This paper examines the link between relative goods prices and relative wages during two periods of Mexico's trade liberalization. The relative price of skill-intensive goods rose following Mexico's entrance to the General Agreement and Tariffs and Trade (GATT) in 1986, but fell after Mexico entered the North American Free Trade Agreement (NAFTA) in 1994. This paper adds a band pass filter to two established techniques to compare the relationship between prices and wages. Results from all three approaches are consistent with a positive long-run relationship between relative output prices and relative wages. The band pass filter results suggest that the relevant time frame for the relationship begins after 3–5 years.
This paper examines the effects on the domestic economy of domestic tariffs imposed on an intermediate good or a final good in vertically related markets which are characterized by Cournot oligopolies. Tariffs could lead a foreign firm to enter or exit from the domestic final-good market. Some of our results are counter-intuitive. It is particularly shown that tariffs on the intermediate good which induce the entry could harm domestic intermediate-good producers and/or benefit domestic final-good producers; and that tariffs on the final good which induce the exit could harm both domestic intermediate-good and final-good producers.
This paper examines the theoretical predictions of the multi-cone Heckscher–Ohlin model and the empirical evidence for it. I extend Helpman (1984)by identifying additional restrictions that characterize the free trade equilibrium. I illustrate that the complete set of restrictions are the building blocks of a multi-cone factor content specification which is the factor content dual to Alan Deardorff's (1979)well-known chain of comparative advantage goods prediction. The theoretical analysis implies that the existing tests of Helpman are incomplete. Applying the complete set of restrictions to Choi and Krishna's data set of 8 OECD countries, I find limited empirical support. This is compatible with previous studies suggesting that OECD countries do not occupy different cones.
Rodrik [Rodrik, D., 1997. Has Globalization Gone Too Far? Institute for International Economics, Washington, DC.] argues that firms use the threat of moving to low-cost (generally developing) markets to make employment more flexible at home. Although a large literature documents significant adjustment costs in developed countries, we know little about their size and importance in developing countries that receive capital. We employ monthly Mexican data from the GATT–NAFTA period to estimate adjustment costs in Mexico. We consider adjustment costs for production and non-production workers and allow for asymmetry. While patterns of adjustment costs are similar as in developed countries, adjustment costs in Mexico are generally an order of magnitude smaller.
In the framework of international Cournot oligopoly, we analyze welfare-enhancing policies when policymakers have only limited information on demand and cost structures. We show that even if policymakers have no idea about costs and demand, they can raise welfare by introducing a small production subsidy. If the government knows that demand is not very convex, a small tariff can be used to enhance welfare. With strategic complements, a small import reduction by an import quota deteriorates welfare while a small increase in the number of domestic firms improves welfare. In other cases, some more information is required to determine right policies.
This paper takes a microeconometric approach to the study of exchange rate pass-through in imperfectly competitive markets. We provide evidence for the hypothesis that incomplete exchange rate pass-through can be attributed to non-competitive conduct by foreign firms. A unique feature of our approach is the use of highly disaggregated industry data which is compatible with the behavioral assumptions of a homogeneous-product oligopoly model. We employ a panel data set consisting of location- and product-specific price and cost data for 29 traded petrochemicals for the US, Germany and Japan during 1982 to 1993. Our empirical estimates indicate that German and Japanese firms exercised (statistically) ‘significant’ market power in the US petrochemical market during our sample period.
This paper develops a model of strategic outsourcing. With trade liberalization in the intermediate-product market, a domestic firm may choose to purchase a key intermediate good from a more efficient foreign producer, who also competes with the domestic firm for a final good. This has a strategic effect on competition. Unlike the outsourcing motivated by cost saving, the strategic outsourcing has a collusive effect that could raise the prices of both intermediate and final goods. Trade liberalization in the intermediate-good market has a very different effect compared with trade liberalization in the final-good market.
We analyze price dumping and anti-dumping duties in the context of a model with a vertical industry structure. Dumping in the intermediate good market arises from differences in country-specific final good production costs. The price differential, or dumping margin, is shown to increase as the productivity difference increases. An anti-dumping duty, designed to reduce the equilibrium price differential, has two effects on welfare: a welfare loss from reduced final good production and a contrasting gain achieved by producing the lower output level more efficiently.
