Production Clustering and Offshoring, 2022 (American Economic Journal: Microeconomics: 14(3), 700-732)
I introduce a model of international production that allows the production chain to be of any length or number of sourcing countries, while imposing only weak assumptions on the structure of production and trade costs. The production process does not have to be perfectly sequential, and the final goods can be made from any number of independent subchains. I show that in this model, allocation decisions at different stages of production are interdependent, which generates a new channel of proximity-concentration trade-off. The presence of trade costs makes firms cluster their production in certain countries while trade liberalization allows firms to fragment their production more and exploit productivity differences between countries more efficiently. Clustering patterns depend on the characteristics of the production structure, with stronger clustering associated with longer and less connected structures. Clustering intensity in upstream stages of production is generally higher and less affected by exogenous changes in production structure.
An MPA Design Approach to Benefit Fisheries: Maximising Larval Export and Minimising Redundancy (with Colm Tong, Karlo Hock, Nils Krueck, and Peter Mumby)
Diversity 13 (11), 586
Russian Counter-Sanctions and Smuggling: Forensics with Structural Gravity Estimation (Revise and Resubmit at Journal of International Economics) (with John Romalis and Yongli Long)
Trade and other economic sanctions are a common foreign policy instrument, but their effectiveness can be blunted by trade deflection and smuggling. We develop a novel methodology to study the effect of the food embargo imposed by Russia on Western countries after the annexation of Crimea in 2014. We construct predicted trade flows for the post-sanctions period using an estimated structural general equilibrium gravity model with many industry sectors and compare those predictions with actual trade flows. We identify a substantial value of suspicious trade flows which we associate with smuggling; especially importing banned goods through third countries such as Belarus. The structural gravity model systematically under-predicts trade volumes for country-product combinations used as channels for smuggling of the banned goods. We identify a substantial quantity of smuggling. An ability to quickly evade sanctions must decrease their efficacy.
Oligopoly and Oligopsony in International Trade (Revise and Resubmit at Canadian Journal of Economics) (with Luca Macedoni)
We study the effects of international trade on firms’ oligopsony power in input markets. We build a theoretical model of international trade in which firms are oligopolists in the market for final goods and oligopsonists in the market for inputs. Consistent with evidence from the literature, firms’ markups increase in both the extent of oligopsony power and of oligopoly power. Trade liberalization in one market reduces firms’ market power in that market, but it has the opposite effect in the other market. In particular, international trade between oligopolists in final goods markets causes oligopsony power to increase. Calibrating our model for the US, we find that the reduction in domestic markups generated by international trade is 12-44% lower due to the presence of oligopsony power.
Shadow Offshoring and Input Complementarity (with Edwin Jiang)
We introduce a quantifiable model of international production of a complex good that consists of multiple parts. Production of any pair of parts in the same country exhibits pair-specific cost complementarity, and consequently, decisions on production locations are interrelated, which generates rich patterns of clustering. We use the World Input-Output Database to estimate the model for the case of US production and find that these complementarity costs are highly heterogeneous across industries and, on average, account for 1.86% of total production costs. Gains from trade associated with the decrease in these costs are 50% larger than in the case of a decrease in tariffs. Finally, using our model, we construct an index of international integration, that, unlike standard measures, accounts not only for the total costs of parts produced abroad but also what parts are produced and how similar these parts are to one another. We find that this index is a better predictor of the welfare consequences of trade liberalization than conventional measures of offshoring.
PPML, Gravity, and Heterogeneous Trade Elasticites (with Xinbei Zhou)
The gravity equation, the most popular empirical tool in International Trade, is usually estimated by the OLS or Poisson Pseudo-Maximum Likelihood (PPML), with PPML being robust to the heteroskedasticity of an error term. We find that when the trade elasticity is heterogeneous between country pairs, OLS and PPML estimates have different interpretations: OLS estimates the average elasticity and PPML the elasticity of the average. We show that most of the differences between the PPML and OLS estimates are explained by the difference in the interpretation of the coefficients with only 8-30% of the differences explained by the heteroskedasticity channel.