Essays in international trade

Abstract

This thesis is a collection of essays on the effect of trade costs on international trade. Chapter 1 derives and empirically examines how factor proportions determine the structure of commodity trade when international trade is costly. It combines a many-country version of the Heckscher-Ohlin model with a continuum of goods developed by Dornbusch-Fischer-Samuelson (1980) with the Krugman (1980) model of monopolistic competition and transport costs. The commodity structure of production and bilateral trade is fully determined. Two main predictions emerge. There is a quasi-Heckscher-Ohlin prediction. Countries capture larger shares of industries that more intensively use their abundant factor. There is a quasi-Rybczynski effect. Countries that rapidly accumulate a factor see their production and export structures systematically move towards industries that intensively use that factor. Both predictions receive support from the data. Factor proportions appear to be an important determinant of the structure of international trade. Chapter 2 focuses on the effect of preferential tariff liberalization on the direction of trade and suggests that NAFTA has had a substantial impact on North American trade. The chapter focuses on where the US sources its imports of different commodities from. It identifies the impact of NAFTA by exploiting the substantial cross-commodity variation in the tariff preference given to goods produced in Canada and Mexico.

(cont.) Canada and Mexico have greatly increased their share of US imports of commodities for which they enjoy a tariff preference. For commodities where no preference is given, Canada's share has declined while Mexico's has increased much more modestly. The empirical results suggest that Canada's share of US imports may have declined without NAFTA, rather than increased, while the growth in Mexico's share of US imports would have been much slower. Useful products of the empirical work are estimates of consumer willingness to substitute between different varieties of the same commodity. The estimated average elasticities of substitution range from 5 to 7. Chapter 3 examines the effect of international trade costs on the volume of trade. It extends the model in Chapter 1 to allow trade costs to vary by country and commodities. An arbitrary country imports more commodities from countries where bilateral trade costs are lower, and imports more from larger countries. It also sources specific commodities disproportionately from trading partners that possess in relative abundance the productive factors that are used relatively intensively in the production of that commodity. Useful products of the empirical examination are estimates of the willingness to substitute between different varieties of goods within an industry. The implied elasticities of substitution are mostly high, typically ranging between 6 and 16. With such high elasticities of substitution, small costs to international trade will sharply reduce trade volumes.