Conventional analysis in the trade-industrial-organization literature suggests that, when a count... more Conventional analysis in the trade-industrial-organization literature suggests that, when a country has some market power over an imported good, some small level of protection must be welfare improving. This is essentially a terms-of-trade argument that is reinforced if the imported goods are substitutes for domestic goods produced with increasing returns to scale, goods that are initially underproduced in free-trade equilibrium. This paper notes that this result may not hold when (1) the imports are intermediates used in a domestic increasing-returns industry, and/or (2) the intermediates are complements for domestic inputs produced with increasing returns. We then demonstrate such an outcome with respect to Mexican protection against imported auto parts using an applied general-equilibrium model of the North American auto industry.
Gains from knowledge transmission arising from the presence of foreign firms has received a good ... more Gains from knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through "reinventing the wheel". We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or "absorptive") capacity of the domestic economy. "I once asked a plumber who came to fix my water heater, and who did it in three minutes, how he dared to charge me eighty thousand lire for turning a little knob. He told me it had taken him twenty years to learn which knob to turn." from "Wilful Behavior" , a novel by Donna Leon "I wanted to work for a foreign company so I could learn from experts. My life would be much harder if I didn't have this job. Now we can think about the future. If I can afford it, I want to send my son to study overseas -maybe Australia or the United States." Dang Thi Hai Yen, production manager at a Vietnamese factory sub-contracted by Nike, Inc.
Beginning in the early 1980s, theoretical analyses have incorporated the multinational firm into ... more Beginning in the early 1980s, theoretical analyses have incorporated the multinational firm into the microeconomic, general-equilibrium theory of international trade. Recent advances indicate how vertical and horizontal multinationals arise endogenously as determined by country characteristics, including relative size and relative endowment differences, and trade and investment costs. Results also characterize the relationship between foreign affiliate production and international trade in goods and services. In this paper, we survey some of this recent work, and note the testable predictions generated in the theory. In the second part of the paper, we examine empirical results that relate foreign affiliate production to country characteristics and trade/investment cost factors. We also review findings from analyses of the pattern of substitutability or complementarity between trade and foreign production.
The basic gains-from-trade theorem makes a stark comparison between completely free trade and com... more The basic gains-from-trade theorem makes a stark comparison between completely free trade and complete autarky. This paper is motivated by recent evidence that trade has greatly expanded on the extensive margin (aka fragmentation, offshoring) by adding newly traded goods and services and that much of this new trade is in intermediates. I provide an extension of existing gains-from-trade results by allowing trade in an added set of final and/or intermediate goods. As seems generally understood, a sufficient condition for all countries to gain from fragmentation is that the relative world prices of initially-trade goods don't change. However, trade costs break the strict link between domestic and world prices in my approach and this results in interesting subtleties as initially-traded goods change their trade status following fragmentation. I illustrate these results by applying them to two recent and quite specific formulations of expansion at the extensive margin: Grossman and Rossi-Hansberg ( ) and . Symmetry in two senses results in gains for all countries: countries are relatively symmetric in size and the newly-traded goods are relatively symmetric in their factor intensities with respect to the world endowment ratio. This paper is a significant revision of a long-stalled earlier version circulated under the title "Expansion of trade at the extensive margin: welfare and trade-volume consequences". The paper was presented at the Athens ETSG and at CESifo Munich in September 2007 and in a couple of other places I can't remember. I appreciate comments received then and added comments, suggestions and references are most welcome now. 1 1. 1 The idea that gains moving from restricted (but positive) trade to more-liberal trade requires ruling out "on average" terms-of-trade losses is not new, though I don't know who to credit (a folk theorem?). I have had a proof of this in my PhD course notes since the late 1970s, but am not claiming credit for it. An excellent general discussion is found in Deardorff ( ) and the result is noted for trade in "tasks" in Baldwin and . Added references are welcome. A simple example of losses from liberalization: a large country that unilaterally drops its optimal tariff is going to be worse off due to the resulting terms-of-trade deterioration. weakest condition for Pareto improvements in standard models with no trade costs: with any change in world prices, the sufficient condition must fail for at least one country. With trade costs, this need not be the case since domestic prices of initially-trade goods may move differently from world prices as goods change their trade status. Pareto improving gains are possible in spite of some movement in world prices. 1
Any paper on services typically either chooses to define services or to ignore the question and a... more Any paper on services typically either chooses to define services or to ignore the question and assume that we all know what we are talking about. The first option is a swamp, and in seminars authors who chose this route seldom get beyond section one. The second route is almost as bad, but at least the authors may make it to the model before the inevitable question arises.
