3 essays in international trade

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2005.Includes bibliographical references.This thesis is a collection of three essays in international trade. Chapter 1 explains how firm heterogeneity and market structure can distort the geography of international trade. By considering only the intensive margin of trade, Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this chapter, I introduce firm heterogeneity in a simple model of international trade. I prove that the extensive margin, the number of exporters, and intensive margin, the exports per firm, are affected by the elasticity of substitution in exact opposite directions. In sectors with a low elasticity of substitution, the extensive margin is highly sensitive to trade barriers, compared to the intensive margin, and the reverse holds true in sectors with a high elasticity. The extensive margin always dominates, and the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified. To test the predictions of the model, I estimate gravity equations at the sectoral level. The estimated elasticities of trade flows with respect to trade barriers are systematically distorted by the degree of firm heterogeneity and by market structure.(cont.) These distortions are consistent with the predictions of the model with heterogeneous firms, and reject those of the model with representative firms. Chapter 2 demonstrates the importance of liquidity constraints in international trade. If firms must pay some entry cost in order to access foreign markets, and if they face liquidity constraints to finance these costs, only those firms that have sufficient liquidity are able to export. A set of firms could profitably export, but they are prevented from doing so because they lack sufficient liquidity. More productive firms that generate large liquidity from their domestic sales, and wealthier firms that inherit a large amount of liquidity, are more likely to export. This model predicts that the scarcer the available liquidity and the more unequal the distribution of liquidity among firms, the lower are total exports. I also offer a potential explanation for the apparent lack of sensitivity of exports to exchange rate fluctuations. When the exchange rate appreciates, existing exporters lose competitiveness abroad, and are forced to reduce their exports. At the same time, the value of domestic assets owned by potential exporters increases. Some liquidity constrained firms start exporting. This dampens the negative competitiveness impact of a currency appreciation. Under some circumstances, it may actually reverse it altogether and increase aggregate exports.(cont.) This model provides some argument for competitive revaluations. In chapter 3, I build a dynamic model of trade with heterogeneous firms which extends the work of Melitz (2003). As countries open up to trade, they will experience a productivity overshooting. Aggregate productivity increases in the long run, but it increases even more so in the short run. When trade opens up, there are too many firms, inherited from the autarky era. The most productive foreign firms enter the domestic market. Competition is fierce. The least productive firms that are no more profitable are forced to stop production. Not only do the most productive firms increase their size because they export, but the least productive firms stop producing altogether. Aggregate productivity soars. As time goes by, firms start to exit because of age. Competition softens. Some less productive firms resume production. This pulls down aggregate productivity. The slower the exit of firms, the larger this overshooting phenomenon. This model also predicts that the price compression that accompanies trade opening may be dampened in the long run. It also predicts that inequalities should increase at the time when a country opens up to trade, and then gradually recede in the long run.by Thomas Chaney.Ph.D