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The author is an economist at the IMF Institute. This paper is adapted from Essay III in her University of Michigan dissertation entitled, “Three Essays on the Effects of International Trade,” 1995. The author thanks Susanto Basu, Charles Brown, Gregory Dahl, Alan Deardorff, Samir El-Khouri, Mario Hernandez, Phil Howrey, Mohsin Khan, James Levinsohn, Charles Sisson, and Bernard Yeung for many helpful comments.
The growing concerns about the effects of trade also fall into the broader context of issues arising from increasing worldwide globalization. A comprehensive discussion of the opportunities and challenges arising from globalization can be found in the issue of the IMF’s World Economic Outlook, May 1997.
Thus, the aggregate returns of factors are derived only from an aggregate production function rather than from the sectoral production functions.
Due to data availability, sectors are examined at the three-digit SIC level in this paper.
A discussion of the data sources and the industries selected for study can be found in the Appendix. Not all of the sectors had export and import prices for the entire period from December 1980 until December 1991. Therefore, depending on the availability of data for each sector, the time period under study was altered slightly. For example, the first and third regression specifications for the meat products sector were restricted to begin from March 1983 because of lack of data on export prices. The second specification regression was conducted for the whole time period. Also, the availability of only export price data beginning from December 1983 for the plastic material sector and import price data beginning from June 1983 for the electronic components and accessories sector restricted the time periods of the regressions for those sectors.
A discussion of the treatment of lags and the difficulties associated with determining the appropriate lag structure can be found in Goldstein and Khan (1985).
A11 of the data are not seasonally adjusted. Therefore, it was necessary to include seasonal dummies in all of the regressions.
The standard errors on the summed coefficients are obtained from an F-test of the hypothesis that the sum of the coefficients is equal to zero. An F-test with one degree of freedom is equivalent to the square of the t-test.
It is also important to note that the response of producers to price changes depends on the structure of the industry. Many of the sectors that contribute a large share of U.S. exports may be monopolistic (such as the aircraft and parts industry) or oligopolistic (such as the motor vehicle industry) rather than competitive. Changes in demand in monopolistic and oligopolistic industries will lead to endogenously rather than exogenously set prices.
Ideally, a price index of inputs used in production should be included in the regressions for each industry in order to account for the indirect effects of trade from one industry to another. However, constructing industry-specific input prices is a difficult procedure since inputs used in production are not categorized for each industry according to the SIC system.
Since the reduced-form equations for employment and wages are estimated including two lags of the export price variable, contemporaneous and two lagged values of the gross domestic products of the countries that receive U.S. exports were used as instruments. Also, for the broadwoven fabric mills, manmade fiber, and silk sector, and the construction and related machinery sector it was found appropriate to include the contemporaneous geometric average of the exchange rates of countries that receive more than 5 percent of U.S. exports as an additional instrument.
A11 of the sectors that are classified as import sectors have positive coefficients on the export price variable in the IV regressions.
Unfortunately, data on production levels are not available on a quarterly (nor monthly) basis for three-digit SIC industries. Therefore, it was impossible to estimate the impact of changes in the trade prices on the output levels of the industries.
The estimates are too weak to warrant reporting.
Bureau of Labor Statistics. Handbook of Methods. The export prices are based on f.a.s. (free alongside ship) prices at the U.S. port of exportation. On the other hand, the import prices are based on c.i.f. (cost, insurance, freight) prices at the U.S. port of importation.
A devaluation of the U.S. dollar can also partially increase the dollar price of imports.
A log-linear interpolation was used where lnKT,j=j ln (1+αT)+lnKT-1,4 for j = quarter 1, 2, 3 and ln (1+αT)=(lnKT,4– lnKT-1,4)/4.
Some countries only report gross national product and so this was used instead.