Richard Baldwin

Graduate Institute of International and Development Studies · Department of International Economics

Digital transformation is underway, particularly shaped by the ever-expanding frontier of Artificial Intelligence (AI) technologies. It is impacting our everyday life, at work, in public space, as well as at home and in the private sphere. We are already strong users and consumers of information, and our dependence on connectivity, shaping the way...

This paper tests the hypothesis that the domino-like spread of regionalism is partly driven by ‘defensive’ FTAs, i.e. FTAs signed to reduce discrimination created by third-nation FTAs. A theory-based measure is used to test contagion against alternative determinants of regionalism. The main finding is that contagion is present in our data and robus...

Global supply chains (GSCs) are transforming the world. This paper explores why they emerged, why they are significant and future directions they are likely to take along with some implications for policy. After putting global supply chains into an historical perspective, the paper presents an economic framework for understanding the functional and...

Using firm-level data on the sales and sourcing patterns of Japanese affiliates, this paper suggests that very little FDI falls neatly into the standard bins of horizontal, vertical and export-platform FDI. Most affiliates import some intermediates and export some output suggesting a pattern that might be called ‘networked FDI’. This suggests that...

Massive intra-Asian economic integration has been accompanied by very little institution building. This paper considers whether Asia needs new institutions by drawing lessons from the EU’s supranational integration sequence and EFTA’s intergovernmental sequence. Sequencing theory is presented and used to structure historical narrative of Europe’s a...

Revolutionary transformations of industry and trade occurred from 1985 to the late-1990s -- the regionalisation of supply chains. Before 1985, successful industrialisation meant building a domestic supply chain. Today, industrialisers join supply chains and grow rapidly because offshored production brings elements that took Korea and Taiwan decades...

No abstract available.

Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalization of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of value added flows. This fact has important implications for the estimation of the gravity equation. We prese...

Research on the spatial aspects of economic activity has flourished over the past decade due to the emergence of new theory, new data, and an intense interest on the part of policymakers, especially in Europe but increasingly in North America and elsewhere as well. However, these efforts--collectively known as the "new economic geography"--have dev...

Does policymakers' horizon affect their willingness to support economic reforms? Voting in the U.S. Congress provides an ideal setting to address this question: differences between the House and Senate, in which members serve two-year and six-year mandates respectively, allow to examine the role of term length; the staggered structure of the Senate...

We derive a micro-founded measure of bilateral trade integration that is consistent with a broad range of leading gravity models. This measure accounts for cross-industry heterogeneity by in-corporating substitution elasticities estimated at the industry level. We then use it to provide a theory-based ranking of trade integration across manufacturi...

For a long time, the GATT led a life of its own as a self-contained regime. The evolution from tariff to non-tariff barriers brought about increasing overlaps with other regulatory areas. WTO rules increasingly interface with other areas of law and policy, including environmental protection, agricultural policies, labour standards, investment, huma...

Recent trade models determine the equilibrium distribution of firm-level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity due to entry and exit of firms. These models ignore the possibility that freer trade also alters the firm-size distribution via international firm migration (offshorin...

In an open letter to the President of the European Council in the run-up to the December meeting that will deliberate on new rules of economic governance, a team of expert economists from CEPS and EuropEos expresses serious doubt that the proposals under consideration are a sufficient cure for the economic plight of the European Union. They fear th...

Fragmentation of stages of the production process is determined by international cost differences and by the benefits of co-location of related stages. The interaction between these forces depends on the technological relationships between these stages. This paper looks at both cost minimising and equilibrium fragmentation under different technolog...

Global production sharing is determined by international cost differences and frictions related to the costs of unbundling stages spatially. The interaction between these forces depends on engineering details of the production process with two extremes being ‘snakes’ and ‘spiders’. Snakes are processes whose sequencing is dictated by engineering; s...

Unilateral tariff liberalisation by developing nations is pervasive but our understanding of it is shallow. This paper strives to partly redress this lacuna on the theory side by introducing three novel political economy mechanisms with particular emphasis is on the role of production unbundling. One mechanism studies how lowering frictional barrie...

The stumbling-bloc argument asserts that regionalism hinders MFN tariff cutting. If this was of first-order importance over previous decades, we should detect this in the levels of the tariffs. Using tariff line data for 23 large trading nations we find that MFN and PTA tariffs are complements, not substitutes since margins of preferences tend to b...

This version: 09 March 2009 This paper presents empirical evidence on the extent to which FTAs are "contagious", using empirical techniques inspired by the study of contagion in exchange rate crises. Applying a series of different econometric techniques, it tests the null hypothesis that the signing of an FTA between one nation’s trade partners has...

Feedback mechanisms are the key to sequencing when it comes to regional integration. Feedback mechanisms can mean that today’s policy or institution alters the political economy landscape in a way that makes it politically optimal for future governments to take further steps towards integration – even when these steps are not politically optimal fr...

