this paper what we know about foreign trade and in what ways our understanding has improved as a result of the last 20 years of research

We evaluate two alternative models of international trade in differentiated products.

What are the barriers that separate nations? While recent work provides intriguing clues, we have remarkably little concrete evidence as to the nature, size, and shape of barriers. This paper offers direct and indirect evidence on trade barriers, moving us toward a comprehensive geography of trade costs. There are three main contributions. One, we provide detailed data on freight rates for a number of importers. Rates vary substantially over exporters, and aggregate expenditures on freight are at the low end of the observed range. This suggests import choices are made so as to minimize transportation costs. Two, we estimate the technological relationship between freight rates and distance and use this to interpret the trade barriers equivalents of common trade barrier proxies taken from the literature. The calculation reveals implausibly large barriers. Three, we use a multi-sector model of trade to isolate channels through which trade barriers affect trade volumes. The model motivates an estimation technique that delivers direct estimates of substitution elasticities. This allows a complete characterization of the trade costs implied by trade flows and a partition of those costs into three components: explicitly measured costs (tariffs and freight), costs associated with common proxy variables, and costs that are implied but unmeasured. Acknowledgments: Thanks for the gracious provision of data go to Jon Haveman, Rob Feenstra, Azita Amjadi and the ALADI secretariat. Thanks for helpful suggestions on previous drafts go to seminar participants at

This review of recent contributions reveals common conclusions about the effects of integration on location. For high trade costs, the need to supply markets locally encourages firms to spread across different regions. Integration weakens the incentives for self-sufficiency and for intermediate values of trade costs pecuniary externalities induce firms and workers to cluster together, turning location into a self-reinforcing process. However, agglomeration raises the price of immobile local factors and goods, so for low transport costs firms may spread to regions where those prices are lower.

This paper derives and empirically examines how factor proportions determine the structure of commodity trade. It integrates a many-country version of the Heckscher-Ohlin model with a continuum of goods developed by Dornbusch-Fischer-Samuelson (1980) with the Krugman (1980) model of monopolistic competition and transport costs. The commodity structure of production and bilateral trade is fully determined. Two main predictions emerge. There is a quasi-Heckscher-Ohlin prediction. Countries capture larger shares of world production and trade of commodities that more intensively use their abundant factors. There is a quasi-Rybczynski effect. Countries that rapidly accumulate a factor see their production and export structures systematically move towards industries that intensively use that factor. Both predictions receive support from the data. Factor proportions appear to be an important determinant of the structure of international trade.

The simple gravity equation explains a great deal about the data on bilateral trade flows, and is consistent with several theoretical models of trade. We argue that alternative theories nevertheless predict subtle differences in key parameter values, depending on whether goods or homogeneous or differentiated, and whether or not there are barriers to entry. Our empirical work for differentiated goods delivers results consistent with the theoretical predictions of the monopolisticcompetition model, or a reciprocal-dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocaldumping model with barriers to entry. JEL Classification Number: F10, F12 Keywords: homogeneous; empirical; theoretical; simulation; Cournot-Nash; reciprocal dumping.

This chapter examines empirical strategies that have been or could be used to evaluate the importance of agglomeration and trade models. This theoretical approach, widely known as “New Economic Geography” (NEG), emphasizes the interaction between transport costs and firm-level scale economies as a source of agglomeration. NEG focuses on forward and backward trade linkages as causes of observed spatial concentration of economic activity. We survey the existing literature, organizing the papers we discuss under the rubric of five interesting and testable hypotheses that emerge from NEG theory. We conclude the chapter with an overall assessment of the empirical support for NEG and suggest some directions for future research.

This paper argues that the theoretical foundations for the gravity equation are general, while the empirical performance of the gravity equation is specific to the type of goods examined. Most existing theory for the gravity equation depends on the assumption of differentiated goods. We show that the gravity equation can also be derived from a ‘reciprocal dumping ’ model of trade in homogeneous goods. The different theories have different testable implications. Theoretically, the gravity equation should have a lower domestic income elasticity for exports of homogeneous goods than of differentiated goods, because of a ‘home market ’ effect which depends on barriers to entry. We quantify the home market effect empirically using cross-sectional gravity equations, and find that domestic income export elasticities are indeed substantially higher for differentiated goods than for homogeneous goods. JEL Classification Number: F10, F12 Keywords: homogeneous; differentiated; empirical; theoretical; simulation; Cournot-Nash;

Very preliminary results, subject to change. We investigate the hypothesis that firms prefer to locate “where the markets are. ” We use theoretical model of location choice under imperfect competition to formalize this concept. The model yields an equilibrium profit equation incorporating a term closely connected to the market potential index introduced by Harris in 1954. The location decision is a function of demand expressed by consumers in all locations weighted by accessibility of those consumers. We also show that the spatial distribution of competitors should also be factored into the location choice. We then implement the model empirically, comparing our theoretically-derived measures of demand and competition “potentials ” with the more conventional demand and agglomeration variables. Our sample consists of firm-level location choices by Japanese firms between 1980 and 1995 and we use both the information on the choice of country and the choice of region inside each country in our analysis. JEL classification: F12, F15

As currently implemented, the workhorse econometric models of international trade (monopolistic competition, Heckscher-Ohlin, and gravity) do not rigorously incorporate product prices into their estimating equations. They are thus of limited value for assessing the gains from trade liberalization. We model general equilibrium product price e#ects using the CES monopolistic competition model. We then estimate the model and, mimicking computable general equilibrium (CGE) models, use the model to estimate the compensating variation associated with trade liberalization.