Peer-Reviewed Publications

  • Abstract: We analyze how trade affects aggregate volatility using a multi-country, multi-industry, and multi-destination framework. We decompose aggregate output growth risk into destination risk, origin risk, and idiosyncratic risk (and their covariances). We then use this framework to run counterfactuals changing the degree of destination-market diversification (including home) and industry specialization. Using data on 19 industrial sectors, 34 countries, and 84 destination markets for the 1980–2011 period, we find that destination risk dominates, followed by idiosyncratic risk. From the counterfactuals, we find that the effect of increased destination-market diversification is quantitatively important in reducing aggregate volatility for high volatility countries. On the other hand, reducing specialization increases volatility.

  • Abstract: In their highly influential paper, ‘Does Trade Cause Growth?’, Frankel and Romer estimate a trade equation to predict bilateral trade shares, which are in turn aggregated to construct an instrument for trade openness in income regressions. The Frankel-Romer approach has gained widespread popularity as a method to generate instruments for trade and many other outcome variables from estimated bilateral relationships. In this paper, we show analytically and empirically that the Frankel-Romer instrument gives inconsistent estimates for the effect of trade on income when fitted values for zero and missing bilateral shares are omitted from the instrument. This leads to a violation of the exclusion restriction because the instrument captures the endogenous variation in the observed probability that countries engage in bilateral trade, as reflected in the number of observed trading partners. This violation disappears when predicted bilateral shares for all observed and unobserved bilateral trade relationships are included in the instrument for trade openness.

  • Abstract: Using the synthetic control method, this paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. In contrast, the Netherlands would have been as well off without the euro. We show that these estimates are not contingent on our choice of baseline control groups, growth predictors and pre-treatment period. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain our estimates. We find that early euro adopters with a business cycle more synchronized to that of the union and more open to intra-union trade or migration, lost less or gained more from the euro. A key role in increasing post-euro income losses of union members has been played by the integration of capital markets.

  • Abstract: We collect extensive data on worldwide trade by transportation mode and use this to provide detailed comparisons of the greenhouse gas emissions associated with output versus international transportation of traded goods. International transport is responsible for 33 percent of world-wide trade-related emissions, and over 75 percent of emissions for major manufacturing categories. Including transport dramatically changes the ranking of countries by emissions per dollar of trade. We systematically investigate whether trade inclusive of transport can lower emissions. In one quarter of cases, the difference in output emissions is more than enough to compensate for the emissions cost of transport. Finally, we examine how likely patterns of global trade growth will affect modal use and emissions. Full liberalization of tariffs and GDP growth concentrated in China and India lead to transport emissions growing much faster than the value of trade, due to trade shifting toward distant trading partners.

  • Abstract: This paper re-examines Adda and Cornaglia’s (2006) evidence on the compensatory behavior of smokers who, in face of higher taxes, are found to reduce their consumption of cigarettes while maintaining their cotinine—a biomarker for nicotine—levels constant. This comment examines the robustness of the empirical findings in Adda and Cornaglia (2006) using: appropriate clustered standard errors, a larger sample from the same years and survey as the data in Adda and Cornaglia (2006), cigarette-prices instead of and in addition to cigarette-taxes, and sampling weights. The empirical findings of Adda and Cornaglia (2006) are not robust. Further, little systematic evidence of compensatory behavior is found among subsamples of smokers.

  • Abstract: This paper revisits Trefler and Zhu’s (2005, 2010) (TZ) empirical examination of the factor content of trade in the presence of international differences in production techniques and trade in inputs. In this framework, knowing the bilateral details of each country’s input-output structure is key to the correct calculation of the factor content of trade. Because input-output tables typically lack this detail, TZ impute the relevant input-output coefficients by making a proportionality assumption. This paper uses survey-based input-output coefficients from the Asian Input-Output (AIO) tables that do provide bilateral details. Exploiting methodological differences in the compilation of the AIO tables and the data underlying TZ studies, this paper empirically assesses how well the TZ approach fits sourcing patterns of inputs and finds that it understates countries’ use and relative use of foreign inputs, especially in those sectors where they are most used. As a result countries’ use of domestic factors is overstated. Biases generated on exported and imported factor services cancel each other out. The net effect on the measured factor trade is small.

Published Software Packages

  • Description: Provides support for transformations of numeric aggregates between statistical classifications (e.g. occupation or industry categorisations) using the ‘Crossmaps’ framework. Implements classes for representing transformations between a source and target classification as graph structures, and methods for validating and applying crossmaps to transform data collected under the source classification into data indexed using the target classification codes.

Work in Progress

  • Abstract: Efforts to restrict Inward FDI (IFDI) have traditionally been modest. Recently there has been a dramatic increase in the number of countries screening IFDI. The costs imposed by screening raise concerns about the consequences for IFDI. In this paper, we leverage a structural gravity framework to quantify the effect of screening on the level of FDI in a host country, and on the distribution of IFDI across countries. We address these issues from three perspectives. First, partial equilibrium estimates suggest that screening reduces IFDI by 35-37%, on average. Second, general equilibrium estimates reveal that the unilateral adoption of screening reduces the aggregate IFDI of a new screener by, on average, 10%, but the impact varies from -0.2% to -33%. Finally, we consider a world where all non-screening hosts adopt screening. We find that IFDI is reduced on average by 11.4% for new screening hosts but this effect differs across hosts ranging from -0.2% to -34%. The impact on bilateral IFDI from the adoption of screening is even more varied, with the largest increase recorded as 6% while the largest drop is 64%. Third-country effects are also pronounced, with bilateral IFDI changes for bystanders ranging from -50% to 7%.