This paper examines the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper–Samuelson-like result and several results related to the volume of trade, which are empirically testable. We also analyze what might be called an anti-variety effec...

No abstract received.

Our paper integrates results from trade-in-task theory into mainstream trade theory by developing trade-in-task analogues to the four famous theorems (Heckscher-Ohlin, factor price equalisation, Stolper-Samuelson, and Rybczynski) and showing the standard gains-from-trade theorem does not hold for trade-in-tasks. We show trade-in-tasks creates intra...

The standard international tax model is extended to allow for heterogeneous firms when agglomeration forces are important, enabling us to study the relocation effects of taxes that vary according to firm size. We show that allowing for heterogeneity permits a given tax scheme to have an endogenously different effect on the location decision of smal...

In 1977 a seminal paper was published by Avinash Dixit and Joseph Stiglitz that revolutionized the modeling of imperfectly competitive markets. It launched what might be called the second monopolistic competition revolution, which has been far more successful than the first one, initiated by Edward Chamberlin and Joan Robinson in the 1930s. In this...

In 1977 a seminal paper was published by Avinash Dixit and Joseph Stiglitz that revolutionized the modeling of imperfectly competitive markets. It launched what might be called the second monopolistic competition revolution, which has been far more successful than the first one, initiated by Edward Chamberlin and Joan Robinson in the 1930s. In this...

This chapter argues that bilateral agreements between countries like Japan and Korea are likely to have domino effects - they will encourage additional bilateral agreements. The result will be less an efficient network of trade than a pair of inefficient hub-and-spoke arrangements, where China and Japan serve as hubs and the other Asian countries (...

In einem weltweiten Appell vom 2. Oktober 2008 haben führende Ökonomen aus Europa und den USA, darunter DIW-Präsident Klaus F. Zimmermann, die europäischen Staaten zu einem ge meinsamen Vorgehen in der Finanzmarktkrise aufgerufen. Die Krise sei noch be-herrschbar – nur ein schnelles, europaweit koordiniertes Vorgehen könne aber verhindern, dass sie...

This paper studies tax competition in a setting that allows for agglomeration economies and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation, with this rate being too low from a social point of view. Tighter integration of markets leads to an intensification of competition...

This paper presents the trade-in-tasks conceptual framework and extends it to consider a setting where offshoring occurs between high wage nations and where agglomeration forces are important. It also considers the policy implications ranging from rules of origin and trade facilitation to external trade policy and R&D subsidies. The focus is on pol...

Based on theoretical distinctions suggested by the heterogeneous firms trade model and the quality heterogeneous firms trade model, we classify exports at the HS 6-digit level as being characterised by either quality or price competition. We find a high proportions of quality-competition goods for the major EU countries and lower proportions for Ca...

A simple model of offshoring, which depicts offshoring as ‘shadow migration’, permits harsimonious derivation of necessary and sufficient conditions for the effects on wages, prices, production and trade. We show that offshoring requires modification of the four classic international trade theorems. We also show that offshoring is an independent so...

Small Think Regionalism focused on the Vinerian question: "Would a nation gain from joining a trade bloc?" Big Think Regionalism considers regionalism's systemic impact on the world trading system, focusing mainly on two questions: "Does spreading regionalism harm world welfare?" and "Does regionalism help or hinder multilateralism?" This paper syn...

We model international tax competition allowing for agglomeration forces and heterogeneous firms. This provides a new perspective since a tax schedules have different effects on the international relocation decision of small and large firms (large firms are endogenously more sensitive to tax competition) and these decisions affect industry producti...

The introduction of the euro opens the door to a major advance in our understanding of how a common currency affects economic activity ranging from trade and foreign direct investment to wage-setting behaviour and corporate business strategies. Regarding the euro's trade effects we confirm the received wisdom that the euro has promoted trade signif...

The paper argues that East Asian regionalism is fragile, since (i) each nation's industrial competitiveness depends on the smooth functioning of "Factory Asia" — in particular, on intra-regional trade; (ii) the unilateral tariff-cutting that created "Factory Asia" is not subject to WTO discipline (bindings); (iii) there is no "top-level management"...

This paper posits a formal political economy model where the principle of reciprocity inmultilateral trade talks results in the gradual elimination of tariffs. Reciprocity trade talks turneach nation's exporters into anti-protectionists at home; they lower foreign tariffs byconvincing their own government to lower home tariffs. Due to the new array...

The paper first reviews Europe's experience with regional integration, stressing the political economy forces that governed the direction and speed of the process. It argues that the geographic spread of economic integration in Europe is driven by a domino effect by which each successive integration increases the pressure on non-participants to joi...

This paper estimates a two equation system – an investment equation and a growth equation – that allows trade openness to affect growth directly via its impact on TFP growth, and indirectly via its impact on the investment rate. We find that domestic trade barriers depress investment and thereby growth. This result is robust in that it is present i...

