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2021: Forthcoming papers and abstracts

September 2021

Kazunobu Hayakawa (Institute of Developing Economies), Hiroshi Mukunoki (Gakushuin University), Shujiro Urata (Institute of Developing Economies)
"Can E-commerce Mitigate the Negative Impact of COVID-19 on International Trade?"

The Japanese Economic Review

This study aims to empirically investigate the role of E-commerce (EC) on the trade impacts of COVID-19. To this end, we estimate gravity equations for bilateral trade among 34 reporting countries and their 145 partner countries during January–August in 2019 and 2020. Our major findings can be summarized as follows. A larger number of confirmed cases or deaths in both importing and exporting countries significantly decrease international trade. However, we found that EC development in importing countries contributes to mitigating this negative effect of COVID-19 on trade while that in exporting countries does not. These results are robust for our use of multiple measures of EC development.

Yasuhiro Takarada (Nanzan University), Takeshi Ogawa (Senshu University), Weijia Dong (Chinese Academy of Social Sciences)
"Trade, Transportation, and the Environment: Welfare Effects of Emissions Reduction and International Emissions Trading"

The International Trade Journal

This article examines the environmental regulations of international transport in a two-country model with the international transport sector in each country. International transport generates pollution which is treated as a pure public bad. First, we show that a country may benefit from voluntarily imposing a strict environmental regulation despite this regulation having the effect of shrinking the international transport sector. Second, we find that permit trading between the international transport sectors of two countries benefits an international-transport-importing country, while permit trading may harm an international-transport-exporting country even if it receives all of the direct gains from permit trading.

Chingunjav Amarsanaa (Bank of Mongolia) and Yoshinori Kurokawa (University of Tsukuba)
"The Extensive Margin of International Trade in a Transition Economy: The Case of Mongolia"

Comparative Economic Studies

Using the Kehoe and Ruhl (2013) methodology, we investigate whether the variety of traded goods, which is the extensive margin of trade, has actually changed in a transition economy, such as Mongolia, as predicted by recent theoretical models. Answering this question would be interesting especially for the transition economies that still have an observer status in the World Trade Organization (WTO). We find large increases in the extensive margin of Mongolia’s trade with 10 major trade partners from 1997 to 2002, when Mongolia was undergoing significant structural reforms. We also find further increases in the extensive margin for Mongolia-China and Mongolia-the main EU trade partners after trade liberalizations due to China’s accession to the WTO (2001) and Mongolia’s eligibility for the EU Generalized Systems of Preferences (GSP+) scheme (2005). We, however, find no or relatively small further increases in the extensive margin for the Mongolia-Russia pair during the period 2002 to 2007, when there was no major change in the trade regime of these two countries. Our robustness checks indicate that methodologies other than that of Kehoe and Ruhl’s overstate the extensive margin growth in Mongolia with small trade relationships.

Hiroshi Mukunoki (Gakushuin University), Hirofumi Okoshi (Okayama University)
"Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing"

International Tax and Public Finance

We explore the new roles of rules of origin (ROO) when multinational enterprises (MNEs) manipulate their transfer prices to avoid a high corporate tax. The ROO under a free trade agreement (FTA) require exporters to identify the origin of exports to be eligible for a preferential tariff rate. We find that a value-added criterion of ROO restricts abusive transfer pricing by MNEs. Interestingly, an FTA with ROO can induce MNEs to shift profits from a low- to high-tax country. Because the ROO augment tax revenues inside FTA countries, they can transform a welfare-reducing FTA into a welfare-improving one.

August 2021

Zhe Chen (University of International Business and Economics) and Yoshinori Kurokawa (University of Tsukuba)
"Do Exporters Respond to Both Tariffs and Nominal Exchange Rates? Evidence from Chinese Firm-Product Data"

Review of International Economics

Past evidence on exchange rates and exports implies that nominal exchange rates might not matter for the extensive margin of exports. Using Chinese firm-product data during 2000–2006, however, this paper finds that the effect of nominal exchange rates on exporter numbers is significant and even comparable with that of tariffs. The effects are larger for processing trade, low income destinations, and differentiated products. Financial constraints are a factor that significantly enlarges the effect of nominal exchange rates on exporter numbers.

Kazuhiro Takauchi (Kansai University) and Tomomichi Mizuno (Kobe University)
"Endogenous transport price, R&D spillovers, and trade"

The World Economy

Efficient distribution has a considerable influence on the sales volume of firms, and thus affects the firms' research and development (R&D) activities. This paper analyzes the relationship between competition in the transport sector and the R&D of firms using the transportation services. We consider a two-region reciprocal market in which firms invest in cost-reducing R&D and use carriers that engage in price competition to supply their products to the foreign market. We show that, corresponding to the degree of R&D spillover, a transport cost (or price) reduction because of an increase in the number of carriers can increase or decrease the firms' R&D investments. This result is consistent with the finding in previous studies that trade liberalization can hinder R&D. Because inefficient firms lead to high prices in the market, an increase in the number of carriers may reduce consumer surplus. We further discuss the case in which firms have monopsony power in transportation services and show that our main results are robust to the extension.

