Publications
[1] Can Trade Taxes be a Major Source of Government Revenue? [published version] [slides] [replication files]
(Journal of the European Economics Association, October 2021, lead article)The tariff-for-revenue argument has been invoked repeatedly in recent years to justify protectionism. It is motivated by the belief that a country with market power can use trade taxes to raise revenue from foreign consumers and producers. This paper develops a new sufficient statistics methodology to evaluate this claim for a wide range of countries. I show that (a) even large countries have limited market power. (b) So, before retaliation by trading partners, the average country can beneficially replace only 16% of its domestic tax revenues with trade taxes. (c) After retaliation, however, 50% of the collected trade tax revenues disappear, governments are forced to increase domestic taxes to counter their shrinking tax base, and real GDP drops across-the-board by an average of 7%. On the flip side, these findings indicate (d) the gains from multilateral trade agreements are also 30% larger once we account for the fiscal cost of trade wars.
[2] The Cost of a Global Tariff War: A Sufficient Statistics Approach [published version] [slides] [replication files] [online appendix]
(Journal of International Economics, July 2021)Tariff wars have reemerged as a serious threat to the global economy. Yet measuring the prospective cost of a global tariff war remains computationally prohibitive, unless we restrict attention to a small set of countries and industries. This paper develops a new methodology that measures the cost of a global tariff war in one simple step as a function of observable shares, industry-level trade elasticities, and markup wedges. Applying this methodology to data on 44 countries and 56 industries, I find that (i) the prospective cost of a global tariff war has more-than-doubled over the past fifteen years, with small downstream economies being the most vulnerable. (ii) Meanwhile, due to the rise of global markup distortions, the potential gains from cooperative tariff policies have also elevated to unprecedented levels.
[3] Weight-Based Quality Specialization[published version]
(Journal of International Economics, November 2020)This paper uncovers a new type of quality specialization that occurs along the physical weight margin. To this end, I document that (i) there is great heterogeneity in the unit weight of traded goods even within narrowly-defined product categories; (ii) heavier varieties of the same product are more costly to produce; (iii) heavier varieties exhibit (on average) a higher product appeal or quality; and (v) the cost of transportation increases more rapidly with unit weight than the cost of production. These observations indicate that suppliers face a basic quality-cost trade-off when choosing their output unit weight. As a result of this trade-off, high-wage economies specialize in heavier varieties of a given good, while geographically distant economies specialize in lighter varieties (i.e., weight-based quality specialization). Micro-level trade data support these predictions and suggest that weight-based quality specialization can explain a significant portion of the cross-national variation in export prices and export quality. Moreover, accounting for the heterogeneity in export unit weights yields support for the iceberg trade cost assumption, which has proven to be elusive in the past.
[4] Discrete Trade[replication files][published version]
(Journal of International Economics, September 2020)International quality specialization (IQS) and pricing-to-market (PTM) are two of the most studied phenomena in international trade. I present new evidence that PTM and IQS are significantly more pronounced in discrete industries that involve indivisible consumption goods. In light of this observation, I develop a generalized model of international trade that accommodates both discrete and continuous industries. Using this general framework, I argue that IQS and PTM in discrete industries are magnified by (i) affordability constraints, and (ii) cross-country differences in the price of non-traded services. These predictions find strong support from micro-level trade data. Furthermore, I show that the unique forces underlying discrete trade shed fresh light on the gains from trade and the “big-push” effects of globalization.
[5] Within-Industry Specialization and Global Market Power[replication files]
(AEJ: Microeconomics, February 2020)Export price levels exhibit tremendous cross-national and spatial variation, even within narrowly-defined industries. Standard theories attribute this variation to within-industry quality specialization. This paper argues that a significant portion of the export price variation is driven by rich and remote economies specializing in high-market power, high-returns-to-scale segments of industries. I also argue that this particular pattern of specialization (i) accounts for 30% of the overall gains from trade, and (ii) explains more than 37% of the observed cross-national income inequality.
Working Papers
[1] Can Trade Policy Mitigate Climate Change? [Slides]
Trade policy is often cast as a solution to the free-riding problem in international climate agreements. This paper uncovers the extent to which trade policy can deliver on this promise. We introduce abatement technology and carbon externality into a multi-country, multi-industry quantitative trade model. Our framework accommodates a rich set of policy considerations, including firm delocation, multilateral carbon leakage, and returns to scale in production and abatement. By deriving simple analytical formulas for optimal carbon, production, and border taxes, we are able to quantify the reduction in CO2 emissions under two prominent proposals that combine carbon pricing with trade policy. First, we show that carbon border taxes can replicate at most 1% of the CO2 reduction attainable under global climate cooperation. By comparison, Nordhaus’s (2015) climate club proposal can foster global climate cooperation and reduce global CO2 emissions by up to 61%. This successful outcome hinges on both the US and EU committing to the climate club as core members, using their collective trade penalties to enforce climate cooperation by reluctant governments.
