Russell H. Hillberry

A Decomposition of North American Trade Growth since NAFTA

Total U.S. trade with NAFTA partners has increased 78 percent in real terms since 1993-U.S. Mexico trade alone is up 141 percent-compared to a 43 percent increase in U.S. trade with the rest of the world. In this article we compare the nature of U.S. trade growth with Canada and Mexico to growth in U.S. trade with non NAFTA partners. We apply a simple decomposition of trade growth offered by Hummels and Klenow (2002) that provides insights into whether the United States is trading more of the same goods with NAFTA partners since 1993, or trading new products. The results provide evidence of both. A sizeable component of U.S. trade growth since 1993 can be explained by increases in the variety of products the U.S. imports from Mexico.

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.

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.

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)

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.

Regionalism, Trade and Growth: The Case of the Eu-South Africa Free Trade Arrangement

In a sequential Computable General Equilibrium analysis, we investigate the likely effects of the EU-South Africa Free Trade agreement (FTA), with a special emphasis on South Africa’s growth prospects. We find that the FTA increases South African output and welfare. We note, however, that the gains are very modest when viewed in the context of the time period over which full adjustment to the treaty provisions is expected to occur. Only 2 percent of the economic growth expected over the next 18 years in South Africa can be linked to additional trade associated with the FTA. The long phase-in period and the partial benefits of regionalism limit the importance of trade as an engine of growth.

Causes of International Production Fragmentation: Some Evidence

What forces have driven international fragmentation of production in recent decades? Perhaps technological innovations in information technology have allowed the coordination of integrated production processes that are separated by vast distances. Perhaps reductions in transportation costs, tariffs and other trade barriers facilitated multi-stage production, allowing components to cross several international borders and/or long distances with relatively low accumulated transit costs. Perhaps changes in the political economy of new market economies (first in Eastern Europe and then in East Asia) have opened up new possibilities for specialization in different segments of the supply chain. Each of these explanations undoubtedly plays a role, of course, and the interaction of these effects is also important. This document attempts to identify evidence that points towards one or more of these theories as a leading cause.

Trade effects of customs reform : evidence from Albania

Despite enormous academic interest in international trade costs and keen policy interest in efforts to mitigate them, so far there is very little hard evidence on the impacts of trade facilitation efforts. This paper exploits a dramatic reduction in the rate of physical inspections by Albanian customs to estimate the effects of fewer inspection-related delays on the level and composition of imports. In this setting, the paper finds evidence that the expected median number of days spent in Albanian customs falls by 7 percent when the probability that a shipment is inspected falls from 50 percent or more to under 50 percent. In turn, this reduction in time produces a 7 percent increase in import value. The paper finds evidence that the reforms favored imports from preferential trading partners, especially the European Union. There are also reform-induced changes in the composition of trade, including increases in average quantities and unit prices, the number of shipments, and the number of importing firms per product-country pair and the number of countries per firm-product pair. A back-of-the-envelope calculation suggests that the estimate of 7 percent import growth along an intensive margin is roughly consistent with a 0.36 percentage point reduction in average tariff equivalent trade costs. Applying this figure to the value of Albanias non-oil imports produces a reform-induced trade cost savings estimate of approximately US

Expediting Trade: Impact Evaluation of an In-House Clearance Program

12 million in 2012.