Jota Ishikawa (Hitotsubashi University) and Nori Tarui (University of Hawaiii)
"You can’t always get what you want: Protectionist policies with the transport sector"

Economics Letters

This paper incorporates key stylized facts about the transport sector into the conventional international oligopoly model and explores how protectionist policies perform differently when transport costs are endogenous and subject to the backhaul problem (i.e., the imbalance of shipping volume in outgoing and incoming routes). A country’s protectionist policies, which benefit domestic firms and harm foreign firms in the conventional model, can harm domestic firms and benefit foreign firms if carriers avoid the backhaul problem. Protectionist policies may also lead to a facilitating practice. In the absence of the backhaul problem, both domestic and foreign consumers lose from protectionist policies.

June 2021

Makoto Hirono (Tokushima Bunri University) and Kazuo Mino (Kyoto University)
"Pension Reforms, Population Aging, and Retirement Decision of the Elderly in a Neoclassical Growth Model"

Macroeconomic Dynamics

This study explores the linkage between the labor force participation of the elderly and the long-run performance of the economy in the context of a two-period-lived overlapping generations model. We assume that the old agents are heterogeneous in their labor efficiency and they continue working if their income exceeds the pension that can be received in the case of full retirement. We first inspect the key factors that determine the retirement decision of the elderly. We then examine analytically as well as numerically the long-run impacts of labor participation of the elderly on capital accumulation and income distribution.

May 2021

Takumi Naito (Waseda University)
"Can the optimal tariff be zero for a growing large country?"

International Economic Review

Can the optimal tariff be zero for a growing large country? To pursue the possibility, we extend the Rivera-Batiz–Romer lab-equipment model of endogenous technological change to include asymmetric countries, import tariffs, and either homogeneous or heterogeneous firms. Each country's domestic revenue share is a sufficient statistic for its long-run growth rate, but it is not for its long-run welfare. A unilateral tariff reduction by either country always increases the balanced growth rate. A zero tariff is locally optimal for a country under a mild condition, which is automatically satisfied at a symmetric balanced growth path with the zero tariff.

March 2021

Angus Chu (University of Liverpool), Yuichi Furukawa (Aichi University), Sushanta Mallick (Queen Mary University of London), Pietro Peretto (Duke University), and Xilin Wang (Fudan University)
"Dynamic Effects of Patent Policy on Innovation and Inequality in a Schumpeterian Economy"

Economic Theory

This study explores the dynamic effects of patent policy on innovation and income inequality in a Schumpeterian growth model with endogenous market structure and heterogeneous households. We find that strengthening patent protection has a positive effect on economic growth and a positive or an inverted-U effect on income inequality when the number of differentiated products is fixed in the short run. However, when the number of products adjusts endogenously, the effects of patent protection on growth and inequality become negative in the long run. We also calibrate the model to US data to perform a quantitative analysis and find that the long-run negative effect of patent policy on inequality is much larger than its short-run positive effect. This result remains consistent with our empirical finding from a panel vector autoregression.

Angus Chu (University of Liverpool), Guido Cozzi (University of St. Gallen), and Haichao Fan (Fudan University), and Yuichi Furukawa (Aichi University)
"Inflation, Unemployment and Economic Growth in a Schumpeterian Economy"

Scandinavian Journal of Economics

This study explores the long-run relationship between inflation and unemployment in a monetary Schumpeterian growth model with matching frictions in the labor market and cash‐in‐advance (CIA) constraints on consumption and R&D investment. Under the CIA constraint on R&D, higher inflation that raises the opportunity cost of cash holdings leads to a decrease in innovation and economic growth, which in turn decreases labor‐market tightness and increases unemployment. Under the CIA constraint on consumption, higher inflation instead decreases unemployment in addition to stifling innovation and economic growth. Therefore, the two CIA constraints have drastically different implications on the long‐run relationship between inflation and unemployment. This theoretical result is consistent with our empirical finding and provides a plausible explanation (via the relative magnitude of the two CIA constraints) for the mixed empirical results on the relationship between inflation and unemployment in the literature. Finally, we also calibrate our model to aggregate data in the US and Eurozone to explore quantitative implications on the relationship between inflation and unemployment.

Yasushi Kawabata (Nagoya City University), Yasuhiro Takarada (Nanzan University)
"Deep Trade Agreements and Harmonization of Standard"

Southern Economic Journal

This study examines how free trade agreements (FTAs) and customs unions (CUs) affect multilateral trade agreements when countries endogenously determine the standards as well as tariffs. Raising standards reduces the negative consumption externalities of a traded good but increases firms’ costs. We find that a deep FTA with the harmonization of standards may be a stumbling block for multilateral free trade with the international standard that maximizes world welfare, whereas a deep CU with standards is a building block. As extensions, we consider asymmetry in firms’ production costs and in the awareness of negative externalities between countries as well as transboundary externalities.

