely specialized. A consequence is that stylized facts about trade costs associated with national borders and distance can be explained by a model with no trade barriers.

Asia and Global Production Networks—Implications for Trade, Incomes and Economic Vulnerability

This timely book deploys new tools and measures to understand how global production networks change the nature of global economic interdependence, and how that in turn changes our understanding of which policies are appropriate in this new environment. Bringing to bear an array of the latest methods and data to study global value chains, this unique book assesses the evolution of global value chains at the firm level, and how this affects competitiveness in Asia.