Structural Change and Global Trade Logan Lewis1
Ryan Monarch1 Jing Zhang3 1 Federal
2 Federal 3 Federal
Michael Sposi2
Reserve Board
Reserve Bank of Dallas
Reserve Bank of Chicago
November 2017 The views expressed here should not be interpreted as reflecting the views of the Federal Reserve Board of Governors, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Dallas, or any other person associated with the Federal Reserve System.
Introduction Figure 1: Global Trade to Expenditure Ratio 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Global trade openness triples over the past half century.
Structural Change Figure 2: Sectoral Expenditure Shares 1 Goods Services
0.9
Sectoral expenditure share
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Global expenditure switches from goods to services over time.
Sectoral Expenditure Derivation
Sectoral Openness Figure 3: Trade to Expenditure Ratios by Sector 2
Goods Services
Sectoral trade/sectoral expenditure
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1970
1975
1980
1985
1990
1995
2000
Year
I
Goods are more tradable than services.
2005
2010
2015
Structural Change and Trade Openness Figure 4: Correlations (gtrade-to-expenditure , gservices expenditure share ) ‐0.5 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 ‐0.55 ‐0.6 ‐0.65 ‐0.7 ‐0.75 ‐0.8 ‐0.85 ‐0.9 ‐0.95
I
A faster rise in the services expenditure share is associated with a slower growth in global trade openness
What we do I
I
We quantify the impact of structural change on global trade growth I
A simple empirical exercise
I
A general equilibrium trade model
We find that structural change has substantially held back trade growth over the past four decades I
The model implies that global trade openness would have been about 70 percent (23 ppts higher) by 2015 without structural change in expenditure shares
I
The simple empirical calculation overstates the impact of structural change
Literature
I
Trade affects structural change I
I
Why does trade grow faster than GDP? I
I
Matsuyama (2009), Uy, Yi, and Zhang (2013), Betts, Giri and Verma (2016), Teignier (2016), Sposi (2016), Kehoe, Ruhl and ´ ecki (2016), Reyes-Heroles (2017) Steinberg (2016), Swi¸
Rose (2011), Baier and Bergstrand (2001), Imbs and Wacziarg (2003), Yi (2003)
Non-homothetic preferences help explain trade patterns I
Markusen (1986), Fieler (2011), Simonovska (2015)
Empirical Counterfactual
I
Data openness (26 countries and ROW 1970-2015) Tradegt Expgt Tradest Expst Tradet = + Expt Expgt Expt Expst Expt
I
Counterfactual openness ^t Tradegt Expg 0 Tradest Exps0 Trade = + Expt Expgt Exp0 Expst Exp0
Empirical Counterfactual Figure 5: Aggregate Trade to Expenditure Ratio 1.1 Data Fixed expenditure weights
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
In the counterfactual, the trade/expenditure ratio is 93 percent or 45 percentage points higher than in the data.
Discussion on Empirical Counterfactual I
Reduced form analysis shows substantial impact of structural change on global trade flows
I
On the other hand, the reduced form analysis is limited I
I
Ignores endogenous responses of sectoral trade openness to structural change I
Ignores input-output linkages
I
Ignores endogenous responses of prices and trade patterns
So we analyze the implications of structural change on international trade in a quantitative model
Model
I
A multi-country two-sector Eaton-Kortum trade model with two key features: 1. Non-homothetic preferences generates the rising expenditure share of services over time 2. An input-output structure generates gross trade and accounts for linkages across sectors
I
The EK structure generates both intra- and inter-sector trade, which is crucial for matching bilateral trade patterns.
Model: Preferences I
We use “non-homothetic CES” preferences, as in Gorman (1965), Hanoch (1975) and Comin et al. (2015)
I
The aggregate consumption Ci combines sectoral composite goods Cik according to the implicitly defined function: X k=g ,s
ωk
Ci Li
k −σ σ
Cik Li
σ−1 σ
= 1,
I
k gives sector-specific income elasticity of demand
I
σ gives elasticity of substitution between sectoral composites
Model: budget constraint
I
Earns labor income and spends on goods and services: Pig Cig + Pis Cis = wi Li − (ρi wi Li − RLi ), {z } | {z } | Pi Ci
I
NXi
Trade imbalances are introduced as in Caliendo, Parro, Rossi-Hansberg, and Sarte (2014) I
A exogenous fraction ρi of income is sent to global portfolio.
I
Global portfolio disperses R to every worker to maintain zero balance.