In this paper the two workhorse theories of international trade under imperfect competition – Krugman’s taste for variety model and Brander’s strategic intra‐industry trade model – are integrated into a single analytical framework. A quadratic utility function allows for a nesting of these two theories by postulating a consumer taste for variety over differentiated products, where the extent of product differentiation is linked to the intensity of strategic interaction among firms. The model yields intuitive predictions on the effects of the degree of product differentiation on the volume of trade and on the composition of the gains from trade under imperfect competition. JEL classification: F12 Différenciation de produits, concurrence et commerce international. Ce mémoire intègre deux théories connues du commerce international en régime de concurrence imparfaite – le modèle du goût pour la variété de Krugman et celui du commerce intra‐industrie de Brander – en un seul cadre analytique. Une fonction d’utilité quadratique permet d’encadrer ces deux théories en postulant que le consommateur a un goût pour la variété dans une gamme de produits différenciés où le degré de différenciation est reliéà l’intensité de l’interaction stratégique entre les entreprises. Le modèle engendre des prévisions quant aux effets du degré de différenciation des produits sur le volume de commerce international et la composition des gains résultant de ce commerce en régime de concurrence imparfaite.
This article analyzes three criteria for labor market integration between Mexico and the United States before and since the North American Free Trade Agreement: the responsiveness of Mexican wages to US wage shocks, the speed at which relative wages return to a long-run differential, and changes in the rate of convergence of absolute wages. Tests for increased integration using these three criteria generate mixed results, which are then explored by directly incorporating trade, foreign direct investment (FDI), and migration. The results suggest that trade and FDI did in fact positively contribute to integration but that the increase in border enforcement depressed Mexican wages, masking the positive benefits.
This paper investigates strategic export intervention in a final‐good industry which uses an intermediate good supplied by a foreign monopolist. An export tax‐cum‐subsidy leads to horizontal and vertical rent extraction. The optimal government intervention in the final‐good market is shown to depend on the pricing scheme employed by the intermediate‐good producer.
We provide an empirical assessment of the comparative advantage gains from trade argument. We use Japan’s nineteenth-century opening up to world commerce as a natural experiment to answer the following counterfactual: “By how much would real income have had to increase in Japan during its final autarky years of 1851–1853 to afford the consumption bundle the economy could have obtained if it were engaged in international trade during that period?” Using detailed historical data on trade flows, autarky prices, and Japan’s real GDP, we obtain upper bounds on the gains from trade of about 8 to 9 percent of Japan’s GDP.
We exploit Japan's sudden and complete opening up to international trade in the 1860s to test the empirical validity of one of the oldest and most fundamental propositions in economics: the theory of comparative advantage. Historical evidence supports the assertion that the characteristics of the Japanese economy at the time were compatible with the key assumptions of the neoclassical trade model. Using detailed product-specific data on autarky prices and trade flows, we find that the autarky price value of Japan's trade is negative for each year of the period 1868-75. This confirms the prediction of the theory.
This study uses household-level data from the United States and Mexico to examine labor-market integration. I consider how the effects of shocks and rates of convergence to an equilibrium differential are affected by borders, geography, and demographics. I find that even though a large wage differential exists between them, the labor markets of the United States and Mexico are closely integrated. Mexico's border region is more integrated with the United States than is the Mexican interior. Evidence of integration precedes the North American Free Trade Agreement (NAFTA) and may be largely the result of migration. (JEL F15, F20, J61)
Mexico plays an important role in the developing‐country trade‐liberalisation literature because it liberalised early and extensively. Numerous papers analysed changes in Mexican wage levels and inequality after Mexico joined the GATT in 1986. This paper reviews recent papers that analyse changes in wage levels and inequality since the North American Free Trade Agreement in 1994. Two main puzzles emerge. First, wage growth rates are similar before and after NAFTA. Second, Mexican wage inequality, which received much attention after its post‐GATT rise, falls steadily after NAFTA. This paper reviews several possible explanations for these two phenomena.
We conduct a theory-based empirical study of intraindustry trade in homogeneous products. We derive an oligopolistic model of intra-industry trade, which is an extension of the segmented market model of trade, initially proposed by [Brander, J. A., 1981, Intra-industry trade in identical commodities, Journal of International Economics 11, 1–14]. The empirical implementations of the model are investigated in the context of the petrochemical industry. Our analysis employs a unique data set containing detailed product- and location-specific data on the petrochemical industries in Germany and the United States. Allowing for different empirical specifications, we find that cross-product variations in bilateral intra-industry trade of petrochemicals are well explained by the variables suggested by the theoretical model.
Unlike most studies that calculate productivity as a residual, this study uses detailed plant-level data to examine the relationship between exposure to foreign markets and specific innovations including product design, investment in new tools (such as computers), research and development, and innovation in products and processes. The results suggest that exposure to foreign markets is positively related to most types of technology. The effects seem to be stronger in recently liberalized Mexico, which may suggest that the innovation gains from liberalization are greatest in the early stages of liberalization.
