A Reconsideration of the Failure of Uncovered Interest Parity for the U.S. Dollar (with Charles Engel, Katya Kazakova, and Nan Xiang), Journal of International Economics, 136, May 2022, 1-35.
Spatial Implications of Trade Cost Reduction with Resource Reallocation Frictions (Job market paper) (link)
Shih Graduate Student Fellowship, UW-Madison
Abstract: How do changes in external trade costs and internal frictions interactively impact export growth? I build a dynamic spatial general equilibrium model that incorporates costs in trade of goods within and across borders, labor migration, and firms' borrowing. The model is calibrated using China's external and internal reforms from the early 2000s. I find that both external and internal reforms played a significant role in boosting export growth, with the latter having a more pronounced effect. Notably, domestic financial frictions are found to be the most important. Additionally, I observe a complementary relationship between external and internal factors, meaning that the reduction in external trade costs becomes more effective when internal frictions are mitigated. In the presence of internal frictions, labor misallocation and limited capital accumulation impede the effectiveness of trade cost reduction. The findings highlight the importance of accounting for financial frictions and capital accumulation, as their neglect leads to an underestimation of the impact of reducing internal frictions and its interaction with reducing external trade cost.
Internal Reforms, Trade Liberalization, and Labor Market Outcomes (link)
Culbertson Field Paper Scholarship, UW-Madison; Ph.D. Summer Research Fellowship, UW-Madison
Presented at Midwest Macro Meeting Fall 2022, SEA 91st Annual Meeting 2021, WEAI International Conference 2021, UMN-UW International/Macro Student Workshop 2020, UW-Madison Ph.D. Summer Research Fellowship Presentation 2020.
Abstract: How do changes in trade cost and the size of the state-owned sector interactively impact the unemployment rate and job turnover? I build a small open economy model that features heterogeneous firms who make dynamic exporting, exiting, and labor adjustment decisions, in a labor market with job-search frictions. Compared with state-owned firms (SOEs), private firms have smaller labor adjustment costs but do not have access to government subsidies. I calibrate this model using reforms in China in the early 2000s. The model shows that trade cost reduction alone has limited impacts on labor markets, in the absence of a reduction in the size of the state-owned sector. A reduction in the state-owned sector size results in a significant increase in unemployment and job turnover rates, aligning with empirical data trends. Importantly, I find that labor market and SOE reforms are complementary, as labor market adjustments following trade cost reductions are more pronounced when combined with a reduction in the state-owned sector size.
Abstract: The paper builds a unique industry-level dataset by combining Mexico’s nationally sourced input-output data (INEGI) with cross-country sources (WIOD, UN Comtrade). Using this dataset to exploit higher supply linkages across a larger number of industries than what is available in cross-country sources, the paper estimates the trade diversion effect on Mexico’s exports to the U.S. from two episodes, with a focus on the first: the U.S.-China trade tension in 2018 and the U.S. sanctions on Russia in 2014. Difference-in-differences, local projections and few other empirical methodologies are used. For the first episode, the paper finds higher trade diversion effects than estimates in literature. Output tariff plays an important role, and there is some evidence of a positive impact through downstream tariffs. The effects are stronger when nationally sourced input-output data is used compared to those derived from cross-country sources. Importantly, the magnitude of trade diversion across industries does not depend on Mexico’s industry-level trade exposure to the U.S., but rather on the U.S. tariff changes on Chinese goods, the decrease in imports from China, product substitutability with Chinese products, and (weakly) on Mexico’s GVC integration. Similarly, for the second episode, the paper finds positive trade diversion effects. Overall, the findings suggest that trade diversion effect might be higher than previously thought and the proper accounting of dataset and supply linkages makes a difference.
Work in progress
Product Substitutability and Asymmetric Tariff Pass-through
Abstract: This project investigates the asymmetric tariff pass-through onto import prices during the U.S.-China trade tension, which is complete pass-through of U.S. tariffs and incomplete pass-through of Chinese retaliatory tariffs. This asymmetry comes from variation in product substitutability across sectors and sectoral composition difference between two countries' imports. U.S. import contains mainly differentiated products, which have lower substitutability and therefore higher pass-through. This paper shows U.S. imports are relatively harder to substitute away from China, using several measures. I build a three-country model with a nested CES demand structure and oligopoly competition and explore the role of substitutability between two imported varieties. Product substitutability affects exporters' pricing decision through changes in their market shares, rationalizing lower pass-through for products with higher substitutability. The estimated model explains half of the asymmetric tariff pass-through between the U.S. and China during the trade war episode.
Preferential Trade Agreements with Labor Clauses
Abstract: In 2015, a total of 257 Preferential Trade Agreements (PTAs) included Labor Clauses (LCs), constituting 42% of the overall PTAs. These LCs comprised regulations concerning the labor markets of trading partners, particularly those in emerging markets. A notable example is the wage stipulation for the automotive industry in Mexico, as seen in the USMCA. Non-compliance with these regulations subjects exporters to higher tariffs in contrast to the preferential rates. This study explores the impact of incorporating labor clauses into trade agreements on trade dynamics and labor conditions. Empirical evidence reveals that labor clauses diminish the trade-boosting effects of trade agreements. However, they do not demonstrably enhance working conditions, as exporters opt for higher tariffs to evade potential penalties. To gauge the interactive effects of trade agreements and labor clauses, this research formulates a model featuring heterogeneous exporters making dynamic decisions regarding exports, labor union formation, and tariff reporting strategies. Labor clauses are depicted as requirements for labor unions that incorporate collective bargaining and a monitoring system capable of detecting violations with a certain probability. Under these labor clauses, exporters face a trade-off between increased labor costs associated with mandated labor unions and the potential for higher tariffs if they are caught of violation. Simulated results validate the empirical findings and underscore the significance of effective monitoring in improving labor conditions while minimizing the adverse impact on trade flows.
Trade Policy Uncertainty and Multinationals (with Zaure Aitkulova)
Ph.D. Summer Research Fellowship, UW-Madison, 2021.
Abstract: This paper explores the difference between multinational enterprises (MNEs) and non-multinational enterprises by looking at their trade dynamics facing a potential tariff increase. A dataset of US MNEs with subsidiaries in China is constructed and used to estimate demand elasticities and markups charged by MNEs and Non-MNEs. We find that MNEs face lower demand elasticity and charge lower markups compared to non-MNEs. In response to TPU, we show that subsidiaries of US MNEs decrease their exports more than non-MNEs after uncertainty gets resolved.
Are Foreign Monks Better at Chanting? The Effect of "Airborne" SDICs on Anti-corruption (with Huihua Nie), Economic and Political Studies, 2016.
The Impact of Political Cycles on Combating Corruption: Evidence from Chinese Bureau-level Corruption Cases during 2003-2013 (with Huihua Nie), Comparative Economic & Social Systems, 2014 (in Chinese).