  • Abstract: Measures of trade restrictiveness are key to evaluate trade policy and design trade reforms. Kee, Nicita and Olarreaga (KNO, 2009) propose a Trade Restrictiveness Index (TRI) grounded in theory that accounts for tariffs and non-tariff measures across goods. In this paper, we revisit the KNO TRI by challenging two assumptions implicit in KNO’s welfare calculations of non-tariff measures (NTMs). The first assumption is that NTMs generate fiscal revenues as tariffs do. In fact they do not. The second is that NTMs must be welfare-reducing as they artificially increase the price of the traded good. However, that may not need to be the case to the extent that NTMs may even increase trade to the extent that they efficiently address sufficiently large negative externalities. We build on Feenstra’s (2004) framework to derive a TRI measure that corrects both issues. Preliminary results using KNO data suggest that when accounting for the zero revenues of NTMs, our TRI indices are on average 53% larger than KNO’s, with substantial effect on the ranking of countries’ trade restrictiveness.

  • Conformr: tools for creating transparent and reproducible panel datasets. (with Cynthia Huang)

Book Chapters and Interdisciplinary Work

  • Abstract: This chapter outlines political, legal and economic aspects of Australia’s inward foreign investment screening regime, taking account of the historical development of the legislative framework and its practical implementation to date. Australian screening is characterised by high levels of discretion in the Treasurer, within broad policy parameters regarding the meaning of ‘national interest’ and ‘national security’. The impact of the most recent changes as of 2021 is difficult to assess, but they have clearly increased the number of investment proposals that are subject to review. Although most applications are approved, approval with conditions is common, while other applications may be withdrawn following informal feedback, obviating the need for formal rejection. The increasing restrictiveness of Australia’s approach and its continuing differentiation between investors from different countries create risks of violating one of Australia’s 30+ international investment agreements in force, the majority of which include investor–state dispute settlement mechanisms. The economic and diplomatic rationale for such restrictiveness and differentiation (particularly in the form of higher screening thresholds for some but not all of Australia’s preferential trade agreement partners) is unclear.

  • [Link to our related Investment Treaty News piece]

    Abstract: Screening of inward foreign investment in numerous countries worldwide has heightened in recent years for a range of reasons, one of which is the volume of Chinese outward investment. Moulding screening policies around concerns about Chinese investment has been a common pattern, particularly among developed countries and allies of the United States. The application of screening measures to Chinese investments in particular is also seen in recent practice in numerous countries. These developments create potential inconsistencies with international investment law, at least for those countries with an international investment agreement with China. The 2020 arbitral award in Global Telecom v Canada shows that even a provision that explicitly excludes investment screening decisions from a bilateral investment treaty may not apply to prevent all related investment treaty claims. The increased use of screening as a policy tool, with respect to China and otherwise, also raises questions about economic rationale and impact. Put simply, blocking a foreign investment proposal may have negative effects on shareholders, jobs and the economy itself, while even the existence of a restrictive screening regime and the threat of the imposition of conditions on a deal may dampen the appeal for foreign investors.

  • Excerpt: Every once in a while news reports show the disastrous impact of natural disasters on local communities. In some cases, the losses in terms of property and lives are so big that economies struggle for months, sometimes years, before bouncing back. Local production is often affected and so is the transport of local goods to other areas. There are plenty of examples of such disasters in the 1990s and more recently: the Kobe Earthquake (Japan, 1995), the 921 earthquake (Taipei,China, 1999), Hurricanes Katrina and Rita (United States, 2004), the Japanese Great Tohoku earthquake and tsunami and the Thai floods (2011). Anecdotal evidence suggests that the distinguishing feature of these recent disasters is the global scope of their effects. It is not uncommon for firms abroad to report production delays and profit losses because suppliers in source countries struck by natural disasters fail to provide parts in time. For example, the disruptions in the supply chain caused by the Great Tohoku earthquake and tsunami events in March 2011, not only forced Japanese car manufacturers to shut down their plants for a short period, but also resulted in temporary closures of a General Motors truck plant in the United States. However, the question arises whether these global supply chain effects are just limited to a small group of extreme cases of disaster events, or are a more systematic feature of (large) natural disasters. In this chapter we provide insights into this matter by examining the effect of disruptions to global supply chains due to natural disasters on countries’ exports.

  • Excerpt: We extend a standard model of international trade with intermediate inputs. This model, originally due to Krugman and Venables (1995, 1996), is widely used in literatures on international trade and agglomeration economies. It assumes a strong form of symmetry between intermediate and final goods: the sensitivity of a good’s demand to relative prices and trade costs is assumed to be independent of its “end-use”. We derive an implication that, for a given industry, the input share of bilateral trade depends exclusively on the industrial absorption share of intermediates from that industry. That is, the intermediate input share of bilateral trade in an industry should not be explained by factor and trade costs once its industrial absorption share is controlled for. An empirical failure of the theory would instead imply that the effect of factor costs and trade barriers is not symmetric across final and intermediate international flows. We empirically test this prediction using a unique dataset, the Asian International Input-Output Tables. These tables allow us to examine country and industry level determinants of the sourcing of intermediate goods and the extent of vertical specialization.