Kazunobu Hayakawa (Institute of Developing Economies), Hiroshi Mukunoki(Gakushuin University)
"Impacts of COVID-19 on International Trade: Evidence from the First Shock"

Journal of the Japanese and International Economies

This study investigates how the effects of COVID-19 on international trade changed over time. To do that, we explore monthly data on worldwide trade from January to August in 2019 and 2020. Specifically, our study data include the exports of 34 countries to 173 countries. We estimated the gravity equation by employing various variables as a proxy for the COVID-19 damage. Our findings can be summarized as follows: First, regardless of our measures to quantify the COVID-19 pandemic, we found significantly negative effects of COVID-19 on the international trade of both exporting and importing countries. Second, those effects, especially the effects of COVID-19 in importing countries, tended to become insignificant since July 2020. This result implies that the harmful impacts of COVID-19 on international trade were accommodated after the first wave of the pandemic to some extent. Third, we found heterogeneous effects across industries. The negative effects on non-essential, durable products persist for a long time, whereas positive effects in industries providing medical products were observed.

Kazunobu Hayakawa (Institute of Developing Economies), Hiroshi Mukunoki(Gakushuin University)
"Impacts of Covid‐19 on Global Value Chains"

The Developing Economies

We investigate the impacts of COVID‐19 on global value chains by examining bilateral trade in finished machinery products from January to June in both 2019 and 2020. We use the numbers of COVID‐19 cases and deaths as measures of the impact of the pandemic. Specifically, we investigate how these impacts affect value chains in three scenarios—countries that import finished machinery products, countries that export finished machinery products, and countries that export machinery parts to countries exporting finished machinery products—to assess the impacts on demand, output, and supply‐chain, respectively. In our analysis, the largest negative impacts were from supply‐chain effects, followed by output effects. In contrast, we did not find significant impacts from demand effects. We also found that output effects are not so strong in intra‐Asian trade compared with trade in other regions.

January 2021

Takumi Naito (Waseda University)
"Trade diversion is reversed in the long run"

Review of Economic Dynamics

We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive.

Kozo Kiyota (Keio University and RIETI), Sawako Maruyama (Kindai University), Mina Taniguchi (LMU Munich)
"The China Syndrome: A Cross-Country Evidence"

The World Economy

While in many advanced countries the increasing import competition from China on employment is a major concern for policymakers and for the general public, its impact of Chinese import competition could be different across countries, depending upon the volume and the composition of the products. This paper examines the impact of the China shock on employment in six advanced countries. We find that the import penetration of final goods from China has negative effects on manufacturing employment in these countries, whereas the import penetration of intermediate inputs from and the exports to China could have positive effects. Moreover, such positive effects could offset or even outweigh the negative effects in some countries. These results together suggest that a careful interpretation is needed when evaluating the external validity of the China shock that is obtained in one country.

Hiroshi Mukunoki (Gakushuin University), Hirofumi Okoshi (Okayama University)
"Rules of Origin and Consumer-hurting Free Trade Agreements"

The World Economy

This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value-added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer-hurting FTA formation is possible, even if all firms make tariff-free exports. Furthermore, such an FTA formation may worsen total welfare.

Kuo-Feng Kao (Tamkang University), Hiroshi Mukunoki (Gakushuin University)
"The Effects of Parallel Trade in Two-sided Markets"

Economics Letters

This study investigates the effects of parallel imports in two-sided markets, which may increase profits for manufacturers when products have a two-sided market nature. Additionally, parallel imports increase consumer surplus and social welfare in all countries if the network externalities from both sides are large enough. However, if one externality is small while the other is large, parallel imports can hurt consumers and welfare in all countries.

Yuhua Li (Zhejiang University of Finance & Economics), Ze Jian (Guangdong University of Finance & Economics), Wei Tian (Peking University), Laixun Zhao (Kobe University)
"How Political Conflicts Distort Bilateral Trade: Firm-Level Evidence from China"

Journal of Economic Behavior and Organization

We examine how political conflicts affect trade, using both the Goldstein score that scales all political conflicts daily worldwide and the firm-country-product level data of Chinese imports. We find that political conflicts reduce Chinese imports in general. Specifically, (i) the imports of State-owned enterprises (SOEs) are most reduced, and the effects mostly fall on imports of intermediate goods while not so much on capital goods; (ii) foreign-invested enterprises (FIEs) are less negatively affected, because most of their trade is processing, which is less negatively affected by political conflicts than ordinary trade. These results are obtained via mechanisms in the mode of trade (processing vs. ordinary), variations in broad economic categories (BEC) and import boycotts and export controls.

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