Xuepeng Liu

Trade and Income Convergence: Sorting Out the Causality

This paper studies the linkage between international trade and income convergence across countries. Different theories offer conflicting predictions regarding how they might affect each other. In the existing empirical literature estimating the trade impact on income convergence, a long-lasting problem is the reverse causality from income convergence to trade. This paper provides a disaggregated bilateral trade data analysis to solve this problem. The results show that the reverse causality from income convergence to trade exists in differentiated product sectors, but not in homogeneous product sectors. Trade in homogeneous sectors reduces the income gaps among trade partners, but it is not significantly affected by their income difference. Therefore, the negative effect of trade in homogeneous sectors on the income gap is free from the reverse causality problem. It can be taken as a pure evidence of trade-induced income convergence. This result is robust to various econometric methods.

Does Final Market Demand Elasticity Influence the Location of Export Processing? Evidence from Multinational Decisions in China*

Given the importance many developing countries attach to attracting foreign investors engaged in export‐processing activities, surprisingly little is known about the sensitivity of these investors to local wage differences and the role played by final product market conditions. Using data on 2,884 foreign‐invested manufacturing projects in China, we estimate the importance of host province wages to firm’s location choice and investigate how this sensitivity varies with demand conditions facing the industry in China’s largest export market, the United States. We use the profit function to show theoretically that firms’ ability to pass wage costs through to final markets matters for location choice and we test the implications of the theory using a control‐function technique for conditional logit developed by Petrin and Train. As predicted, we find that investors facing more elastic demand in the US market are more sensitive to wages across export‐processing locations. Taking both the factor intensity of the activity and final market demand elasticity into account, we find that investors producing homogenous goods, such as metals, chemicals, and food processing, are more likely to be attracted by relatively low wages than those producing differentiated goods. We also find that while OECD investors are more responsive to wage differences than are investors from Hong Kong, Taiwan and Macau, they are less likely to choose a location that has received a large share of prior foreign investment.

Services development and comparative advantage in manufacturing

Most manufacturing activities use inputs from the financial and business services sectors. But these services sectors also compete for resources with manufacturing activities, provoking concerns about de-industrialization -- financial services in industrial countries like the United States and the United Kingdom, and business services in developing countries like India and the Philippines. This paper examines the implications of services development for the export performance of manufacturing sectors. It develops a methodology to quantify the indirect role of services in international trade in goods and constructs new measures of revealed comparative advantage based on domestic value added in gross exports. The paper shows that the development of financial and business services enhances the revealed comparative advantage of manufacturing sectors that use these services intensively but not that of other manufacturing sectors. It also finds that a country can partially overcome the handicap of an underdeveloped domestic services sector by relying more on imported services inputs. Thus, lower services trade barriers in developing countries can help to promote their manufacturing exports.

Anti-Dumping Duty Circumvention through Trade Re-Routing: Evidence from Chinese Exporters

We study the evasion of U.S. anti-dumping duties by Chinese exporters through trade rerouting via third countries or regions. Using detailed monthly trade data reported by China and the U.S. Customs during the period of 2002–2006, we find that U.S. anti-dumping actions against China lead to a stronger positive correlation between U.S. imports from third countries and Chinese exports to the same third countries. Such an effect is more pronounced for the products subject to anti-dumping duties (treatment groups) than similar products not subject to these duties (control groups), which is consistent with trade re-routing. We show further that the positive correlation increases with some product or third-country characteristics that are conducive to duty evasion.