Essays in International Trade

Abstract

The world is still far from flat today. A large literature finds that there is too little international trade and too much intra-national trade. The vast majority of country pairs even do not trade at all. Borders and distance impede trade by much more than tariffs or transports costs can explain. Although other sources of resistance, such as taste, information, culture, and so on, have been discussed, it is difficult to measure and model them. My doctoral research examines the big question "What various resistances lead to the wide gap between reality and full globalization?" The first chapter focuses on how important the home-biased preference is for the home-biased consumption. In the second chapter, which is joint work with James Anderson, we study which of the iceberg and fixed trade cost accounts more for the international trade zeros. Finally, in the third chapter coauthored with Ben Li, we study how the country geographical heterogeneity affects international trade, as well as the global geopolitics. Chapter 1 relaxes the assumption of the representative consumer to heterogeneous ethnic consumers in terms of taste biases. More specifically, any given consumer has a taste biased towards the good produced by her country of origin wherever she currently resides in the world. Thus consumers are heterogeneous in terms of how large their taste biases are. I extend the structural gravity model by building and estimating a structural component of home-biased preferences. The gravity model generates bilateral trade shares with three distinct components: ethnic composition of resident population, bilateral trade cost, and per capita income. Market taste depends in part on the ethnic origin of consumers. When ethnicities are home-biased in tastes, migration promotes trade with countries of origin. Using international trade and transnational migration data among 40 countries, this paper estimates the home bias of each ethnic group in tastes. The results show that consumers' tastes for products from their country of origin deviate from unbiased levels by 40 percent on average. Large and poor ethnicities are more biased in their tastes. Ethnic taste bias is found to explain 64 percent of the home bias in trade. Chapter 2 identifies the extent to which zero trade flows is explained by variable and fixed trade cost, respectively. This job is important because variable and fixed trade cost play different roles in shaping zero trade flows and thus imply different trade policies to stimulate the trade to occur. Despite the enormous growth in global trade, most countries still do not trade with one other. Choke prices that shut off demand are suggested by the prevalence of zeros in disaggregated bilateral trade flows. We find the variation of price elasticities is even larger than income elasticities. On average, VC's effect on trade probability is much larger than FC's effect. The variable trade cost is more important than the fixed trade cost to explain the international trade zeros. Chapter 3 finds that since the Age of Discovery, the world has become economically integrated while remaining politically disintegrated as a collection of nation-states. The nation-state system is robust because borders, which divide the world landmass into states, interact with economic integration to absorb shocks. We build a tractable general equilibrium model of international trade and national borders in the world. Over a long time horizon, declining trade costs alter trade volumes across states but also incentivize states to redraw borders, causing states to form, change, and dissolve. Our model has significant implications for the global economy and politics, including trade patterns, political geography, state-size distribution, and the risks of militarized disputes. These implications are supported by modern and historical data.