Two essays in international trade.
Morrow, Peter Michaels
2007
Abstract
This dissertation is comprised of two chapters. The first chapter deals with the widespread emergence of bilateral trade agreements between large and small countries and asks why they occur despite the fact that many common theories of trade predict that trade agreements should occur between large countries. The second chapter integrates Heckscher-Ohlin models of trade that emphasize factor abundance with Ricardian models which emphasize differences in total factor productivity. The first chapter starts by asking why the United States signs so many bilateral trade agreements with small countries with whom its volume of trade is so small? This paper derives conditions under which large countries offer trade agreements to small- but not medium-sized countries. The key insight is that there is a tradeoff between the size of a developing country and how much it benefits from trade diversion. As developing countries increase in size, they can make larger aggregate concessions for preferential treatment but each representative firm benefits less from trade diversion. When demand in the developed world are relatively low, trade diversion is important and small countries sign exclusive trade agreements with large countries. When demand in the developed country are sufficiently high, trade diversion is relatively unimportant and large countries sign agreements with small <italic> and</italic> medium size developing countries. I extend the model by assuming that increased production lowers marginal cost though learning-by-doing. This introduces hysteresis in trade agreements in that the parameter space that supports a set of agreements expands if that set of agreements is enacted. Consequently, bilateralism can reinforce bilateralism and multilateralism can reinforce multilateralism. The second chapter starts by noting that models of comparative advantage are usually based on differences in factor abundance <italic>or</italic> differences in total factor productivity within a country despite abundant empirical evidence that <italic>both</italic> matter. Because theoretical treatments of each model usually ignore the other as a force for comparative advantage, it is unclear how to assess their relative contributions in determining international production patterns. This paper articulates a unified and tractable model in which comparative advantage exists due to differences in factor abundance <italic> and</italic> relative productivity differences across a continuum of industries with monopolistic competition and increasing returns to scale. I provide evidence that both sources of comparative advantage shape international production patterns. In addition, relative productivity differences across industries are uncorrelated with factor intensity of these industries. Therefore, each of the two forces for comparative advantage can offer valid partial descriptions of the data. Also, one can simply aggregate the predictions of the factor abundance based and relative productivity based models to obtain a full description of industry by industry production patterns.Subjects
Bilateral Trade Agreements Essays International Trade Production Total Factor Productivity Two
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