Pravin Krishna

Foreign Lobbies and Us Trade Policy

In popular discussion, much has been made of the susceptibility of government policies to lobbying by foreignersthe general presumption being that this is harmful to the home economy. However, in a trade policy context this may not be the case. If the policy outcome absent any foreign lobbying is characterized by welfare-reducing trade barriers, foreign lobbying may reduce such barriers and possibly raise welfare. Using a new data set on foreign political activity in the United States, this paper investigates this question empirically. Tariffs and nontariff barriers are both found to be negatively related with foreign lobbying activity.

On necessarily welfare-enhancing free trade areas

Abstract The well-known Kemp–Vanek–Ohyama–Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union – whether final or intermediate – be allowed to be traded freely. The proportion of domestic value added in final goods does not enter as a criterion in the rules of origin.

Trade liberalization and labor demand elasticities: evidence from Turkey

Abstract In the recent debate over the impact of trade reform on factor markets, it has been argued that trade liberalization will lead to an increase in labor-demand elasticities — thus placing labor markets under increased pressure. Using Turkish plant-level data spanning the course of a dramatic trade liberalization, we test this idea. However, we are unable to find any empirical support for this supposed theoretical link: in most of the industries we consider, we cannot reject the hypothesis of no relationship between trade openness and labor-demand elasticities.

Are regional trading partners natural

A central statement of the theory of natural trading partners is that preferential trading with regional trading partners is less likely to be trade diverting and therefore geographically proximate partners are to be considered “natural” partners for preferential arrangements. This paper examines this question empirically. The analytical framework involves a general equilibrium model of preferential trade and an econometric model with tight links to this theory. This framework is used to implement tests of the natural trading partners hypothesis using U.S. trade data for the years 1964–95: Welfare changes that would result from preferential tariff reductions by the United States against various trading partners are first estimated, and correlations with bilateral “distance” measures (with and without controls for income levels) are then examined. Since the argument for “natural” trading partners is based on the greater likelihood of geographically proximate countries to be more significant trading partners, correlations between the welfare change estimates and bilateral trade volume are examined as well. Both geographic proximity and trade volume are found to have no effect. Thus this paper is unable to find any support for the natural trading partners theory in U.S. data.

Trade Policy, Income Risk, and Welfare

This paper studies empirically the relationship between trade policy and individual income risk faced by workers, and uses the estimates of this empirical analysis to evaluate the welfare effect of trade reform. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, we find that trade policy changes have a significant short run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

The Factor Content of Bilateral Trade:an Empirical Test

The factor proportions model of international trade is one of the most influential theories in international economics. Its central standing in this field has appropriately prompted, particularly recently, intense empirical scrutiny. A substantial and growing body of empirical work has tested the predictions of the theory on the net factor content of a country’s trade with the rest of the world, usually under the maintained assumptions of factor price equalization and identical homothetic preferences across trading countries (or under quite specific relaxations of these assumptions). In contrast, this paper uses OECD production and trade data to test the restrictions (derived by Helpman) on the factor content of trade flows that hold even under nonequalization of factor prices and in the absence of any assumptions regarding consumer preferences. In a further contrast with most of the existing literature, which has focused on the factor content of a country’s multilateral trade, our tests concern bilateral trade flows, thereby enabling the examination of trade flows between only a subset of countries for which quality data (relatively speaking) are available. We find that restrictions implied by the theory cannot be rejected for the vast majority of country pairs considered in our analysis.

A unification of second best results in international trade

Abstract The received wisdom from the theory of second best is that the presence of distortions in some sectors of the economy would in general require intervention in other sectors as well. This paper offers a simple set of propositions which help unify the results of numerous papers in the international trade literature involving the theory of second best, many of which appear to contradict this theory. The propositions identify how, in optimization problems in economics, pre-imposed quantitative restrictions enter differently from price restrictions. The implications of this difference for the conduct of second-best optimum policies are also analyzed. In particular, the paper identifies and discusses the conditions under which the presence of distortions in some sectors does not undermine the case for non-intervention in other markets.

Trade Liberalization, Firm Heterogeneity, and Wages: New Evidence from Matched Employer-Employee Data

In this paper, the authors use a linked employer-employee database from Brazil to examine the impact of trade reform on the wages of workers employed at heterogeneous firms. The analysis of the data at the firm-level confirms earlier findings of a differential positive effect of trade liberalization on the average wages at exporting firms relative to non-exporting firms. However, this analysis of average firm-level wages is incomplete along several dimensions. First, it cannot fully account for the impact of a change in trade barriers on workforce composition especially in terms of unobservable (time-invariant) characteristics of workers (innate ability) and any additional productivity that obtains in the context of employment in the specific firm (match specific ability). Furthermore, the firm-level analysis is undertaken under the assumption that the assignment of workers to firms is random. This ignores the sorting of worker into firms and leads to a bias in estimates of the differential impact of trade on workers at exporting firms relative to non-exporting firms. Using detailed information on worker and firm characteristics to control for compositional effects and using firm-worker match specific effects to account for the endogenous mobility of workers, the authors find the differential effect of trade openness on wages in exporting firms relative to domestic firms to be insignificant. Consistent with the models of Helpman, Itskhoki, and Redding (2010) and Davidson, Matusz and Schevchenko (2008), they also find that the workforce composition improves systematically in exporting firms in terms of innate (time invariant) worker ability and in terms the quality of the worker-firm matches.

Necessarily welfare-enhancing customs unions with industrialization constraints: The Cooper-Massell-Johnson-Bhagwati conjecture

Abstract This paper demonstrates that welfare-improving Customs Unions can be guaranteed even if we are constrained by specific non-economic government objectives, thus proving the Cooper-Massell-Johnson-Bhagwati conjecture. We consider a ‘production’ objective here, where a member country requires the output of a particular sector (e.g. a target level of industrialization) to be maintained at the pre-union level, and show that welfare-improving Customs Unions can still be achieved. It is straightforward to show that this result can be extended to other non-economic objectives as well.

Trade and Inequality in India

To study the effects of the dramatic economic reforms undertaken in India in the early 1990s on inequality, this paper examines Theil inequality as well as other inequality measures constructed using Indian household expenditure survey data from 1988-2005. Overall inequality shows some variation over the period, falling between 1988 and 1994, rising between 1994 and 2000, but falling again by 2005. The evolution of inequality in the post reform period is thus non-monotonic. A similar inequality trend is seen within most Indian states over this time period. Finally, the change in inequality across households within states is found to be uncorrelated with the change in state-level measures of tariff and non-tariff protection.