Model: Optimality
I
The sectoral expenditure shares are given by Pik Cik = ωkσ eik = Pi Ci
Pik Pi
1−σ
Ci Li
k −1
I
σ governs how relative prices affect expenditure shares
I
k governs how income affects expenditure shares
(1)
Model: Production I
Production of good z in sector k and country i 1−λik γikn Yik (z) = Aik (z)(Tik Lik (z))λik Πn=g ,s Mikn (z)
I
I
Aik (z) drawn from a Fr´echet with shape parameter θk
I
Tik value-added productivity
Sector composite (“absorption”), standard in EK. Z Qik =
1
Qik (z)
η−1 η
η η−1
dz
0 I
Absorption is split between final consumption and input usage: X Qik = Cik + Mink , n=g ,s
Model: Trade I
Sectors source from the cheapest source with trade costs τijk
I
Import shares θλjk
πijk = PI
Tjk
(vjk τijk )−θ
θλjk
s=1
Tjk
(vsk τisk )−θ
where λik
vik = Bik wi I
(Πn=g ,s (Pin )γikn )1−λik
Relationship between production and absorption I X
Pjk Qjk πjik = Pik Yik
j=1
I
Global market clearing Pik Qik = Pik Cik +
X n=g ,s
(1 − λin )γink
I X j=1
πjin Pjn Qjn
Model: Equilibrium
I
A competitive equilibrium is a sequence of output and factor prices {wi , Pig , Pis , Pi }Ii=1 , allocations {Lig , Lis , Migg , Migs , Misg , Miss , Qig , Qis , Yig , Yis , eig , eis , Cig , Cis , Ci }Ii=1 , transfers from the global portfolio, R, and trade shares {πijg , πijs }i,j=1,..I , such that (i) given prices, allocations are optimal; (ii) markets clear.
Calibration I
26 countries and ROW aggregate over 1970-2015
I
Two sectors: goods and services
I
labor endowment {Li }: employment data
I
trade imbalances {ρi }: net exports data
I
Fr´echet parameter {θk }: 4.0 (Simonovska and Waugh 2014)
I
production coefficients {λik , γikn }:
I
preferences parameters {σ, k , ωk }
I
trade costs {τijg , τijs }, productivities {Tig , Tis },
Calibration of Production Parameters
I
World Input-Output database (WIOD) (1995-2011)
I
Extend to the full time period (1970-2015)
I
Parameter values: Cross-country, cross-time averages λg
Value added share in sector g
0.39
λs
Value added share in sector s
0.61
γgg
Share of g ’s Intermediate input from g
0.68
γss
Share of s’s Intermediate input from s
0.66
Calibration of Preferences I
The equilibrium condition on relative expenditure shares
I
eig eis
=
ωg ωs
σ
1−σ
Ci Li
εg −εs
Pick (ωg , σ, εg − εs ) to maximize the fit to the data on d c expenditure shares ec ik , expenditure Pi Ci , sectoral prices Pik " X X ωg σ min ωs t i \ P it Cit s.t. = cit L
I
Pig Pis
X k
ωkσ
d P igt Pc ist
Cit cit L
!1−σ
εk −σ
Cit cit L
εg −εs
1−σ d P ikt
σ = 0.4, εg = 1, εs = 1.59, ωg = 0.49
−
!
1 1−σ
ec igt ec ist
#2
Calibration of Productivity and Trade Costs I
Target the expenditure shares and bilateral trade shares
I
d b Compute {Pig , Pis } from data on {c eig , ec is , Pi Ci , Li } and estimated {σ, εk , ωk }
I
Calibrate Tik and τijk using {Pig , Pis } and bilateral trade shares πijk Tikλik = τijk
Bik νik −
1
θk Γ−1 k Pik (πiik ) 1 πijk − θk Pik = πjjk Pjk
Summary of Productivity and Trade Costs
6 5
Log index of productivity Goods Services
6
Sectoral trade barriers Goods Services
5
4 4 3 3
2
2
1 0 1970
1980
1990
2000
2010
1 1970
1980
1990
2000
2010
I
Productivity growth is much faster in goods than in services.
I
Trade barriers decline over time, and are lower for goods.
Model-based Counterfactual
I
Solve the model counterfactuals by setting εk = 1, σ = 1, and ωik = eik0 I
No income effects: g = s = 1
I
No relative price effects: σ = 1
I
Keep all other baseline driving forces unchanged
I
Compare the resulting changes in trade/expediture ratios to the baseline model solution.
Model-Based Counterfactual Figure 6: Global Trade to Expenditure Ratio 1.1 Baseline Fixed expenditure shares
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1970
I
1975
1980
1985
1990
1995
2000
2005
2010
2015
By 2015, the model-based counterfactual is 23 percentage points or 48 percent higher than the data. Goods expenditure share
Model-Based v.s. Empirical Counterfactual Figure 7: Global Trade to Expenditure Ratio 1.1 Baseline Fixed expenditure shares, model Fixed expenditure weights, empirical
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1970
I
1975
1980
1985
1990
1995
2000
2005
2010
2015
The empirical counterfactual overestimates the impact of structural change on global openness by 25 percentage points.
