International studies.

• Author: Branson, William H.
• Position: Program Report

International Studies

Since my last program report (NBER Reporter, Spring 1987), the focus of attention in international economics has remained on competitiveness and protection; macroeconomic policy coordination; debt and stabilization in developing countries; and international financial markets. There also has been a resurgence of interest in growth and its interaction with trade, and the emergence of the single European market of 1992 has provided a new set of questions for researchers.

This report will discuss the program's research in six main areas: trade and competitiveness; strategic behavior and trade; international macroeconomics; international finance; developing country debt; and stabilization programs in developing countries. The report ends with a discussion of the NBER project on international taxation and the series of international seminars sponsored jointly by the NBER and other organizations.

Trade and Competitiveness

Analyses of U.S. trade and competitiveness, and of adjustment of U.S. trade to changes in the pattern of world trade and competitive pressure from abroad, have long been a central part of our research. Current work includes studies of growth and trade with differentiated products; hysteresis in trade fluctuations; the role of multinational corporations in trade; growth of trade in services; trade and fluctuations in stock prices; competitiveness and differences in the cost of capital; and the effects of trade policy.

Gene M. Grossman and Elhanan Helpman have been studying the effect of the international economic environment, including trade policy, on innovation and growth.(1) One of their results is that trade can make available a wider range of inputs and technologies, and thus can increase the growth rate. Nancy P. Marion also has developed a model in which the growth rate is endogenous, with learning by doing. In her model, open capital markets do not necessarily increase the growth rates; the nation's knowledge-based growth rate actually could fall.(2)

In a related area, Richard E. Baldwin, one of the pioneers in the analysis of hysteresis in U.S. trade, has been working with Richard Lyons.(3) With hysteresis, foreign firms enter the U.S. market as the dollar appreciates but do not exit when the dollar comes back down to the level at which they entered. The exit price is lower than the entry price. This is one explanation of why U.S. imports remained high as the dollar depreciated after 1987.

Robert E. Lipsey, Rachel McCulloch, Irving B. Kravis, and Magnus Blomstrom have continued their work on multinational corporations and international investment. Kravis and Lipsey also are studying the determinants of price level differences across countries. Kravis and Lipsey have found that exports of manufactured goods by U.S. multinationals have retained their share of world exports in the 1980s, while the share of the United States in world exports has declined.(4) Blomstrom finds that multinationals increase competition in the host country.(5) McCulloch is now studying the effects of inward foreign investment in the United States.(6)

Albert Ando, Jorge Braga de Macedo, and I are studying international comparisons of the cost of capital. In a comparative study of saving and investment in the United States and Japan, Ando has estimated their relative costs of capital.(7) In a joint research project with J. David Richardson, de Macedo and I are estimating real effective exchange rates, inclusive of relative costs of capital. Our study of the effects of exchange rate changes across countries will follow the lines of my recent work with James H. Love.(8) Related research on the effects of changes in exchange rates or trade policies on relative stock prices of sectors producing traded goods has been done by Grossman and James A. Levinsohn, and by James A. Brander. These studies find that stock prices do react to trade news.(9)

Barry J. Eichengreen and Lawrence H. Goulder have developed a dynamic computable general equilibrium (CGE) model to study the changing international competitive position of the U.S. economy. They have used it to study the effects of changes in domestic taxation designed to promote saving and investment on export-producing sectors, and to compare the effects of tariffs versus voluntary export restrictions (VERs). With a high degree of international capital mobility, subsidizing saving helps exports in the short run, but not in the long run. The opposite is true for subsidizing investment. Also, VERs do more damage to the economy than tariffs do. In April 1988, Robert C. Feenstra organized a conference on "Trade Policies for International Competitiveness" (summarized in the NBER Reporter, Summer 1988).(10)

Robert E. Baldwin continues to head the project on American trade relations; he and Richardson edited a Conference Report, Issues in the Uruguay Round, in 1988.

Strategic Behavior and Trade

The analysis of trade and the consequences of trade policy in a world of imperfect competition and strategic behavior between and among governments and actors in the private sector has been a major research area in the program since 1983. More recently, Paul R. Krugman, and Alasdair Smith of the Center for Economic Policy Research (CEPR) in London have been leading a group of researchers who are conducting empirical case studies of strategic behavior and trade at the industry level. A report on their October conference will appear in the Winter 1989/90 issue of the NBER Reporter. Several NBER researchers made important early contributions in this area. Helpman and Krugman have written a concise exposition of this topic, with extensive references.(11)

In addition, Barbara J. Spencer has been working on the trade policy implications of domestic dependence on imports for the supply of a key intermediate input, examining incentives for the exporting firm and the government to restrict exports of the input.(12) Carl Shapiro has been working on the related problem of the costs of switching between sources of supply, and horizontal mergers.(13)

Feenstra, Kala Krishna, Robert W. Staiger, and Richard H. Clarida also continue to work in this area. Feenstra and Krishna have analyzed the consequence of auctioning import quota rights. Feenstra argues that giving any quota rents to foreign suppliers will remove an incentive for domestic producers to appeal for protection. Krishna argues that foreign producers will appropriate the quota rent by their price...