International trade and integration: The latest research

What’s the latest research in international trade and integration? Researchers from the World Bank, the IMF and the WTO recently gathered for a one-day workshop to present their latest research on the topic. The papers presented addressed topical questions in areas as diverse as the links between trade, wage inequality and the poor, global value chains, non-tariff measures, preferential trade agreements, FDI restrictions, and migration. We provide a quick roundup on the papers presented during the workshop.

On trade, wage inequality, labor mobility and the poor
Countries often protect their poor by raising tariffs on the goods they produce. But if all countries apply pro-poor trade policies, a coordination problem arises since the poor are employed in similar sectors across countries.  The result is that the goods the poor produce face higher barriers in destination markets. Roberta Piermartini from the WTO shows that indeed tariffs faced by Indian exports abroad are higher for goods produced by individuals in lower-income groups and by women. Removing this unbalanced access to international markets may contribute to a more even distribution of the gains from trade.
 
Empirical evidence shows that after countries liberalize trade, wage inequality increases gradually for several years but then stops increasing and can even decrease. The model by Matthieu Bellon from the IMF explains this evidence emphasizing the dynamics of worker reallocation between heterogeneous firms and workers in the presence of adjustment costs to labor.  
 
Using a novel district-to-district migration dataset, Aaditya Mattoo from the World Bank studies the determinants of worker mobility across Indian districts. He provides evidence of invisible walls across state borders  explained by the existence of state-level entitlement schemes, ranging from access to subsidized goods through the public distribution system to the bias in favor of states’ own residents in access to tertiary education and public sector employment.
 
On Global Value Chains (GVCs)
 
Strong domestic linkages across firms reduce fragmentation costs but also create a lock-in situation in relationship-specific sectors. Therefore, domestic value chains (DVCs) can either be stepping stones or stumbling blocks for GVCs. Cosimo Beverelli from the WTO presents empirical evidence showing that GVCs have their foundations in DVCs, supporting the stepping stone hypothesis.
 
Real currency depreciations not only increase exports of domestic value-added (DVA) - a conventional result - but also increase imports of foreign value added (FVA) - a result contrasting with traditional trade theory, according to the study by Gee Hee Hong from the IMF.  These results support the idea that GVC-related exports and imports are complements in production.
 
On preferential trade agreements
 
The impact of trade agreements in existence until 1995 is revisited by Swarnali Hannan from the IMF who introduces synthetic control methods as a novel approach to establish causality. She finds substantial gains from trade agreements, with an average boost to exports among preferential partners of 80 percentage points over a decade.
 
Exploring the role of deep trade agreements, which go beyond tariff reduction to cover policy areas such as investment, competition policy, and intellectual property rights protection, Alen Mulabdic from the World Bank uses a new dataset on the depth and content of the agreements to show that deep trade agreements lead to more trade creation and less trade diversion than shallow trade agreements.
 
Below is a brief flavor of other interesting papers also presented at the workshop:

• Revisiting the trade and growth debate focusing on China as a source of supply and demand shocks, Jaebin Ahn from the IMF finds a positive impact of Chinese import penetration and export market access on sectoral total factor productivity growth in advanced economies. The recent trade slowdown could thus weigh significantly on the already weak productivity growth in advanced economies.
• Using a new methodology to estimate bilateral ad valorem equivalent (AVE) of non-tariff measures (NTMs), Hiau Looi Kee from the World Bank shows that products with higher AVEs exhibit larger discrepancies across reported import and export statistics for a given bilateral flow.  The evidence is consistent with the hypothesis that firms misdeclare product codes or country of origin to circumvent cumbersome and opaque NTMs.
• According to a unique disaggregated IMF dataset on global trade in services, presented by Saurabh Mishra from the IMF, service exports from developing countries have grown tenfold since 1990 - twice as fast as those from advanced economies.  Transport and travel have lost share in world services exports to intellectual property and financial services.
• The availability of factoring - an alternative finance instrument - is shown by Marc Auboin from the WTO to allow small firms in emerging economies to access international markets, in particular by being involved in global supply chains.
• Foreign acquisitions improve management practices – e.g., through an increase in the number of hierarchical layers and increased span of control among top managers. One reasons could be acquisition-induced reductions in communication costs within acquired firms in Portugal, according to the study by Paulo Bastos from the World Bank.
• Bilateral investment agreements can lower FDI restrictions but in practice several countries have lowered their FDI restrictions without such agreements while others retain high FDI restrictions with no interest in such agreements. The research by Mathilde Lebrand from the World Bank emphasizes the role of tax havens to which the profits of multinationals can be shifted as an important determinant of FDI restrictions.
• Aggregate trade responds sharply to spatial frictions, falling rapidly over short distances as distance to the destination increases, even within the European Single Market. The study by Shawn Tan from the World Bank shows that such sharp trade responses are explained by trade in intermediate inputs, as there is spatial clustering of firms connected by input-output linkages, who choose to co-locate to avoid trade costs.