International Trade and Investment.

• Author: Redding, Stephen J.

The International Trade and Investment (ITI) Program holds three regular meetings annually, in winter, spring, and at the NBER Summer Institute. The ITI Program has 85 research associates, 11 faculty research fellows, two research economists, and 34 members with primary affiliations in other NBER programs, making a total of 132 members. Research within the group covers a wide range of topics, such as explaining patterns of international trade and foreign direct investment, understanding the impact of trade policies, and examining the spatial distribution of economic activity within countries.

The regular meetings are often complemented with specialized conferences. In recent years, these have included "International Fragmentation, Supply Chains, and Financial Frictions" (2023), organized by Pol Antras, Sofia Bauducco, Linda S. Goldberg, and Sebnem Kalemli-Ozcan; "Trade and Trade Policy in the 21st Century" (2022), "The Future of Globalization" (2021), and "International Trade Policy and Institutions" (2020), all organized by Robert W. Staiger and myself; "The Rise of Global Supply Chains" (2021), organized by Laura Alfaro and Chad Syverson); "Risks in Agricultural Supply Chains" (2021), organized by Antras and David Zilberman; "Agricultural Markets and Trade Policy" (2020), organized by Dave Donaldson; "Economic Consequences of Trade" (2019), organized by Redding; "Firms and Networks" (2018), organized by Alfaro, Antras, and Redding; and "Trade and Geography" (2017), organized by Redding and Esteban Rossi-Hansberg.

This report focuses on research during 2016-22 period; the last ITI program report was in 2016. During this period, two ITI program members--Donaldson in 2017 and Oleg Itskhoki in 2022--received the John Bates Clark Medal, awarded by the American Economic Association to American economists under the age of 40 who have made significant contributions to economic thought and knowledge.

Trade Policy

The last six years have witnessed a resurgence in protectionist policies and an accompanying renaissance in research on trade policy. Although several previous US presidents have introduced protectionist measures early in their first terms, the Trump administration followed this historical precedent with more breadth and force than hitherto observed, and these policies have largely remained in place in the Biden administration. During 2018, six waves of tariffs were introduced on $283 billion of US imports, with further waves of tariffs introduced in 2019. As illustrated in Figure 1, the average US import-weighted tariff rose sharply from less than 2 percent to more than 5 percent, with a marked increase in the number of US tariffs of more than 10 percent. In response, China, the European Union, Russia, Canada, Turkey, Mexico, Switzerland, Norway, India, and Korea all filed disputes with the United States at the World Trade Organization (WTO). Many countries retaliated against the US actions by applying tariffs of their own. (1)

A growing body of research has estimated the economic impact of the US-China trade war. Two early empirical studies--one by Mary Amiti, David Weinstein, and me, and one by Pablo Fajgelbaum, Pinelopi Goldberg, Patrick Kennedy, and Amit Khandelwal--estimated aggregate real income losses for the United States of $8.2 billion and $7.2 billion, respectively. While these real income losses correspond to less than 1 percent of GDP, they are comparable to estimates of US welfare gains from tariff reductions under the North American Free Trade Agreement (NAFTA). (2) Figure 2 shows event-study estimates in which imposition of the US tariffs is followed by sharp reductions in import values. (3) One surprising finding of these and other empirical studies is that the US tariffs were largely passed through into higher prices for US firms or consumers, with little evidence of reductions in the prices received by Chinese exporters. In contrast, neoclassical trade theory would predict incomplete pass-through for a country that is large relative to world markets, such as the US. These high rates of pass-through into import prices remain somewhat of a puzzle for ongoing research.

Whether the US tariffs were passed on fully into US consumer prices is harder to discern because of the challenges of developing comprehensive mappings from Harmonized Tariff Schedule (HTS) products to final consumer expenditure categories. Using product-level data from several large retailers, Alberto Cavallo, Gita Gopinath, Brent Neiman, and Jenny Tang find more limited movements in consumer prices, suggesting that these tariffs were mainly absorbed in retail and wholesale margins within the United States. (4) In a detailed study of washing machines, Aaron Flaaen, Ali Hortacsu, and Felix Tintelnot find that the 2018 tariffs increased the US consumer price of washing machines by nearly 12 percent. Notably, even though dryers were not themselves subject to tariffs, the price of dryers increased by an equivalent amount, suggesting a role for complementarities in demand between goods. (5)

