How preferences shape the welfare and employment effects of trade

We set up a trade model with two countries, two sectors, and one production factor, which features a home-market effect due to the existence of trade costs. We consider search frictions and firm-level wage bargaining in the sector producing differentiated goods and a perfectly competitive labor market in the sector producing a homogeneous good. Consumers have price-independent generalized-linear preferences over the two types of goods, covering homothetic and quasi-homothetic preferences as two limiting cases. Due to the specific functional forms of indirect utility, homothetic preferences lead to risk aversion, while quasi-homothetic preferences lead to risk neutrality in our model. We show that trade between two countries that differ in their population size leads to an expansion of the differentiated goods sector and a contraction of the homogeneous good sector in the larger economy. This induces the larger country to net-export differentiated goods at the cost of a higher economy-wide rate of unemployment in the open economy (with the effects reversed for the smaller country). The welfare effects of trade depend on the preference structure. Looking at the two limiting cases, we show that the larger country is likely to benefit from trade if preferences are homothetic, whereas losses from trade are possible if preferences are quasi-homothetic. The opposite is true in the smaller country. This reveals an important role of preferences for the welfare effects of trade in the presence of labor market imperfection, a result we further elaborate on by considering more general preferences as well as differences of countries in their per-capita income levels.

Quantifying Brexit: from ex post to ex ante using structural gravity

Exploiting changes in the geography of economic integration in Europe, this paper quantifies the effects of Brexit from ex post to ex ante using structural gravity. By isolating the directional treatment effects of EU agreements for the UK, the analysis reveals important heterogeneity across agreements, sectors, and within pairs. We find that these directional effects matter for the size and distribution of the welfare effects of Brexit—the withdrawal of the UK from EU agreements resulting into a return of trade costs to the situation quo ante. We make this point with the help of a modern multi-sector trade model that is able to capture inter- and intranational production networks. In line with other papers, the welfare costs of Brexit are higher in the UK than in most other EU countries. However, heterogeneity tends to attenuate overall costs while giving rise to substantial heterogeneity between EU27 members and sectors. A scenario that could shift bargaining power eliminates asymmetries in the costs of Brexit as soon as the UK fully liberalizes its market.

Where has the rum gone? The impact of maritime piracy on trade and transport

Despite a general agreement that piracy poses a significant threat to maritime shipping, empirical evidence regarding its economic consequences remains scarce. This paper combines firm-level Chinese customs data and ship position data with information on pirate attacks to investigate how exporting firms and cargo ships respond to maritime piracy. It finds that overall exports along affected shipping routes fall following an increase in pirate activity. In addition, piracy induces firms to switch from ocean to air shipping, while remaining ocean shipments become larger. At the ship-level, the paper provides evidence for re-routing, as container ships avoid regions prone to pirate attacks.