Essays in International Trade

Abstract

This dissertation consists of three essays exploring specific issues in international trade.

The first chapter studies how disaggregated input-output interactions shape trade and welfare responses to changes in trade costs. I develop a model with a large number of products linked through a general "snakes and spiders" network. The central feature of the model which also makes it highly intractable is endogenous formation of comparative advantage. To overcome this complexity challenge, I obtain a perturbation solution in terms of intuitive summary statistics. I find that, in contrast to the composite intermediate good structure often employed in the literature, imperfect supplier diversification transforms fundamental comparative advantage in two ways. First, as exogenous productivity differences accumulate along supply chains, endogenous variation in relative costs is increasing in the level of trade frictions. Second, the comparative advantage of upstream and downstream industries becomes positively correlated. The first effect generates larger welfare gains from trade and also raises the average product-level import share. The second effect, however, is trade-reducing: the tendency of comparative-advantage industries to source disproportionately from each other increases aggregate home bias.

The second chapter links the growth of trade to structural transformation in the major economies over the last several decades which have seen steadily declining manufacturing employment. I find that, under increasing returns, falling employment in manufacturing amplifies comparative advantage forces relative to trade barriers, specialization deepens to offset losses in scale in the marginal industries, and trade increases. I establish this result in a model based on Dornbusch, Fischer, and Samuelson (1977) to which I add exogenously nontraded services and fixed costs in manufacturing.

The third chapter studies optimal trade policy in the presence of intermediate goods. I consider a multi-industry two-stage production economy where both final and intermediate products are traded and the available policy instruments include all import and export tariffs. Import taxes for intermediate goods are uniform, while other instruments are heterogeneous, responding to variation in model parameters. I find that stronger international production sharing reduces optimal import tariffs but increases optimal export taxes.