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Research Highlights 2006: Trade and International Integration

Themes
Research Highlights
  New techniques to determine who wins and who loses from trade reforms and trade agreements  
 
Greater trade in health-care services would benefit both rich & poor countries
 
 
Acquiring and spreading the use of technology increases productivity on both sides
  Well-managed trade defense instruments can support overall liberalization
Team
Publications in 2006
Forthcoming in 2007

Recent years have witnessed a boom in world trade and investment flows. Many developing countries have benefited from and helped drive this boom, but others have not. The research program seeks to better understand the role of international trade in goods, services, and factors of production—specifically foreign direct investment (FDI) and workers—in economic development, and to analyze and devise policies to increase the gains from integration.

Themes

The research program centers on a number of themes: the aggregate welfare and distributional impacts of trade and trade policy reforms, both national and global; the magnitude and effects of trade costs, both due to "at the border" controls (customs clearance procedures, fees, delays) and "behind-the-border" regulation; the productivity and growth impacts of trade and foreign direct investment (FDI); services trade liberalization; export diversification; the economics of migration; the political economy of trade-related policies; and, finally, trade agreements, bilateral, regional and global (WTO) and the design and effects of development assistance to enhance trade capacity and deal with adjustment costs – "aid for trade."

As well as analysis, the research program also encompasses the development of databases on trade and production [forthcoming 166, 413], dispute settlement in the World Trade Organization (WTO) [417], trade policies affecting goods and services, including a global database on antidumping [416], and the estimation of an overall trade restrictiveness index and import demand elasticities at the product level for 72 countries [459].

Research Highlights

New techniques to determine who wins and who loses from trade reforms and trade agreements

In the case of Argentina, implementation of the Mercosur regional trade agreement was found to be pro-poor: on average, poor households gained more from the reform than middle-income households [346]. In contrast, the impact on high-income families is not statistically significant. This is because Argentine trade policy granted some relative protection to the poor under Mercosur. The techniques used in this paper combine household survey data with prices of tradable goods to estimate key responses in consumption and wages. The methods used in the Argentine case identify two types of general equilibrium effects. On the one hand, trade-induced increases in relative prices of traded goods can cause an increase in the demand for the factors of production intensively used in their production, thus causing employment and wages of skilled and unskilled labor to respond. On the other hand, changed prices of key consumer goods can cause changes in the cost of living, thus causing real income to respond. These techniques can be applied to other countries with similar household survey data to determine winners and losers from unilateral trade reforms, regional trade agreements, and the WTO Doha Development Agenda negotiations.

Assessments of the distributional impacts of trade policies need to consider the general equilibrium effects as well as impacts at the household level. By using household survey data to estimate the consumption and labor income impacts of trade policies, it is possible to determine the effects of trade reforms across the entire income distribution.

Greater trade in health-care services would benefit both rich and poor countries

An analysis of prices of fifteen standardized medical procedures suggests that some $1.4 billion could be saved every year if just one in ten U.S. patients were treated abroad [342, 343]. Many medical services are tradable, in that consumers can travel abroad for treatment. International price comparisons suggest that there could be substantial savings if patients were to be treated in lower-cost locations.

One impediment to realizing such gains is that health insurance plans in OECD countries often impede trade in medical services. Modifying insurance contracts to make reimbursement independent of the location of the medical provider and extend to the associated travel costs would allow a greater share of the potential gains from trade to be realized. This is therefore an issue that could be pursued by developing countries in the context of trade negotiations.

Greater trade of this type can have several benefits, including attenuating pressures for outward migration of health professionals from developing countries. A precondition for such trade in medical services is that providers in the healthcare exporting countries—which may include foreign investors—satisfy quality standards and obtain international accreditation. Greater trade in medical services can benefit both the patients that move and the providers and their employees in developing countries. The possibility that an inflow of foreign patients adversely affects local patients can be avoided through government policy measures to use a share of export revenues to improve health care access for citizens.

Acquiring and spreading the use of technology increases productivity on
both sides

Trade is a key channel for new knowledge, while foreign direct investment has a significant positive effect on local suppliers to foreign plants, in addition to enhancing the productivity of acquired firms. Exporting, importing, and inward foreign direct investment are all channels through which knowledge is transferred and productivity performance may be improved over time. Using both cross-country and firm-level panel datasets, a research project analyzing how specific activities affect technology transfer documents the importance of international technology diffusion for economic development.

Many of the papers generated by the project were collected in a book [354]. Other papers appeared in academic journals [334, 348] or edited volumes [358]. These papers show that the acquisition of technology and its diffusion increases productivity in importing/host countries. Policies to enhance absorptive capacity are important complements to openness to trade and foreign direct investment, including procompetitive regulation, education, and innovation policies.

Well-managed trade defense instruments can support overall liberalization

So-called trade defense mechanisms such as safeguards and antidumping—instruments through which governments may increase protection for local firms or industries—are increasingly used by developing countries. They now account for more such actions than do OECD nations [416]. What drives the increased use of such instruments is an important policy question.

A project seeking to better understand the reasons for this development brought together a set of Latin American policy makers who had been directly involved in the design and administration of trade defense mechanisms [387, 395, 396, 401,402, 403, 412]. The project concludes that these mechanisms closed off other avenues such as direct lobbying opportunities for firms to seek protection and helped policy managers to introduce politically effective constraints on pressures for protection. Skillful management of such mechanisms was important in sustaining general trade liberalization programs in the countries covered by the project.

The findings of this research illustrate that trade defense instruments can be useful in supporting an overall liberalization effort, but that much depends on the ability of officials to manage the process. Trade agreement disciplines—in particular WTO rules—can help, especially if negotiators design the rules from the perspective of managing domestic pressures for and against liberalization rather than from the perspective of regulating the interests of exporters in one country versus competing producers in an importing country.

Team

Bernard M. Hoekman, Senior Advisor




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