Publications

 

 

[1] Within-Industry Specialization and Global Market Power (February 2020, AEJ: Microeconomics) [replication files]

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.

 

[2] Discrete Trade (forthcoming, Journal of International Economics)[replication files][published version]

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.

 

[3] Weight-Based Quality Specialization (forthcoming: Journal of International Economics)

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 cate- gories; (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 iceberg trade cost assumption, which has proven to be elusive in the past.

 

Working Papers

 

 

[1] Trade, Firm-Delocation, and Optimal Environmental Policy (with Farid Farrokhi, preliminary draft: August 2020)

To what extent can trade policy serve as a remedy for environmental pollution? We examine this question using a multi-country multi-industry general equilibrium trade model with transboundary pollution externalities. Our framework features important margins such as firm-delocation in response to policy, multilateral carbon leakage, and returns to scale in abatement. Our central result is a set of simple formulas for unilaterally optimal trade and emission taxes in an open economy. The optimal policy consists of (i) a uniform emission tax across all industries; (ii) industry-level production subsidies that restore marginal-cost-pricing independent of the industry’s emis- sion intensity; (iii) industry-level import taxes that penalize high-emission imports but less so in high-returns-to-scale industries; and (vi) industry-level export taxes that (in addition to improving the terms of trade) promote clean exports against high-emission foreign competition. These formulas reveal a tension between emission reduction and scale economies that limits the efficacy of trade taxes at correcting transboundary emission. Our formulas parsimoniously map to data, enabling us to uncover the full potential of trade policy at tackling global emission.

 

[2] Can Trade Taxes be a Major Source of Government Revenue? (R&R The Journal of European Economics Association)

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.

 

[3] The Cost of a Global Tariff War: A Sufficient Statistics Approach (R&R Journal of International Economics) [replication files] [Slides]

Tariff wars have reemerged as a serious threat to the global economy. Yet measuring the prospective cost of a global tariff 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 methodol- ogy to data on 44 countries and 56 industries, I find that (i) the prospec- tive cost of a global tariff war has more-than-doubled over the past fifteen years, with small downstream economies being the most vulnerable. (ii) At the same time, due to the rise of global markup distortions, the gains from cooperative tariff policies have elevated to unprecedented levels.

 

[4] The Cost of Dissolving the WTO: The Role of Global Value Chains (with M. Beshkar, May 2020) [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.

 

[5] Profits, Scale Economies, and the Gains from Trade and Industrial Policy (with V. Lugovskyy, April 2020) [Slides]

Trade taxes are often used as (a) a first-best instrument to manipulate the terms-of-trade, or (b) a second-best instrument to correct pre-existing market distortions. We analyze the (in)effectiveness of trade taxes at achieving these two policy goals. To this end, we derive sufficient statistics formulas for first-best and second-best trade/domestic taxes in an important class of multi-industry quantitative trade models featuring market distortions. Guided by these formulas, we estimate the key parameters that govern the gains from policy in these frameworks. Our esti- mates indicate that (i) the gains from terms-of-trade manipulation are relatively small; (ii) trade taxes are remarkably ineffective at correcting domestic distortions; (iii) unilateral domestic policies are also ineffective as they worsen the terms-of-trade; but (iv) deep trade agreements that prohibit trade taxation and encourage a multilateral adoption of corrective policies, deliver welfare gains that are larger than any non-cooperative policy alternative.

 

[6] Interdependence of Trade Policies in General Equilibrium (with M. Beshkar, June 2020)

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.

 

Work in Progress

 

 

[1] Out of Sample Gravity (First version: MAY 2017)