How Important is the New Goods Margin in
International Trade?
Timothy J. Kehoe
University of Minnesota
and Federal Reserve Bank of Minneapolis
Kim J. Ruhl
University of Texas at Austin
Sectoral Detail:
What Drives Increases In Trade?
Data:
four-digit SITC bilateral trade data (789 categories in SITC.R2,
1033 categories in SITC.R3 — source: OECD).
Exercise:
• rank categories in order of base year exports.
• form sets of categories by cumulating exports ⎯ the first 645
categories account for 10 percent of exports, for example; the
next 82 categories account for 10 percent of exports; and so on.
• calculate the fraction of exports in subsequent years accounted
for by each set of categories.
Fraction of Exports: End of Sample Period
Composition of Exports
Sets of Categories Based on Export Size
0.4
0.3
0.2
0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Cummulative Fraction of Exports: Beginning of Sample Period
1.0
Fraction of Exports: End of Sample Period
Composition of Exports
Sets of Categories Based on Export Size
0.2
0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Cummulative Fraction of Exports: Beginning of Sample Period
1.0
Composition of Exports: Mexico to U.S. 1989-1999
By Sets of Categories Based on Export Size
0.20
Fraction of 1999 Exports
662.8
2.3
0.15
27.2
16.3
61.1
0.10
9.5
3.2
1.2
4.8
0.7
0.05
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cummulative Fraction of 1989 Exports
0.9
1.0
Composition of Exports: Mexico to Canada 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.30
743
0.25
0.20
3
0.15
1.6
24.1
4.7
0.10
9.2
0.8
0.05
0.8
1.1
0.8
0.7
0.8
0.00
0.1
0.2
0.3
0.4
0.5
0.6
Cummulative Fraction of 1989 Exports
0.9
1.0
Exports: Mexico to U.S.
Fraction of Total Export Value
0.2
0.15
0.1
0.05
0
1989
1991
1993
1995
Year
1997
1999
Exports: Mexico to Canada
Fraction of Total Export Value
0.32
0.24
0.16
0.08
0.00
1989
1990
1991
1992
1993
1994
Year
1995
1996
1997
1998
1999
Exports to the Single Market
0.15
Fraction of Total Export Value
France
Italy
0.10
0.05
0.00
1990
1991
1992
1993
1994
1995
Year
1996
1997
1998
1999
2000
Composition of Exports: Greece to the EEC 1979-1986
By Sets of Categories Based on Export Size
0.35
732.6
Fraction of 1986 Exports
0.30
0.25
0.20
10.6
0.15
5.8
0.10
3.5
23.9
1.1
3
4.1
0.05
2.7
1.8
0.8
0.9
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Cummulative Fraction of 1979 Exports
1.0
Exports: Greece to EEC
Fraction of Total Export Value
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1979
1980
1981
1982
1983
Year
1984
1985
1986
Trade Liberalization Experiences in North America
NAFTA
Share of Export Value in 1999: Least-Traded Goods in 1989
Mexico to United States
.172
United States to Mexico
.155
Mexico to Canada
.281
Canada to Mexico
.415
Canada to United States
.160
United States to Canada
.123
Canada – U.S. FTA
Share of Export Value in 1993: Least-Traded Goods in 1988
Canada to United States
.134
United States to Canada
.134
Trade Liberalization Experiences in Europe
EU Single Market
Share of Export Value 2000: Least-Traded Goods in 1990
Austria to Single Market
Denmark to Single Market
Finland to Single Market
France to Single Market
Germany to Single Market
Greece to Single Market (1990-1998)
Ireland to Single Market
Italy to Single Market
Netherlands to Single Market
Norway to Single Market
Portugal to Single Market
Spain to Single Market
Sweden to Single Market
Switzerland to Single Market
United Kingdom to Single Market
.175
.150
.097
.131
.129
.262
.098
.144
.123
.078
.193
.158
.169
.129
.137
Share of Export Growth Accounted for by the Least-Traded Goods
Following Accession to the EEC
Greece to the EEC (1978-1986)
.327
Spain to the EEC (1982-1987)
.153
Portugal to the EEC (1982-1987)
.161
Ricardian model with a continuum of goods x ∈ [0,1]
production technologies y ( x) = ( x) / a ( x) , y *( x) = * ( x) / a * ( x)
ad valorem tariffs τ , τ *
a ( x)
w*
(1 + τ *) wa ( x) < w * a * ( x) ⇔
<
a *( x) (1 + τ *) w
⇒ home country produces good and exports it to the foreign country.
a( x)
(1 + τ ) w *
>
a *( x)
w
⇒ foreign country produces good and exports it to the home country.
(1 + τ ) w * a ( x)
w*
>
>
w
a *( x) (1 + τ *) w
⇒ good is not traded.
