We combine a multi-country, continuum-good Ricardian model of Eaton and Kortum (2002) with a multi-country AK model of Acemoglu and Ventura (2002) to examine how trade liberalization affects countries' growth rates and extensive margins of trade over time. Focusing mainly on the three-country case, we obtain two main results. First, a permanent fall in any trade cost raises the balanced growth rate. Second, trade liberalization increases the liberalizing countries' long-run fractions of exported varieties to all destinations. Numerical experiments show that the long-run effects of trade liberalization are quite different from the short-run effects corresponding to the static Eaton-Kortum model.
On the Welfare Effect of FTA in the Presence of FDI and Rules of Origin
This paper investigates the welfare effect of forming a free trade agreement (FTA) in an international oligopoly model with cost heterogeneity. To be given tariff-free treatment within the FTA, firms must comply with rule of origins (ROOs) which require them to use a certain fraction of parts and intermediates produced within the FTA. Firms producing outside the FTA could undertake either market-oriented or exportplatform foreign direct investments (FDIs). The presence of ROOs has the following effects: (i) it might make initially infeasible FTA feasible by deterring an FDI undertaken by outside firms, (ii) it could induce an export-platform FDI of a less efficient firm which replaces a market-oriented FDI of an efficient firm, or (iii) it might kick out FDIs made before the FTA formation and deters all possible FDIs. If these effects are taken into account, the welfare effect of FTA becomes complicated and the consumer surplus in member countries might decrease.
Institutions as a Source of Comparative Advantage
Why does the fraction of firms that export vary with countries' comparative advantage? To address this question, I develop a general-equilibrium Ricardian model of North-South trade in which both institutional quality and firm heterogeneity play an important role in determining the pattern of trade. Because of contractual frictions that vary across countries and sectors, North with better institutions produces relatively more in the sectors where production is more institutionally dependent. In addition, institution-induced comparative advantage makes it relatively easier for Northern heterogeneous firms to incur export costs in the more contract-dependent sector, thereby leading to the higher exporters' percentage.
Renewable Resources, Environmental Pollution and International Migration
We develop a two-country model with two industries: the smokestack manufacturing industry, which generates pollution, and the transboundary renewable resource industry. With no trade, migration occurs from the foreign country, with lower manufacturing productivity, to the home country. If the gap in pollution abatement technology, which is superior in the home country, dominates the productivity gap, both countries gain from migration. Under a free trade equilibrium, we also show that if the marginal harvest of the resource industry is lower (higher) than marginal damage of manufacturing in the home (foreign) country, migration still causes positive effects on the stock of renewable resources, which should improve both countries' welfare.