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International Monetary Fund
Using Chilean data, we document that for resource-rich small open economies the effects of terms of trade shocks on the wage gap (between skilled and unskilled workers) depend on factor intensities in the non-tradable sector, following the model in Galiani, Heymann, and Magud (2010). For a skilled-intensive non-tradable sector we show that improvements in the terms of trade benefit skilled workers. We also show that this relation holds at the industry level: the wage gap widens in skilled-intensive sectors while it shrinks in unskilled-intensive ones, the more so as terms of trade volatility decreases.
Ms. Helen B. Junz
The sheer size of mandated trade among members of the Council for Mutual Economic Assistance (CMEA), and its composition and quality, means that its reorientation toward other markets entails a whole complex of structural adjustment policies. To be successful, policy reform must be comprehensive, with clarity of purpose and predictability of action. Nevertheless, while gradualism should not be used as an excuse for delay, reforms must be harmonized with the timetable of requisite institutional change. In any case, reform must be accompanied by trade liberalization to help break down domestic monopolies and to gain the efficiencies from division of labor.
Mr. Julian Di Giovanni, Mr. Jing Zhang, and Mr. Andrei A Levchenko
This paper evaluates the global welfare impact of China's trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. We simulate two alternative productivity growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson, 2004), the large majority of countries in the sample, including the developed ones, experience an order of magnitude larger welfare gains when China's productivity growth is biased towards its comparative disadvantage sectors. We demonstrate both analytically and quantitatively that this finding is driven by the inherently multilateral nature of world trade. As a separate but related exercise we quantify the worldwide welfare gains from China's trade integration.
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.
Weicheng Lian
Existing studies on the downward trend in the labor share of income mostly focus on changes within individual countries. I document, however, that half of the global decline in the labor share of income can be traced to the relocation of activities between countries. I develop a two-country model to show that when the relative price of investment goods falls, production activities with a small elasticity of substitution between capital and labor tend to get offshored from high- to low-wage countries. The model provides an explanation as to why such relocation may drive the labor share down in both developed and developing economies, as well as globally.
Mr. Stephen Tokarick
This paper uses an applied general equilbrium model to decompose the effects of changes in trade and technology-related variables on wages of skilled and unskilled labor between 1982 and 1996 in the United States. The results indicate that trade-related variables (tariff cuts, improvement in the terms of trade, and the increase in the trade deficit) had little impact on the widening wage gap. Also, changes in total factor productivity had a small effect on relative wages. The major factor behind the rise in the skilled wage relative to the unskilled wage was differential rates of growth in skill-biased technical change across sectors. The paper also highlights the role that nontraded goods play in explaining the wage gap. Finally, the paper presents estimates of the effect of trade on wages by calculating what wage rates would be under autarky. The results show that expanding trade could actually reduce wage inequality, rather than increase it. The welfare costs to the U.S economy of moving to autarky (using 1996 as a base) are about 6 percent of GDP.
Mr. Serhan Cevik
This paper develops a gravity model framework to estimate the impact of infectious diseases on bilateral tourism flows among 38,184 pairs of countries over the period 1995–2017. The results confirm that international tourism is adversely affected by disease risk, and the magnitude of this negative effect is statistically and economically significant. In the case of SARS, for example, a 10 percent rise in confirmed cases leads to a reduction of as much as 9 percent in tourist arrivals. Furthermore, while infectious diseases appear to have a smaller and statistically insignificant negative effect on tourism flows to advanced economies, the magnitude and statistical significance of the impact of infectious diseases are much greater in developing countries, where such diseases tend to be more prevalent and health infrastructure lags behind.
Jesmin Rahman and Mr. Tianli Zhao
One of the most important recent developments in international trade is the increasing interconnectedness of export production through a vertical trading chain network that streches across many countries, with each country specializing in particular stages of a good’s production. Using value added trade statistics, this paper tries to dissect and reshape understanding of European exports: where exports values are created, the role of vertical supply links in export growth, what is contributing to the growth in supply links, and how comparative advantages of countries are affected by supply links over time. Our analysis finds strong role of supply links in cross-country export performance in Europe, where these links between countries grew based on physical proximity, cost differential and similarity in export structure.