Essays in International Trade and Globalization

The three chapters of this dissertation are devoted to understanding the impact that globalization has on international trade. In particular, what aspects of international trade theory change when the world economy becomes more globalized. In Chapter 1, I propose a method to introduce FDI into the Eaton and Kortum (2002) model of trade which allows separation between production and ownership of the product. The most attractive features of this extension are: 1) the model continues to have a closed form solution; and 2) it nests the original Eaton and Kortum (2002) model as a particular case. A direct implication of this extension is that some of the parameters in Eaton and Kortum (2002) must be interpreted carefully, namely, the technological state parameters which do not reflect the exporting country true technological state but instead a combination of its own technological state and of the countries which produce there. In Chapter 2, I present a solution to the empirical puzzle of the persistent effect of distance on international trade. The main contribution is to show that globalization has an undetermined impact on the elasticity of distance. I argue that the process of globalization corresponds to a simultaneous reduction of trade costs (distance and non-distance related) and barriers to production decentralization. I show that a reduction in trade costs due to a reduction in transport costs unequivocally reduces the magnitude of the distance elasticity. In contrast, a reduction in the portion of trade costs unrelated to distance (e.g. tariffs or communication costs), can either increase or decrease the magnitude of the distance elasticity. I also show that a reduction of the barriers pertaining to decentralizing production increases the magnitude of the distance elasticity in countries that are technologically more developed, while the opposite effect occurs for less technologically developed countries. Finally, I provide empirical evidence in favor of these results and show that the changes in the composition of trade costs are the main explanation for the evolution of the distance elasticity over time. In Chapter 3, I re-evaluate the McCallum (1995) border puzzle at the light of recent developments in the empirical trade literature. The first finding is that the border effect estimated by OLS was biased upwards due to Jensen's inequality. When a non-linear estimation method is used, the estimated border effect is 35 to 45% smaller. The second finding is that using non-linear estimation methods and allowing for the effect of distance on trade to depend on other trade barriers, the border effect disappears. Instead of a border effect, what I find is that distance matters more for international trade than for intranational trade. Based on these findings I claim that the border puzzle would have not existed if a more appropriate estimation methodology had been available to McCallum (1995) and the author had allowed for alternative explanations.