Should the WTO Require Free Trade Agreements to Eliminate Internal Tariffs? (with Kamal Saggi and Halis Murat Yildiz)
Accepted, Journal of International Economics
In a three-country model of endogenous free trade agreements (FTAs), we study the effects of requiring FTA members to eliminate tariffs on one another, as is stipulated under current WTO rules. We explain why, in the absence of such a requirement, FTA members choose to set positive internal tariffs even when their objective is to maximize their joint welfare. Requiring FTA members to eliminate internal tariffs induces them to lower their external tariffs. Such external trade liberalization by FTA members undermines the prospects of achieving global free trade by reducing the non-member's incentive to enter into trade agreements with them.
Previously circulated as ``Preferential Trade Agreements and Rules of the Multilateral Trading System"
This paper studies transport costs as market outcomes and highlights the round trip effect, a key feature of the transportation industry which links transport supply between locations. Using novel high frequency data on container freight rates, I develop an instrumental variable based on this effect to estimate the containerized trade elasticity with respect to freight rates. Next, I incorporate transportation into a trade model. I show that this effect mitigates shocks on a country's trade with its partner and generates spillovers onto its opposite direction trade, translating a country's import tariffs into a potential tax on its exports with the same partner. Using my elasticity estimates as well as my trade and transportation model, I simulate a counterfactual increase in US import tariffs on all its partners. This tariff increase not only decreases overall US imports but also US exports on the same bilateral routes. A model with exogenous transport costs would over-predict the fall in US imports by 37 percent and fail to capture the associated bilateral reduction in US exports.
Finalist, 2016 Malaysian Young Researcher Prize by the World Bank
Regional trade agreements have proliferated in the past two decades while multilateral trade negotiations have stalled. Both these agreements are governed by the WTO and have to abide by the non-discriminatory (Most-Favored Nation, MFN) clause to varying degrees--regional agreements to a lesser extent than multilateral agreements. This paper investigates the free rider effect that can stem from the MFN clause and how it impacts country incentives towards these agreements. Free-riding occurs because countries cannot be excluded from the benefits of other countries' liberalizations and thus have less incentive to contribute to the cost of liberalization by signing trade agreements and offering its own market access. I extend the equilibrium model of endogenous trade liberalization via trade agreements developed by Saggi and Yildiz (2010) to better capture the effects of MFN. Within multilateral agreements, I show that the free rider effect eliminates global free trade as an equilibrium even when countries have symmetric market power. Within regional agreements, small countries are excluded more under the equilibrium with MFN compared to without.
Works in Progress
Transport Networks and Internal Trade Costs: Quantifying the Gains from Repealing the Jones Act (with Scott N. Swisher IV)
Press Coverage: Bloomberg
The Merchant Marine Act of 1920, also known as the Jones Act, currently restricts the transport of cargo between US ports to vessels that are built in the US, and that are owned and crewed by US citizens. We estimate the intranational transport cost savings for US firms if foreign shipping firms are allowed to service US waterways and maritime transport markets. We construct a comprehensive transportation network of multimodal trade within the US including highways, railroads, and shipping between ports in order to measure US internal transport costs in detail. Repeal of the Jones Act results in an annual cost savings of $US 1.91 billion for US firms since both foreign ships and crew are substantially less expensive relative to their current domestic counterparts. We plan to estimate the welfare gains from these cost savings.
New Export Opportunities and Firm Performance in the Presence of a Large State Sector (with Brian McCaig and Nina Pavcnik)
We investigate the impacts of new export opportunities on manufacturing firm performance in the presence of a large state-owned sector in a low-income country, Vietnam. We find that reductions in U.S. tariffs applied on imports from Vietnam, as mandated by the 2001 U.S.-Vietnam Bilateral Trade Agreement, caused an immediate surge in Vietnamese exports which flattens out in the medium run by 2010. At the industry level, number of firms, employment, and revenue grew more quickly in industries that experienced greater U.S. tariff reductions. Firm entry was driven by private domestic firms and foreign-invested enterprises, with no entry response from state-owned enterprises (SOEs). However, industry growth in employment, revenue as well as capital investment in response to U.S. tariff cuts were mostly driven by foreign-invested enterprises as opposed to private domestic firms and SOEs, especially over the medium run.