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Natalie Chen and Luciana Juvenal
We investigate theoretically and empirically how exporters adjust their markups across destinations depending on bilateral distance, tariffs, and the quality of their exports. Under the assumption that trade costs are both ad valorem and per unit, our model predicts that markups rise with distance and fall with tariffs, but these effects are heterogeneous and are smaller in magnitude for higher quality exports. We find strong support for the predictions of the model using a unique data set of Argentinean firm-level wine exports combined with experts wine ratings as a measure of quality.
Mr. Sonali Das and Mr. Volodymyr Tulin
This paper studies private investment in India against the backdrop of a significant investment decline over the past decade. We analyze the potential causes of weaker investment at the firm level, using both firm-level financial statements and a novel dataset on firms’ investment project decisions, and find that financial frictions have played a role in the slowdown. Firms with higher financial leverage invest less, as do firms with lower earnings relative to their interest expenses. Consistent with the notion of credit constraints leading to pro-cyclical investment, we also find that firms with higher leverage are (i) less likely to undertake new investment projects, (ii) less likely to complete investment projects once begun, and (iii) undertake shorter-term investment projects.
Diego A. Cerdeiro and Dmitry Plotnikov
The effect that the recent decline in the price of oil has had on growth is far from clear, with many observers at odds to explain why it does not seem to have provided a significant boost to the world economy. This paper aims to address this puzzle by providing a systematic analysis of the effect of oil price shocks on growth for 72 countries comprising 92.8% of world GDP. We find that, on net, shocks driving the oil price in 2015 shaved off 0.2 percentage points of growth for the median country in our sample, and 0.17 percentage points in GDP-weighted terms. While increases in oil supply and shocks to oil-specific demand actually boosted growth in 2015 (by about 0.2 and 0.4 percentage points, respectively), weak global demand more than offset these gains, reducing growth by 0.8 percentage points. Counterfactual simulations for the 72 countries in our sample underscore the importance of diversification, rather than low levels of openness, in shielding against negative shocks to the world economy.
Ms. Yevgeniya Korniyenko, Magali Pinat, and Brian Dew
Anecdotal evidence suggests the existence of specific choke points in the global trade network revealed especially after natural disasters (e.g. hard drive components and Thailand flooding, Japanese auto components post-Fukushima, etc.). Using a highly disaggregated international trade database we assess the spillover effects of supply shocks from the import of specific goods. Our goal is to identify inherent vulnerabilities arising from the composition of a country’s import basket and to propose effective mitigation policies. First, using network analysis tools we develop a methodology for evaluating and ranking the supply fragility of individual traded goods. Next, we create a country-level measure to determine each country’s supply shock vulnerability based on the composition of their individual import baskets. This measure evaluates the potential negative supply shock spillovers from the import of each good.
Mr. Rudolfs Bems and Robert C. Johnson
We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
International Monetary Fund. Asia and Pacific Dept
External trade plays an important role in Singapore’s economy, providing an important share of total value added. Singapore’s exports have a relatively large import share; however, they also have a high level of complexity. As emphasized in previous studies, value-added in exports plays an important role in trade elasticities. The paper finds evidence that this is indeed the case for Singapore’s export products. Products that have higher domestic value-added share also tend to have higher export price elasticity. Economic complexity is also related to export price elasticities: higher economic complexity is associated with lower price elasticity of exports. This relationship is stronger within certain product segments such as the machinery, mechanical appliances and computers as well as the pharmaceuticals segments. Trade elasticities are important to understand Singapore’s exchange rate based monetary policy transmission. Exchange rate changes can affect profits and trade volumes differently, depending upon the price pass-through to import and export prices and the price elasticity of exports and imports. The import and export price pass-through can in return depend on trade elasticities. The paper also shows that there is important product heterogeneity with respect to trade elasticities; both across different product groups but also within individual product groups. This implies that structural changes in the product composition of trade can lead to sizeable changes in Singapore’s trade elasticities.
Kai Guo and Mr. Papa M N'Diaye
This paper assesses the sustainability of China's export-oriented growth over the medium to longer term. It shows that maintaining the current export-oriented growth would require significant gains in market share through lower prices in a range of industries. This, in turn, could be achieved through a combination of increases in productivity, lower profits, and higher implicit or explicit subsidies to industry. However, the evidence suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. Moving up the value-added chain, shifting the composition of exports, diversifying the export base, and increasing domestic value added of exports could give room to further export expansion. However, experiences from Asian economies that had similar export-oriented growth suggest there are limits to the global market share a country can occupy. Rebalancing growth toward private consumption would provide a large impetus to output growth and reduce the need for gaining further market share.
International Monetary Fund
Overall competitiveness of the Dutch economy seems adequate, but domestically produced exports have lost market share recently. Over the past three decades, globalization has greatly influenced economies as countries have become more integrated. Empirical studies on business cycles synchronization and transmission of shocks among countries have provided conflicting results. In its descriptive part, this study concludes that Dutch export competitiveness is not a problem so far. This also finds that the Netherlands is relatively more exposed to supply-driven shocks while Germany is more exposed to demand-driven shocks.
Mr. John Romalis and Mary Amiti
This paper assesses the effects of reducing tariffs under the Doha Round on market access for developing countries. It shows that for many developing countries, actual preferential access is less generous than it appears because of low product coverage or complex rules of origin. Thus lowering tariffs under the multilateral system is likely to lead to a net increase in market access for many developing countries, with gains in market access offsetting losses from preference erosion. Furthermore, comparing various tariff-cutting proposals, the research shows that the largest gains in market access are generated by higher tariff cuts in agriculture.
Mr. Hans P Lankes and Miss Katerina Alexandraki
Preference erosion has become an obstacle to multilateral trade liberalization, as beneficiaries of trade preferences have an incentive to resist reductions in mostfavored- nation (MFN) tariffs. This study identifies middle-income developing countries that are vulnerable to export revenue loss from preference erosion. It concludes that the problem is heavily concentrated in a sub-set of preference beneficiaries-primarily small island economies dependent on sugar, banana, and-to a lesser extent-textile exports. Accordingly, measures to help mitigate the impact of preference erosion can be closely targeted at the countries at risk.