International Trade and Investment

Brian Cadena, University of Colorado Boulder, and Brian Kovak, Carnegie Mellon University and NBER

Immigrants Equilibrate Local Labor Markets: Evidence from the Great Recession (NBER Working Paper 19272)

Cadena and Kovak demonstrate that low-skilled Mexican-born immigrants' location choices in the United States respond strongly to changes in local labor demand, and that this geographic elasticity helps equalize spatial differences in labor market outcomes for low-skilled native workers, who are much less responsive. The authors leverage the wage rigidity that occurred during the Great Recession to identify the severity of local downturns, and the results confirm the standard finding that high-skilled populations are quite geographically responsive to employment opportunities while low-skilled populations are much less so. However, low-skilled immigrants, primarily those from Mexico, respond even more strongly than high-skilled native-born workers. These results are robust to a wide variety of controls, a pre-recession falsification test, and two instrumental variables strategies. A novel empirical test reveals that natives living in cities with a substantial Mexican-born population are insulated from the effects of local labor demand shocks compared to those in cities with few Mexicans. The reallocation of the Mexican-born workforce among these cities reduced the incidence of local demand shocks on low-skilled natives' employment outcomes by more than 40 percent.

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José Fillat, Federal Reserve Bank of Boston; Stefania Garetto, Boston University; and Lindsay Oldenski, Georgetown University

Diversification, Cost Structure, and the Risk Premium of Multinational Corporations

Fillat, Garetto, and Oldenski investigate theoretically and empirically the relationship between the geographic structure of a multinational corporation and its risk premium. Their structural model suggests two channels. On the one hand, multinational activity offers diversification benefits: risk premia should be higher for firms operating in countries where shocks co-vary more with the domestic ones. Second, hysteresis and potential losses induced by fixed and sunk costs of production imply that risk premia should be higher for firms operating in countries where it is costlier to enter. The authors' empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries' contributions.

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Anca Cristea, University of Oregon; David Hummels, Purdue University and NBER; and Brian Roberson, Purdue University

Estimating the Gains from Liberalizing Services Trade: The Case of Passenger Aviation

Over a 22-year period the United States signed 108 bilateral "Open Skies Agreements" that significantly liberalized international trade in passenger aviation services. Cristea, Hummels, and Roberson study how existing trade agreements distorted route structures, carrier entry, and capacity, and how liberalization affected consumer welfare. They develop a novel two-stage game in which carriers first enter and decide on networks, then set capacity and a pricing schedule prior to the realization of uncertain demand. The model allows for three empirically relevant features of airline markets: carriers have unused capacity, prices vary across carriers because of quality, and prices for otherwise identical seats rise as planes near capacity and are sold only to the highest valuation passengers. The authors show that even complex network environments can be described in terms of average pricing functions that provide sufficient statistics for consumer welfare and map closely into empirical objects. In this environment deregulation generates multiple gains for consumers: lowering costs, increasing flight quality, reallocating capacity, and increasing entry. The authors evaluate the model using difference-in-difference regressions applied to a 16-year panel of detailed data on route structure, capacity, and ticket price, quantity, and quality. Liberalizing countries see expansions in route offerings and reallocations of carrier capacity consistent with mechanisms highlighted in the model. Consumers enjoy lower prices, more direct flights, and large increases in passenger quantities conditional on prices and direct measures of quality. Consistent with the model, these effects are not uniform across cities. Quality-adjusted prices fall by 8.7 percent on routes that were the least constrained prior to regulation, and by 23 percent on the most constrained routes.

Katheryn Russ, University of California, Davis and NBER, and Balazs Murakozy, Hungarian Academy of Sciences

Competition with Multinational Firms: Theory and Evidence

Do multinational firms wield more market power than their domestic counterparts? Using Hungarian firm-level data between 1993 and 2007, Russ and Murakozy find that markups are 19 percent higher for greenfield and 7.5 percent higher for acquired foreign-owned firms than for domestically owned firms. Moreover, markups for domestically owned firms are significantly lower in industries where multinationals have a greater technological edge, suggesting that Ricardian differences in technology and endogenous markups constitute important dimensions for models of foreign direct investment. The authors innovate within a canonical Ricardian model of endogenous markups and heterogeneous firms to provide analytical distributions of market shares and markups when goods are imperfect substitutes to provide structure for the empirical analysis. Their model explains about half of the multinational markup premium identified in the empirical analysis.

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Jennifer Poole, University of California, Santa Cruz

Business Travel as an Input to International Trade

The importance of business and social networks in generating trade is becoming increasingly recognized in the international economics literature. An important way in which people build and maintain networks is through face-to-face meetings. Poole proposes an empirical model in which business travel helps to overcome informational asymmetries in international trade, generating international sales in the form of new export relationships. Using a unique survey of all outbound travelers from the United States on international flights which differentiates between business and leisure travel, the empirical evidence supports the model. Lagged business travel with the United States has a positive impact on the extensive export margin from the United States, increasing total U.S. exports. The effect is driven by travel with non-English speaking countries, for which communication with the United States by other means may be less effective. Similarly, the effect is stronger for differentiated products and among technical travelers, reflecting the information-intensive nature of differentiated products and that higher-skilled travelers may be better able to transfer information about profitable trading opportunities.

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Alan Spearot, University of California, Santa Cruz

Tariffs, Competition, and the Long of Firm Heterogeneity Models

Spearot derives a novel solution for the long-run competitive effects of tariffs that is general for many countries, robust to rich cross-country heterogeneity, and a function of only aggregate trade data and country-by-industry Pareto shape parameters. To obtain shape estimates, he estimates a structural trade growth equation that is a function of shape parameters, trade flows, and tariff cuts. The shape estimates indicate that larger and more developed exporters have, on average, bigger surviving firms, and when evaluated on a common import market, exporters with a better shape earn larger trade revenues. Using the shape estimates, the author returns to the model to back out measures of relative competition across countries where within-industries smaller countries with a relatively poor shape of firms tend to have less competitive markets. However, he finds that countries with less competitive markets experience a greater increase in competition over the sample period, suggesting that firms enter where competition is less fierce. Finally, counterfactuals indicate that tariff cuts during 1994 to 2000 increased competition in 85 percent of markets, and that the proposed Trans-Pacific Partnership would increase competition within the agreement, but decrease competition outside of it.

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Emily Blanchard, Dartmouth College, and Gerald Willmann, Kiel Institute for World Economics

Unequal Gains, Prolonged Pain: Dynamic Adjustment Costs and Protectionist Overshooting

Blanchard and Willmann examine the influence of labor market frictions on democratic political responses to global shocks, and highlight a dynamic feedback mechanism by which sharp policy reactions can slow future labor market adjustments. The authors' dynamic political economy model demonstrates the potential for protectionist overshooting, a phenomenon where an unanticipated permanent terms of trade improvement generates a sharp spike in trade barriers that gradually diminish over time. The more unequal the initial distribution of gains and losses from the terms of trade change among the population, the greater the magnitude of protectionist overshooting will be and thus the longer the induced policy distortion will persist: unequal gains, prolonged pain. Using the model as a guide, the authors examine several key data markers for the U.S. labor market which together suggest that protectionist overshooting should be of practical concern to economists and policymakers.