International trade and investment.

• Author: Feenstra, Robert C.

Research activities of the NBER's Program in International Trade and Investment can be grouped into four broad areas: trade patterns (static and dynamic); trade policy; regional and multilateral trade agreements; and foreign direct investment. Much of the research is motivated by the policy experience of the United States and other countries, and one goal of the program is to evaluate the outcome of these international policies. Another goal is to understand the determinants of trade policies and trade patterns. To this end, members of the program are engaged actively in developing models of endogenous growth, economic geography, and political economy, applied to questions of international (or regional) trade.

Trade Patterns

Current research has moved beyond resource endowments as a determinant of static trade patterns, and has introduced monopolistic competition and product diversity as an explanation for trade flows. Elhanan Helpman has shown that when countries are fully specialized in unique product varieties, and tastes are the same across nations, then a relatively simple equation relating trade flows to country sizes can be obtained.(1) This equation fits the data well for the OECD countries. David Hummels and James A. Levinsohn have reconsidered this empirical evidence, and have shown that the same equation also fits well for a group of non-OECD countries, including various South American and African nations.(2) Since we do not expect that the trade patterns of the latter countries are determined by monopolistic competition, there is a puzzle as to what is being explained by this equation.

Along with Tzu-Han Yang and the sociologist Gary G. Hamilton, I provided further evidence on the link between market structure and trade patterns.(3) Hamilton's firm-level data on business groups in Japan, Korea, and Taiwan show dramatic differences in the type of vertical and horizontal integration within these countries. We argue that these market structures should correspond to different trade patterns, and in particular, that greater vertical integration (and resulting economies of scale) should lead to less product diversity. We confirm this hypothesis by comparing Taiwan and Korea, in that Korea has less diversity in its exports to the United States. Japan has greater product variety than either of these countries, and that is explained by its substantial size. Dani Rodrik, and later we, provided evidence on the composition or "quality" of export from these countries (measured by a comparison of unit-values and price indexes).(4)

The dynamics of trade have been extensively analyzed in theory by Gene M. Grossman and Helpman,(5) and various researchers have begun to test these models. David T. Coe and Helpman find that both a country's R and D stock and the R and D stock of its trade partners affect the country's total factor productivity, supporting the idea that knowledge diffuses across borders through trade.(6) James R. Markusen and I have developed empirical measures of product variety that could be applied to growth accounting.(7) In ongoing work, Jonathan Eaton and Sam Kortum test for international technological diffusion using data on patents within the OECD countries. Magnus Blomstrom, Robert E. Lipsey, and Mario Zejan have examined the determinants of developing country growth, finding that inflows of direct investment, along with secondary education and labor force participation, are major factors.(8) The empirical evidence linking trade and growth will be the topic of an upcoming NBER-CEPR International Seminar on International Trade, organized by Robert E. and Richard E. Baldwin, to be reviewed in a future NBER Reporter.

Dynamic patterns of regional trade play a central role in recent models of economic geography, as developed especially by Paul R. Krugman.(9) Kiminori Matsuyama and Takaaki Takahashi have investigated the welfare properties of the equilibrium in which one region dominates, and show that such concentration can reduce welfare.(10) Jonathan Eaton and Zvi Eckstein present evidence that dries in France and Japan have grown in a parallel manner, with little tendency for divergence to the largest centers.(11) James E. Rauch uses data on the growth of industrial parks in the United States to argue that these allowed developers to internalize agglomeration economies; he also has analyzed the impact of bureaucracies on the historical growth of cities in the United States.(12) J. David Richardson is engaged in developing a database and analyzing trade between states within the United States. Finally, Gordon H. Hanson uses data on the garment industry in Mexico to study the impact of trade liberalization on the regional structure of wages and locational choice.(13)

Trade Policy

Research on trade policy can be divided into work on import quotas and export subsidies; on antidumping and countervailing duties; and on the political economy of trade policy. In the first area, Dani Rodrik and Barbara J. Spencer are...