[2] Profits, Scale Economies, and the Gains from Trade and Industrial Policy [Long Slides] [Short Slides]
Trade restrictions are often used as (a) a first-best policy to manipulate the terms-of-trade or (b) a second-best policy to correct misallocation in domestic industries. We analyze the (in)effectiveness of trade restrictions at achieving these goals. To this end, we derive sufficient statistics formulas for first-best and second-best trade taxes in an important class of multi-industry, multi-country trade models where misallocation occurs due to scale economies or profit-generating markups. We discipline our formulas by estimating the key parameters that govern the gains from trade and industrial policy in open economies. Our estimates reveal that (i) trade policy is remarkably ineffective at correcting misallocation in domestic industries, reflecting a deep tension between allocative efficiency and terms-of- trade. (ii) Unilateral adoption of corrective industrial policies is also ineffective as it causes immiserizing growth. But (iii) industrial policies that are coordinated via a deep agreement are more transformative than any unilateral policy intervention.
[3] Trade, Technology Adoption, and Inequality in Distorted Economies
This paper examines how labor market imperfections distort firm-level technology choices and alter the distribution of the gains from trade in developing countries. We begin our analysis by documenting that firms using modern technologies are disproportionately exposed to labor market distortions in low-income countries. We introduce this feature into a quantitative trade model with technology adoption, providing formulas for the welfare cost of misallocation and the gains from productivity growth in distorted economies. We find that labor market distortions provide a possible ex- planation for the inefficiently low levels of modern technology adoption in developing countries. Further trade integration can, in theory, remedy this type of inefficiency, but it comes with distributional consequences. Counterfactual simulations reveal that labor market distortions reduce the gains from trade integration for workers, with the benefits accruing primarily to the owners of distortion rents.
[4] Who Pays for Markups in a Global Economy? The Unequal Impacts of International Rent-Shifting[Slides]
Trade openness over the past decades has prompted tremendous production relocation across international borders and industries. These developments, we argue, have triggered a systematic transfer of markup rents and welfare from low- to high-income nations. We establish this claim by providing semi-parametric formulas for the welfare cost of markups in open economies. Our formulas indicate that trade can magnify the incidence of markups on individual countries by (1) increasing markup dispersion relative to autarky or (2) shifting markup rents from one country to another (rent-shifting). We map these formulas to data by estimating firm-level markups for many countries, using demand-based and cost-based estimation techniques. Our analysis reveals that trade openness has increased the welfare cost of markups among low-income countries by 21% while lowering it by 10% among high-income nations. These unequal effects are driven entirely by rent-shifting from low-income countries to high-income trading partners. We show that these rent-shifting effects are akin to hidden tariffs that violate reciprocity and favor high-income nations.
[5] The Cost of Dissolving the WTO: The Role of Global Value Chains [Slides]
As trade agreements face renewed pressure, we show that the rise of global value chains has multiplied the value of trade agreements to unprecedented levels. We cast our argument using a non-parametric neoclassical trade model that accommodates global input-output networks and nests a wide class of quantitative trade models as a special case. To guide our analysis, we derive analytic formulas for optimal non-cooperative trade taxes in this general framework. These formulas predict the extent of trade restriction if global trade agreements were to dissolve. Mapping these formulas to data, we quantify the value of trade agreements for various countries. We find that the disintegration of existing trade agreements will erase 30% of the overall gains from trade, which amounts to a $2.8 trillion loss in global GDP. Around 46% of this value is driven by the agreements’ facilitation of global value chains.
[6] Interdependence of Trade Policies in General Equilibrium
If governments are banned from using certain trade policy instruments, they may resort to other instruments to compensate for their lost policy space. The welfare effects of trade policy reforms, therefore, depend critically on the interdependence of various policy instruments at the governments’ disposal. Using a multi-industry general-equilibrium Ricardian trade model we find that: (i) Restricting export subsidies/taxes leads to trade liberalization, but restricting import tariffs in isolation has no such effect; (ii) If export subsidies are already restricted, negotiated tariff cuts in a subset of industries lead to unilateral cuts in other industries; and (iii) A free trade agreement that precludes the use of trade taxes may lead to the adoption of wasteful trade barriers by welfare-maximizing governments. Fitting our model to trade data for 40 major countries, we show that these effects are quantitatively significant.