A distinctive feature of US tariffs on imports from China was that the initial waves mainly concentrated on intermediate and capital goods. Later waves expanded to include consumer goods as the administration began to run out of intermediate and capital goods to target. Gene M. Grossman and Elhanan Helpman analyze the reorganization of firm supply chains in response to such tariffs on intermediate goods in a setting with costly supplier search and bargaining. (6) Kyle Handley, Fariha Kamal, and Ryan Monarch analyze the impact of these tariffs on intermediate goods on the ability of US firms to export, and find a resulting decline in US export growth equivalent to an ad valorem tax on US exports of 2 percent for the typical product and up to 4 percent for products with higher than average exposure. (7)

Although most research has focused on the impact of the US-China trade war on the United States, Davin Chor and Bingjing Li use high-frequency night-lights data across latitude and longitude grid cells to provide evidence on the impact on China. (8) While grid cells with negligible direct exposure to the US tariffs account for up to 70 percent of China's population, the 2.5 percent of the population located in grid cells with the largest US tariffshocks saw a 2.52 percent decrease in predicted income per capita and a 1.62 percent predicted drop in manufacturing employment. More broadly, Fajgelbaum, Goldberg, Kennedy, Khandelwal, and Daria Taglioni examine the reallocation of global trade patterns and find that a number of third countries, such as Vietnam, benefited from the US tariffs, experiencing increased exports to the United States and the rest of the world. (9) Fajgelbaum and Khandelwal survey the burgeoning empirical literature on the impact of the US-China trade war, (10) while Lorenzo Caliendo and Fernando Parro provide a broader review of the theoretical and empirical literature on the normative and positive aspects of trade policy. (11)

The decades leading up to the US-China trade war were a time of ongoing multilateral and preferential trade liberalization. A number of studies have argued that the recent change in the direction of US trade policy, alongside other retreats from trade liberalization such as the United Kingdom's Brexit decision to leave the European Union, have substantially increased trade policy uncertainty. This increase in uncertainty by itself can depress trade and investment, as firms adopt a "wait-and-see" strategy before engaging in large investments such as in overseas plant and machinery. Using data on movements in stock prices around the dates of US-China tariff announcements, Amiti, Sang Hoon Kong, and Weinstein estimate that these changes in trade policy lowered the investment growth rate of listed US companies by 1.9 percentage points, and reduced aggregate US welfare through all channels including uncertainty by 4.9 percentage points. (12) More broadly, Andrew Greenland, Mihai Ion, John Lopresti, and Peter Schott use movements in stock prices around trade policy announcements to develop an overall measure of trade liberalization. (13)

A growing number of studies examine the relationship between international trade flows and trade policy uncertainty. Alejandro Graziano, Handley, and Nuno Limao find that increases in the probability of Brexit in prediction markets reduced both bilateral export values and the extensive margin of firm trade participation. (14) Saad Ahmad, Limao, Sarah Oliver, and Serge Shikher show that these increases in the predicted probability of Brexit had a pronounced impact on services trade, with reductions in services exports from Britain to the European Union of around 20 log points. (15) Using data on Chinese firms, Felipe Benguria, Jaerim Choi, Deborah L. Swenson, and Mingzhi Xu find that increases in both US tariffs and Chinese retaliatory tariffs raised measures of trade policy uncertainty (TPU), with a one standard deviation increase in TPU reducing firm-level investment, research and development (R&D), and profits by 1.4, 2.7, and 8.9 percent, respectively. (16) Isaac Baley, Laura Veldkamp, and Michael E. Waugh demonstrate that the effects of greater uncertainty are in fact uncertain. They provide conditions under which increased uncertainty can promote trade. (17) Handley and Limao survey this growing literature on trade policy uncertainty. (18)

The recent resurgence of protection in the United States and elsewhere has led to renewed debate about the future of the WTO and the multilateral rules-based trading system that has characterized the period since the Second World War. Staiger reviews recent research on the economic rationale for the WTO and its underlying principles of reciprocity and nondiscrimination, as captured in the so-called mostfavored-nation (MFN) rule. These principles can be rationalized as a mechanism for countries to overcome the...