Sectoral Trade Openness Figure 8: Trade over expenditure by sector Goods Baseline Fixed expenditure shares
2
0.15
1
0.1
0.5
0.05
I
1980
1990
2000
2010
Baseline Fixed expenditure shares
0.2
1.5
0 1970
Services
0.25
0 1970
1980
1990
2000
2010
Goods trade openness is lower in the counterfactual than the baseline/data.
Sectoral Trade Openness Tradekt Absorptionkt Tradekt = × Expkt Absorptionkt Expkt
0.4 0.2
Absorption over expenditure
1980
1990
2000
Baseline Fixed expenditure shares
4
3
2 1970
1980
1990
2000
2010
Baseline Fixed expenditure shares
0.12 0.1 0.08 0.06 0.04
2010
Goods
5
Trade over absorption
0.6
1970
Services
0.14
Baseline Fixed expenditure shares
1970
Absorption over expenditure
Trade over absorption
Goods 0.8
1980
1990
2000
2010
Services
2.4
Baseline Fixed expenditure shares
2.2 2 1.8 1.6 1970
1980
1990
2000
2010
Counterfactual without Cross-Sector I/O Linkage set γgg = γss = 1
0.4 0.2 1980
1990
2000
No IO No IO, fixed expenditure shares
4
3
2 1970
1980
1990
2000
0.1
2010
No IO No IO, fixed expenditure shares
0.08 0.06 0.04
2010
Goods
5
Trade over absorption
0.6
1970
Services
0.12
No IO No IO, fixed expenditure shares
1970
Absorption over expenditure
Trade over absorption
Goods 0.8
Absorption over expenditure
I
1980
2000
2010
Services
2.4 2.2
1990
No IO No IO, fixed expenditure shares
2 1.8 1.6 1970
1980
1990
2000
2010
Counterfactual with No Income Effect I
set εg = εs = 1 Figure 9: Global Trade over Expenditure 1.1 Data Fixed expenditure shares No income effects
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Income effect explains about 1/4 of the difference between the data and the fixed expenditure counterfactual.
Counterfactul with Fixed Trade Costs I
set τijkt = τijk0 Figure 10: Global Trade over Expenditure 1.1 Data Fixed expenditure shares Fixed trade costs
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Impact of structural change on global trade growth is similar to that of trade barriers
Implication of Structural Change on Trade Costs
5.5
Goods Services Trade-weighted average of two sectors One sector calibration
Sectoral trade barriers
5
4.5
4
3.5
3
2.5 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Ignoring structural change misinterprets trade costs dynamics
Implication of Structural Change on Gains from Trade
Two-sector model One-sector model
World "C" in baseline relative to autarky
1.1
1.08
1.06
1.04
1.02
1 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Year
I
Ignoring structural change overestimates gains from trade
Projection I
Assume that productivity grows at the “average” rate for the next 25 years. All other parameters constant at 2015 levels. Figure 11: Global Trade over Expenditure 0.7
0.6
0.5
0.4
0.3
0.2
0.1 1970
I
1980
1990
2000
2010
2020
2030
Global trade openness would fall to 37% in 2035
Conclusion I
As countries switch away from highly traded goods over time, this structural change dragged down global trade growth over the past four decades
I
Our model with non-homothetic preferences and an input-output structure estimates that global trade openness would be 23 percentage points or 48 percent higher if structural change had not occurred. I
The empirical counterfactual that takes sectoral openness as given overstates the implications of structural change
I
The model implies that structural change held back global trade growth roughly as much as reductions in trade costs boosted it.
I
Global openness might decrease in coming years if the effect of structural change dominates that of trade costs.
