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.
Preferential Trade Agreements and Rules of the Multilateral Trading System (with Kamal Saggi and Halis Murat Yildiz)
Revise and Resubmit, Journal of International Economics
In a three-country model of endogenous trade agreements, we study the effects of major WTO rules governing the conduct of free trade agreements (FTAs). We show that FTA members retain positive internal tariffs even if they seek to maximize their joint welfare. Requiring FTAs to eliminate internal tariffs, as stipulated by current WTO rules, makes the non-member better off although it simultaneously reduces the likelihood of achieving global free trade by encouraging free-riding on its part. While the WTO's non-discrimination constraint is not necessarily conducive to reaching global free trade, it raises welfare in a tariff-ridden world.
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 impact of new export opportunities on manufacturing firm performance in the presence of a large state-owned sector. We focus on Vietnam and find that reductions in U.S. tariffs applied on imports from Vietnam, as mandated by the U.S.-Vietnam Bilateral Trade Agreement, caused an expansion of formal manufacturing in Vietnam and the relative contraction of the state sector within it. While both revenue and employment grew more quickly in industries that experienced greater U.S. tariff reductions, this growth was entirely due to non-state enterprises, foreign-invested and private, domestic enterprises. Non-state enterprises are also more likely to enter these industries while the state-owned enterprises do not. The heterogeneous responses across ownership groups suggest that the presence of a large state-owned sector may heavily influence the gains from trade as state-owned enterprises do not appear to respond to new export opportunities as strongly as other firms.