Do Falling Iceberg Costs Account for Recent US Export Growth? - PowerPoint PPT Presentation

Do Falling Iceberg Costs Account for Recent US Export Growth? George Alessandria Horag Choi FRB Philadelphia University of Auckland April 2009

Trend in Export Share of Manufacturing Value Added 0.6 14 0.5 12 Export Share (Percent) 0.4 10 Tariffs 0.3 8 0.2 6 Export Share 0.1 4 0 2 1959 1964 1969 1974 1979 1984 1989 1994 1999 Year

Trend in Export Share of Manufacturing Value Added 0.6 14 0.5 12 Export Share (Percent) 0.4 10 Tariffs 0.3 8 Tariffs 0.2 6 Export Share 0.1 4 0 2 1959 1964 1969 1974 1979 1984 1989 1994 1999 Year

Introduction Study change in trade costs and trade in puzzling period (87 to 02) through lens of benchmark heterogeneous plant model Measure change in iceberge costs ( ∆ ι ) Given ∆ ι ask: Did US Exports grow too much?

Introduction Study change in trade costs and trade in puzzling period (87 to 02) through lens of benchmark heterogeneous plant model Measure change in iceberge costs ( ∆ ι ) Given ∆ ι ask: Did US Exports grow too much? No. Puzzle is that it grew so little!

Introduction Study change in trade costs and trade in puzzling period (87 to 02) through lens of benchmark heterogeneous plant model Measure change in iceberge costs ( ∆ ι ) Given ∆ ι ask: Did US Exports grow too much? No. Puzzle is that it grew so little! Model overpredicts exporting & misses shift to small plants

Outline Accounting for trade growth & iceberg costs 1 Model 2 Calibration 3 Results 4

Trade Growth - representative plant Consider monopolist selling d it at home & ex it overseas: it ( 1 + ι t ) ( 1 + τ t )] � θ Y � [ p � = ex it t p � θ d it = it Y t

Trade Growth - representative plant Consider monopolist selling d it at home & ex it overseas: it ( 1 + ι t ) ( 1 + τ t )] � θ Y � [ p � = ex it t p � θ d it = it Y t With no price discrimination, p i = p � i , then over time, ∆ ex it = � θ [ ∆ ι + ∆ τ ] + ∆ Y � � ∆ Y d it Direct link between trade costs & export growth.

Trade Growth - representative plant ∆ ex it � ( ∆ Y � � ∆ Y ) = � θ ( ∆ ι + ∆ τ ) d it Penn World Table: ROW-US relative real income ( ∆ Y � � ∆ Y ) � 8 percent Census of Manufacturers: From 1987 to 2002, ∆ ex it / d it � 50 percent

Trade Growth - representative plant Two approaches to estimate source of trade growth Yi (2003), ∆ ι = 0 , measure ∆ τ = � 2 . 5 1 d it � ( ∆ Y � � ∆ Y ) ∆ ex it � 50 � 8 θ = � � 17 ∆ τ 2 . 5

Trade Growth - representative plant Two approaches to estimate source of trade growth Yi (2003), ∆ ι = 0 , measure ∆ τ = � 2 . 5 1 d it � ( ∆ Y � � ∆ Y ) ∆ ex it � 50 � 8 θ = � � 17 ∆ τ 2 . 5 Anderson & Van Wincoop, ∆ ι + ∆ τ unobserved, if θ = 5 2 d it � ( ∆ Y � � ∆ Y ) ∆ ex it ∆ ι + ∆ τ = � � � 8 . 5 θ

Trade Growth - representative plant Two approaches to estimate source of trade growth Yi (2003), ∆ ι = 0 , measure ∆ τ = � 2 . 5 1 d it � ( ∆ Y � � ∆ Y ) ∆ ex it � 50 � 8 θ = � � 17 ∆ τ 2 . 5 Anderson & Van Wincoop, ∆ ι + ∆ τ unobserved, if θ = 5 2 d it � ( ∆ Y � � ∆ Y ) ∆ ex it ∆ ι + ∆ τ = � � � 8 . 5 θ Measurement necessary to distinguish explanations.

Trade Growth - plant heterogeneity Aggregate trade no longer solely determined by trade costs. Characteristics of plants matter. Number of exporters 1 Size of exporters: 2 I Tend to be relatively large Use changes in these margins to infer ∆ trade costs

Trade Growth - plant heterogeneity Assume N t plants, n t exporters w/ same ι t & s it = ex it + d it ( 1 + ι t ) � θ Y � = ∑ n t � ∑ n t Exports t i = 1 ex it i = 1 s it N t � n t t = Y t + ( 1 + ι t ) � θ Y � ∑ N t ∑ N t Sales t n t N t i = 1 s it i = 1 s it t

Trade Growth - plant heterogeneity Assume N t plants, n t exporters w/ same ι t & s it = ex it + d it ( 1 + ι t ) � θ Y � = ∑ n t � ∑ n t Exports t i = 1 ex it i = 1 s it N t � n t t = Y t + ( 1 + ι t ) � θ Y � ∑ N t ∑ N t Sales t n t N t i = 1 s it i = 1 s it t Over time intensity premium export share participation z }| { z }| { � ex / s X � + � � + z }| { z}|{ = . s X / s ∆ exy ∆ ( n / N ) ∆ ∆ Direct link between ∆ in iceberg costs and export intensity.