Country List
Australia, Austria, Belgium-Luxembourg, Brazil, Canada, China, Cyprus, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Netherlands, Portugal, Spain, Sweden, Turkey, United Kingdom, and United States, plus a “Rest of World” Back
Counterfactual Global Expenditure Shares Figure 12: Global Expenditure Share on Goods 0.8 Baseline Fixed expenditure shares
0.7
0.6
0.5
0.4
0.3
0.2 1970
back
1975
1980
1985
1990
1995
2000
2005
2010
2015
Figure 13: Derivation of Sectoral Expenditure
Net
Production
Consumption
Value Added
Expenditure
(Subtract input usage)
(Multiply by GO/VA ratio)
Gross
back
Gross Output
(Add imports, subtract exports)
Absorption
Projection Figure 14: Projection
0.8
0.6
Good's share in GDP
Trade / expenditure, tot
0.7
0.5 0.4 0.3 0.2 0.1
1 Baseline Projection, produtcivity growth = median 2011-2015 0.5
0.6
0.4
0
0.2
-0.5
0 1980
2000
2020
-1 1980
2000
2020
-1
2
1
Absorption / expenditure, gds
3
0.8
0.6
0.4
0.2
0
0.5
10 8 6 4 2
1980
2000
2020
1980
2000
2020
0.3
0.2
0.1
0
0.25 0.2 0.15 0.1 0.05 0
1980
2000
2020
1980
2000
2020
1980
2000
2020
2
Absorption / expenditure, srv
0.3
Trade / absorption, srv
0.4
Trade / expenditure, srv
0
12
Trade / absorption, gds
Trade / expenditure, gds
4
-0.5
1.9 1.8 1.7 1.6 1.5 1.4
1980
2000
2020
1
Country Plots Figure 15: Country Trade/Expenditure 3.5
AUS
3.5
AUT
3.5
BLX
3.5
BRA
3.5
3
3
3
3
3
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
1.5
1.5
1.5
1.5
1.5
1
1
1
1
1
0.5
0.5
0.5
0.5
0.5
0 1970 1980 1990 2000 2010
3.5
CHN
0 1970 1980 1990 2000 2010
3.5
CYP
0 1970 1980 1990 2000 2010
3.5
DEU
0 1970 1980 1990 2000 2010
3.5
DNK
0 1970 1980 1990 2000 2010
3.5
3
3
3
3
3
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
1.5
1.5
1.5
1.5
1.5
1
1
1
1
1
0.5
0.5
0.5
0.5
0.5
0 1970 1980 1990 2000 2010
3.5
FIN
0 1970 1980 1990 2000 2010
3.5
FRA
0 1970 1980 1990 2000 2010
3.5
GBR
0 1970 1980 1990 2000 2010
3.5
GRC
3.5
3
3
3
3
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
1.5
1.5
1.5
1.5
1.5
1
1
1
1
1
0.5
0.5
0.5
0.5
0.5
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
ESP
0 1970 1980 1990 2000 2010
3
0 1970 1980 1990 2000 2010
CAN
IDN
0 1970 1980 1990 2000 2010
2
2
2
2
2
1
1
1
1
1
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
Country Plots
Figure 16: Country Trade/Expenditure
IND
0 1970 1980 1990 2000 2010
IRL
0 1970 1980 1990 2000 2010
ITA
0 1970 1980 1990 2000 2010
JPN
KOR
3
3
3
3
3
2
2
2
2
2
1
1
1
1
1
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
MEX
NLD
PRT
SWE
TUR
3
3
3
3
3
2
2
2
2
2
1
1
1
1
1
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
USA
ROW
3
3
2
2
1
1
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
Baseline Fixed Expenditure
Country Plots Figure 17: Country Sectoral Expenditure Shares 1
AUS
1
AUT
1
BLX
1
BRA
1
0.8
0.8
0.8
0.8
0.8
0.6
0.6
0.6
0.6
0.6
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0 1970 1980 1990 2000 2010
1
CHN
0 1970 1980 1990 2000 2010
1
CYP
0 1970 1980 1990 2000 2010
1
DEU
0 1970 1980 1990 2000 2010
1
DNK
0 1970 1980 1990 2000 2010
1
0.8
0.8
0.8
0.8
0.8
0.6
0.6
0.6
0.6
0.6
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0 1970 1980 1990 2000 2010
1
FIN
0 1970 1980 1990 2000 2010
1
FRA
0 1970 1980 1990 2000 2010
1
GBR
0 1970 1980 1990 2000 2010
1
GRC
1
0.8
0.8
0.8
0.8
0.6
0.6
0.6
0.6
0.6
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
ESP
0 1970 1980 1990 2000 2010
0.8
0 1970 1980 1990 2000 2010
CAN
IDN
0 1970 1980 1990 2000 2010
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
Country Plots
0 0 Figure 18: Country01970Sectoral Expenditure Shares 01970 1980 1990 2000 2010 1970 1980 1990 2000 2010 1980 1990 2000 2010 1970 1980 1990 2000 2010
0 1970 1980 1990 2000 2010
1
IND
IRL
1
1
ITA
1
JPN
1
0.8
0.8
0.8
0.8
0.8
0.6
0.6
0.6
0.6
0.6
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0 1970 1980 1990 2000 2010
1
MEX
0 1970 1980 1990 2000 2010
NLD
1
0 1970 1980 1990 2000 2010
1
PRT
0 1970 1980 1990 2000 2010
1
SWE
0 1970 1980 1990 2000 2010
1
0.8
0.8
0.8
0.8
0.8
0.6
0.6
0.6
0.6
0.6
0.4
0.4
0.4
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0 1970 1980 1990 2000 2010
1
USA
0 1970 1980 1990 2000 2010
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0 1970 1980 1990 2000 2010
ROW
1
0.8
0 1970
0 1970 1980 1990 2000 2010
Goods Services
1980
1990
2000
2010
0 1970 1980 1990 2000 2010
KOR
TUR
0 1970 1980 1990 2000 2010
