Edward J. Balistreri

The Performance of the Heckscher-Ohlin-Vanek Model in Predicting Endogenous Policy Forces at the Individual Level

This study tests the hypothesis that agents base their opinions about trade liberalization on the distribution effects as predicted by the Heckscher-Ohlin-Vanek (HOV) model. The HOV model is utilized to derive the probable effect of a liberalization move on the returns to different Canadian occupations. The predicted effect is then compared with the opinions that Canadians with known occupations held about the proposed Canadian-U.S. Free Trade Agreement of 1988. It is found that these agents took positions that were generally consistent with the prediction from the HOV model.

Structural estimation and solution of international trade models with heterogeneous firms

We present an empirical implementation of a general-equilibrium model of international trade with heterogeneous manufacturing firms. The theory underlying our model is consistent with Melitz (2003). A nonlinear structural estimation procedure identifies a set of core parameters and unobserved firm-level trade frictions that best fit the geographic pattern of trade. Our estimation model is consistent with the specified general equilibrium model, and we conduct general equilibrium counterfactual analyses to illustrate model responses. We first assess the economic effects of reductions in measured tariffs. Taking the simple-average welfare change across regions the Melitz structure indicates welfare gains from liberalization that are four times larger than in a standard trade policy simulation. Furthermore, when we compare the economic impact of tariff reductions with reductions in estimated fixed trade costs we find that policy measures affecting the fixed costs are of greater importance than tariff barriers.

A Discussion on Armington Trade Substitution Elasticities

Applied partial and general equilibrium models used to examine trade policy are almost universally sensitive to trade elasticities. Indeed, the Armington elasticity, the degree of substitution between domestic and imported goods, is a key behavioral parameter that drives the quantitative, and sometimes the qualitative, results that policymakers use. While standard transparent approaches to econometric estimation of these elasticities have been offered for the last 30 years, the estimates are viewed as too small by many trade economists. A few robust findings emerge from the econometric literature: (1) more disaggregate analyses find higher elasticities, (2) long-run estimates are higher than short-run estimates, and (3) time series analyses generally find lower elasticities relative to cross-sectional studies. We offer simulation results to illustrate the sensitivity of general equilibrium models to Armington elasticites. We conclude with remarks on the current challenges that remain in determining these important parameters.

Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms

This chapter considers alternatives to the Armington formulation of international trade found in most computable general equilibrium (CGE) models. International trade structures consistent with the monopolistic competition models suggested by Krugman (1980) and Melitz (2003) are presented in a computational setting. The Melitz structure of heterogeneous firms is particularly appealing given its consistency with micro-level findings on firm sizes and export behavior. We broaden the accessibility of these advanced trade theories for CGE modelers, and strengthen the link between contemporary CGE analysis and the broader trade community. Small-scale examples of all three theories (Armington, Krugman and Melitz) are introduced under a unified treatment. This is helpful in translating the advanced theories into an environment that is more familiar to CGE modelers. It is also helpful in showing how the different approaches affect outcomes, in a relatively transparent setting. Moving to an applied setting, we offer our approach to calibration and computation of models that include the Melitz heterogeneous firms structure. Our applications include an analysis of economic integration and subglobal climate policy in a model calibrated to the Global Trade Analysis Project (GTAP) data. We do find that the heterogeneous firms structure matters for conclusions drawn from empirical CGE analysis. In our analysis of economic integration we find endogenous entry leading to important variety effects. We also find important productivity effects related to the competitive selection of more productive firms. In our examination of subglobal climate policy we see substantial trade diversion in the Melitz structure. This exacerbates the problem of carbon leakage and impacts the emissions yields from carbon-based tariffs.

Trade and welfare: does industrial organization matter?

Many contemporary theoretic studies of trade over geography reduce to an examination of constant-elasticity reactions to changes in iceberg trade costs. These impacts are readily analyzed in simple constant-returns models based on the Armington (1969) assumption of regionally differentiated goods. Following the line of reasoning suggested by Arkolakis et al. (2008) one can reach the surprising conclusion that industrial organization does not matter. In the present paper, we show that this finding is fragile, and with a minor elaboration of their model, the rich industrial-organization features of the popular Melitz (2003) model do, in fact, generate important differences for trade and welfare.