Table 1: Export Characteristics and Trade US Plants with 100+ employees EXY Intensity Premium Participation 1987 0.061 0.100 1.65 0.37 2002 0.097 0.152 1.35 0.47 Log Change 0.46 0.42 -0.20 0.24

Table 1: Export Characteristics and Trade US Plants with 100+ employees EXY Intensity Premium Participation 1987 0.061 0.100 1.65 0.37 2002 0.097 0.152 1.35 0.47 Log Change 0.46 0.42 -0.20 0.24 Similar results for all plants Changes in intensity a¤ect both premium & participation Given small role for ∆ 0 s in income, attribute all to iceberg costs.

Model Baldwin & Krugman (89), Hopenhayn (93), Roberts & Tybout (97), Melitz (03), Das, Roberts, and Tybout (2007) ∞ -horizon 2 symmetric countries f H , F g Final non-traded good made w/ tradable & non-tradable intermediates Complete asset markets

Model Non-tradables: N N , t , N � N , t di¤erentiated H & F intermediates I Di¤er by technology z I ψ NT , t ( z ) denotes measure of plants w/ z .

Model Non-tradables: N N , t , N � N , t di¤erentiated H & F intermediates I Di¤er by technology z I ψ NT , t ( z ) denotes measure of plants w/ z . Tradables: N T , t , N � T , t di¤erentiated H & F intermediates I Di¤er by z , export status m = f 0 , 1 g & …xed cost f m + κ I Export costs: start f 0 , & continue, f 1 (in labor), iceberg, ι t . I Measure of establishments: ψ T , t ( z , κ , m )

Model Non-tradables: N N , t , N � N , t di¤erentiated H & F intermediates I Di¤er by technology z I ψ NT , t ( z ) denotes measure of plants w/ z . Tradables: N T , t , N � T , t di¤erentiated H & F intermediates I Di¤er by z , export status m = f 0 , 1 g & …xed cost f m + κ I Export costs: start f 0 , & continue, f 1 (in labor), iceberg, ι t . I Measure of establishments: ψ T , t ( z , κ , m ) Idiosyncratic shocks φ ( z 0 , κ 0 j z , κ ) & exogenous survival n s ( z , κ ) Free Entry: hire f E workers Timing: …xed costs paid 1 period in advance All plants owned by domestic agents.

Key Abstractions Asymmetric countries/sectors I US may have comparative advantage in small-scale industries or innovation Business-cycle ‡uctuations I Export participation is procyclical (Alessandria-Choi 2007) Iceberg costs are exogenous, identical across …rms I No marketing frictions (Arkolakis 2007 Drozd & Nosal 2007)

Consumer’s Problem ∞ β t U ( C t ) , ∑ V C , 0 = max f C t , B t , K t + 1 g t = 0 B t � W t L t + R t K t � 1 + B t � 1 + ( 1 � δ ) K t � 1 + Π t , C t + K t + Q t P t P t , W t denote price level & real wage, Π t sum of home country pro…ts Foreign problem with * = U � q t � P � Q t = β U C , t + 1 P t t C , t , , U C , t P t + 1 P t U C , t

Competitive Final Good Producers Combine NT & T intermediates to produce …nal good Imports available only from foreign exporters, i.e. m � = 1 . ) Set of available tradables di¤ers across countries.

Competitive Final Good Producers R Π = max P � D � ∑ 1 z � κ P H ( z , κ , m ) y d H ( � ) ψ T ( � ) m = 0 � R z � κ ( 1 + ι t ) P F ( � ) y d F ( � ) ψ � T ( z , κ , 1 ) � P N Y N , subject to: T Y 1 � γ 1. D = Y γ N � R � θ ψ T ( � ) + R θ θ � 1 θ � 1 θ � 1 y d y d θ ψ � 2. Y T = F ( z , κ , 1 ) T ( � ) H ( z , κ , m ) � R � θ θ � 1 θ � 1 y d θ ψ N ( z ) 3. Y N = N ( z )

Competitive Final Good Producers R Π = max P � D � ∑ 1 z � κ P H ( z , κ , m ) y d H ( � ) ψ T ( � ) m = 0 � R z � κ ( 1 + ι t ) P F ( � ) y d F ( � ) ψ � T ( z , κ , 1 ) � P N Y N , subject to: T Y 1 � γ 1. D = Y γ N � R � θ ψ T ( � ) + R θ θ � 1 θ � 1 θ � 1 y d y d θ ψ � 2. Y T = F ( z , κ , 1 ) T ( � ) H ( z , κ , m ) � R � θ θ � 1 θ � 1 y d θ ψ N ( z ) 3. Y N = N ( z ) y d H , t ( z , κ , m ) , y d N , t ( z , κ , m ) & y d ) Input Demand F , t ( z , κ , 1 ) Prices P N , t , P T , t , P t

Tradable Producer (z,m,k) Hires workers, l ( z , m , κ ) Rents capital k ( z , m , κ ) Buys intermediates available at home: x ( z , m , κ ) Determines markets to serve tomorrow, m 0 ( z , m , κ )

Tradable Producer (z,m,k) Lag in investing in exporting & ability ) seperate decisions: For t , given markets, m 2 f 0 , 1 g , max Π T , t ( z , κ , m ) For t + 1 , invest in exporting, m 0 = f 0 , 1 g

Tradable Producer (z,m,k) For t , given markets, m = f 0 , 1 g + mP � H , t ( � ) y � H , t ( � ) P H , t ( � ) y H , t ( � ) Π T , t ( � ) = max P t P t k , l , x � W t l T , t ( � ) � R t k T , t ( � ) � P T , t x ( � ) , H = e z � � 1 � α x x ( � ) α x st : y H + y � k α T ( � ) l 1 � α ( � ) T ) P T , t ( � ) , P � T , t ( � ) , k T , t ( � ) , l T , t ( � ) , x ( � )