International Journal of Economic Theory, Feb 14, 2014
Early analyses of direct investment versus outsourcing focused on the existence of knowledgebased... more Early analyses of direct investment versus outsourcing focused on the existence of knowledgebased assets, knowledge being non-rivaled and non-excludable. Ethier was the first to formally model the consequences of non-excludability for the vertical integration versus outsourcing decision. Later authors took a different approach, modeling physical capital as fully excludable but relationship-specific. This paper further develops a model with both non-excludable knowledge capital and fully excludable physical capital. Results show that vertical integration tends to be chosen when (a) the technology is relatively knowledge intensive and/or when (b) knowledge and physical capital are strong complements.
With public consumption goods, Pareto optimality can be achieved in equilibrium through Lindahl p... more With public consumption goods, Pareto optimality can be achieved in equilibrium through Lindahl pricing. This requires that each consumer pays a price proportional to his marginal utility from the public good. The marginal cost of providing the good is then equated to the sum of the ...
Issue Linking in Trade Negotiations: Ricardo Revisited or No Pain No Gain*
DQDO\VHV RI WKH SDWWHUQ RI VXEVWLWXWDELOLW\ RU .RPSOHPHQWDULW\ EHWZHHQ WUDGH DQG IRUHLJQ SURGX.WL... more DQDO\VHV RI WKH SDWWHUQ RI VXEVWLWXWDELOLW\ RU .RPSOHPHQWDULW\ EHWZHHQ WUDGH DQG IRUHLJQ SURGX.WLRQ -DPHV 5 0DUNXVHQ .HLWK ( 0DVNXV 'HSDUWPHQW RI (.RQRPL.V 'HSDUWPHQW RI (.RQRPL.V 8QLYHUVLW\ RI &RORUDGR 8QLYHUVLW\ RI &RORUDGR %RXOGHU &2 %RXOGHU &2 DQG 1%(5 NHLWKPDVNXV#.RORUDGRHGX MDPHVPDUNXVHQ#.RORUDGRHGX 1 1. 1 Unfortunately, these terms have been defined to mean somewhat different things by different authors. Furthermore, there is rarely a "pure" case of horizontal production in the sense that there is inevitably some vertical component to a firm. The services of firm-specific assets are supplied from parents to subsidiaries, even if the same final goods are produced in both parent and host countries. Further discussion is postponed until the next section. This approach followed directly from the earlier work on direct investment as a branch of the theory of capital flows. The other could be referred to as the "horizontal" model in which a given firm produces roughly the same goods or services in multiple countries. These two alternatives have very different empirical implications, as we will note later. 1 A third step in the development of the theory was to combine these two approaches into a richer framework that allows firms to chose among domestic, horizontal, and vertical strategies. has dubbed this the "knowledge-capital model", and tries to clarify the key unifying assumptions. In the course of discussing the relevant models, we will note their testable implications. We will be particularly interested in their predictions regarding how the volume and pattern of affiliate production relate to country characteristics. These characteristics include markets sizes, differences in market sizes, differences in relative factor endowments, and trade and investment barriers. We will be interested further in testable implications relating to the relationship between affiliate activity and trade in goods. Following the theoretical discussion, we turn to a review of empirical studies that address these questions. Empirical evidence suggests strong support for the horizontal approach, but little support for the vertical approach. The hybrid or "knowledge-capital" model gets good support, but in some cases the evidence does not allow it to be distinguished from the horizontal model.
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Papers by James Markusen