Lowering tariffs generates trade in previously nontraded goods.
a( x)
a *( x)
(1 + τ ) w *
w
w*
(1 + τ *) w
x
Intraindustry trade
Grubel-Lloyd (1975) index for four-digit SITC category k :
gl
US
MEX , k
US
MEX
⎛
−
EX MEX
EX
,k
US , k
= ⎜1 −
US
MEX
⎜
+
EX
EX
MEX ,k
US , k
⎝
⎞
⎟ × 100 .
⎟
⎠
0 if there is no intra-industry trade; 100 if exports of k and imports are the same
size.
Trade-weighted Grubel-Lloyd index:
WGLUS
MEX =
∑
k∈SITC
∑ ( EX
US
US
k∈SITC
glMEX
size
=
,k
MEX , k
US
MEX , k
MEX
US
MEX
+ EX US
−
EX
−
EX
,k
MEX , k
US , k
∑ ( EX
k∈SITC
US
MEX , k
+ EX
MEX
US , k
)
Trade-weighted Grubel-Lloyd index for Mexico-U.S. trade was 48.7 in 1989.
)
.
a( x)
a * ( x)
(1 + τ ) w *
w
w*
(1 + τ *) w
x
A Serious Problem in the Data
• Prior to 1988, data was collected by the individual nations according to
their respective classification, and was then converted into STIC.R2.
For example, the United States collected data on imports and exports
under the Tariff Schedule of the United States Annotated (TSUSA)
system and the “Schedule B," respectively. Canada also used a
national classification system. Most European countries used the
Customs Cooperation Council Nomenclature (CCCN) or a derivation.
• In 1988 and 1989 most countries switched to the Harmonized System
for reporting imports and exports.
• Although efforts have been made to make data collected after the
switch to the Harmonized System compatible with data from before the
switch, it appears that there are serious inconsistencies, especially in
data from countries that did not employ the CCCN before the switch.
Calibrated Model
A grid of J + 1 equally spaced points on [ 0,1] , x j = j / J , j = 0, 1,..., J .
α j = log a ( x j ) − log a *( x j ),
j = 0,1,..., J .
Relative productivities α j are drawn from a uniform distribution.
α j ∼ u [ −α ,α ] ,
j = 0, 1,..., J .
Points x ∈ [ 0,1] that are not on grid are filled in by linear interpolation ⎯
similar goods have similar productivities.
Trade liberalization lowers τ from 0.15 to 0.05.
Utility function
( )
1
i
∫ log c ( x ) dx .
0
Feasibility:
1
i ( x)dx ≤ Li.
∫
0
Calibration to Mexico/U.S. trade 1989-1999:
Sizes of SITC categories:
sj =
US
EX MEX
+
EX
j
j
∑ ( EX
j
MEX
j
+ EX
US
j
)
.
Calibration
Parameter Value
Fact
L
L
0.062
Relative Output of Commodities
J
4251
Growth in Trade Share of Production (202%)
MEX
US
α
and
0.211
(= log 1.245) Trade-Weighted Grubel- Lloyd Index (48.7)
Composition of Exports: Mexico to U.S. 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.30
Two Standard
Deviations
0.25
0.20
0.15
Data
Model
0.10
0.05
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cummulative Fraction of 1989 Exports
0.9
1.0
Composition of Exports: Mexico to Canada 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.6
Two Standard
Deviations
0.5
0.4
0.3
Data
0.2
Model
0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cummulative Fraction of 1989 Exports
0.9
1.0
Composition of Exports: Mexico to U.S. 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.25
Two Standard
Deviations
0.20
0.15
Data
Model
0.10
0.05
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cummulative Fraction of 1989 Exports
0.9
1.0
Composition of Exports: Mexico to Canada 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.40
Two Standard
Deviations
0.30
0.20
Data
Model
0.10
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cummulative Fraction of 1989 Exports
0.9
1.0
Industry Size Measured by Trade Volume and Gross Output
600
Measured by Trade
Number of Industries
500
400
Measured by Gross Output
300
200
100
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Industry Share in Total Trade Volume or Gross Output (%)
1
1+
Composition of Exports: Mexico to U.S. 1989-1999
By Sets of Categories Based on Export Size
Fraction of 1999 Exports
0.20
0.15
Industries Measured by Output
Industries Measured by Exports
0.10
0.05
0.00
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Fraction of 1989 Exports
0.8
0.9
1.0
Distribution of Tariff Changes
U.S. Tariffs on Canadian Goods: Before and After FTA
Percentage of Observations
18
Least-Traded Goods
Other Goods
12
6
0
-100
-90
-80
-70
-60
-50
-40
-30
Percentage Change in Tariffs
-20
-10
0
>0
Distribution of Tariff Changes
U.S. Tariffs on Canadian Goods: Before and After FTA
80
Percentage of Observations
Other Goods
70
Least-Traded Goods
60
50
40
30
20
10
0
-0.2
-0.18
-0.16
-0.14
-0.12
-0.1
-0.08
-0.06
-0.04
Absolute Change in Implied Tariff
-0.02
0
>0