The Gravity Model: An Illustration of Structural Estimation as Calibration

Dawkins, Srinivasan, and Whalley (“Calibration,”Handbook of Econometrics, 2001) propose that estimation is calibration. We illustrate their point by examining a leading econometric application in the study of international and interregional trade by Anderson and van Wincoop (“Gravity with Gravitas: A Solution to the Border Puzzle,”American Economic Review, 2003). We replicate the econometric process and show it to be a calibration of a general equilibrium model. Our approach offers unique insights into structural estimation, and we highlight the importance of traditional calibration considerations when one uses econometric techniques to calibrate a model for comparative policy analysis. (JEL F10, C13, C60)

Oil and Petroleum Product Armington Elasticities: A New-Geography-Of-Trade Approach to Estimation

Exploiting the structural developments suggested by the geography-of-trade literature, we estimate the elasticity of substitution across regional varieties for six crude grades and seven refined products using fixed-effects gravity regressions. We use unique data, compiled by Al-Qahtani (2008), that include global coverage of bilateral trade and transport costs for the crude grades and refined products. We find that the point estimates of elasticities of substitution across import varieties exceed those commonly reported in the literature and those adopted in simulation analysis. Our estimates indicate that there may be far less hysteresis in the pattern of petroleum trade than previously forecast.

Estibration: An Illustration of Structural Estimation As Calibration

Christina Dawkins, T.N. Srinivasan, and John Whalley (2001) propose that estimation is calibration. We illustrate their point by examining a recent econometric study by James E. Anderson and Eric van Wincoop (2003). We replicate the econometric process, and show it to be a calibration of a general equilibrium model. Our approach offers unique insights into structural estimation, and we highlight the importance of traditional calibration considerations when one uses econometric techniques to calibrate a model for comparative policy analysis.

Services liberalization in preferential trade arrangements : the case of Kenya

Despite the fact that many modern preferential trade agreements include commitments to foreign investors in services, the literature does not contain a modeling framework to analyze these commitments. In this paper we fill that void by developing a computable general equilibrium model of Kenya with monopolistic competition, foreign direct investment in services and Dixit-Stiglitz endogenous productivity effects. We use this model to assess preferential commitments by Kenya to foreign services providers. We show that there is an imperfect competition analogy to trade diversion in goods, whereby preferential commitments in services could be immizerising. Sensitivity analysis shows that losses are more likely the more technologically advanced are the excluded regions relative to the partner region, and, very importantly, the greater the rent capture on initial barriers in services. So an agreement with the technologically rich European Union is both worth more to Kenya and is more likely to be welfare increasing than an agreement with its less technologically rich African partners. From our systematic sensitivity analysis, in which the model is executed 30,000 times, and results are reported as confidence intervals of the sample distributions, we find that there is only a two percent chance that a services agreement with the Africa region would be immizerising for Kenya, but an agreement with the EU should produce gains with probability one.

Reducing Trade Costs in East Africa : Deep Regional Integration and Multilateral Action

There is substantial evidence that with the progressive global decline in tariffs over several decades, trade costs are a more significant barrier to trade than tariffs, especially in Sub-Saharan Africa. This paper decomposes trade costs into three categories: costs that can be lowered by trade facilitation, nontariff barriers, and the costs of business services. The paper develops a 10-region, 18-sector, global trade model that includes Kenya, Tanzania, Uganda, and Rwanda of the East African Customs Union. The analysis finds that deep integration in the East African Customs Union that lowers these trade costs results in significant gains for the four countries, especially from improved trade facilitation. Extending the lowering of nontariff barriers and services liberalization multilaterally would increase the gains between two and seven times, depending on the country. that the analysis also finds that reducing nondiscriminatory services barriers in Kenya and Tanzania would increase welfare even more than multilateral reduction of discriminatory services barriers. The paper is innovative both conceptually and empirically. It contains foreign direct investment in services and is the first paper to numerically assess liberalization of barriers against domestic and multinational service providers in a multi-sector, multi-region, applied general equilibrium model. The paper uses new databases of the ad valorem equivalents of barriers in services and the time in trade costs. Both databases are shown to be important to the results.