The introduction of the euro was an immense political and symbolic step towards an integrated Europe. It was also the world's largest economic 'experiment.' This experiment opens the door to a major advance in our understanding of how a common currency affects economic activity ranging from trade and foreign direct investment to wage-setting behavi...

I document that cross-country productivity differences in retail trade, which employs around 20% of workers, are accounted for in large part by compositional differences. In richer countries, most retailing is done in modern stores, with high measured output per worker, whereas in developing countries, retail trade is dominated by less-productive t...

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We argue that the best estimator involves time-varying...

This paper explores a new channel for the transmission of mone-tary policy through the extensive margin. In this paper, a shock to money induces firms to enter by affecting a measure of Tobin's Q: the ratio of expected future profits to entry costs. In a dynamic stochastic general equilibrium setting, though, optimal consumption smoothing limits th...

This paper empirically confronts one explanation of spreading regionalism with the European experience. The domino theory asserts that forming a preferential trade area, or deepening an existing one, produces trade diversion that generates new political-economy forces in third nations as third-nation exporters seek to redress the new discrimination...

Product-level data on bilateral U.S. exports exhibit two strong patterns. First, most potential export flows are not present, and the incidence of these "export zeros" is strongly correlated with distance and importing country size. Second, export unit values are positively related to distance. We show that the leading multi-good general equilibriu...

This paper addresses the final steps to global free trade -- the political economy forces that might drive them, and the role the WTO might play in guiding them. Two facts form the departure point: 1) Regionalism is here to stay; 2) the motley assortment of regional trade agreements is not the best way to organise world trade. Moving to global duty...

Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create rents. In expanding industries, entry tends to erode...

Two seemingly unconnected empirical results suggest an intriguing mechanism. Firstly, economic integration helps harmonize prices internationally, with trade being the primary channel [Rogoff (1996), Goldberg and Knetter (1997)]. Secondly, monetary union may greatly increase the amount of trade among members [Rose (2001)]. Putting these together, w...

The stumbling-block argument asserts that regionalism hinders MFN tariff cutting. If this was of first-order importance over previous decades, we should see a negative relationship between the level of MFN and preferential tariffs, i.e. MFN and PTA tariffs should be substitutes. Using tariff line data for 23 large trading nations (over one million...

We develop an endogenous growth model with R&D spillovers to study the long-run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream division. While there is always a posit...

This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a...

Since Rose (2000), many scholars have found empirical evidence linking trade to exchange rate volatility and currency unions. Our paper takes a first step toward providing theoretical underpinnings for this "Rose effect". In our Melitz-like trade model, reduced volatility boosts trade by inducing existing exporters to export more and by inducing mo...

We examine the effects of regionalism on external trade liberalization using industry-level data on applied MFN tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. This unique data set allows us to examine whether products where preferences loom large are more or less likely to be liberalized externally. Our result...

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop's multilateral trade...

Spillovers from national industrial policies can cause helpful or harmful competition among policy makers and helpful or harmful interactions among the targeted industries. As a result, it is not in general possible to say whether industrial policy coordination is good or bad. However, reaching agreement at the EU level on any type of policy - trad...

We develop an endogenous growth model with R&D spillovers to study the long-run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream division. While there is always a posit...

Recent trade models determine the equilibrium distribution of firm-level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity due to entry and exit of firms. These models ignore the possibility that freer trade also alters the firm-size distribution via international firm migration (offshorin...

This paper examines the impact of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper-Samuelson like result and several results related to the volume of trade, which are empirically testable. We also find what might be called an anti-variety effect as the res...

Formal analysis of the political economy of trade policy was substantially redirected by the appearance of Gene Grossman and Elhanan Helpman's 1994 paper, 'Protection for Sale'. Before that article a fairly wide range of approaches were favoured by various authors on various issues, but afterwards, the vast majority of theoretical tracts on endogen...

This paper addresses the final steps to global free trade - what they might look like, what sort of political economy forces might drive them, and what the WTO might do to help. Two facts form the point of departure: (1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agre...

A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple new economic geography model to show that the standard assumption of identical firms is neither necessary nor innocuous. We show that relocating to the big region is most attractive for the most productive firms; this implies interesting results fo...

We model international tax competition allowing for agglomeration forces and heterogeneous firms. This provides a new perspective since a tax schedules have different effects on the international relocation decision of small and large firms (large firms are endogenously more sensitive to tax competition) and these decisions affect industry producti...

FDI has received surprisingly little attention in theoretical and empirical work on openness and growth. This paper presents a theoretical growth model where MNCs directly affect the endogenous growth rate via technological spillovers. This is novel since other endogenous growth models with MNCs, e.g. the Grossman-Helpman model, assume away the kno...

This paper sets out a basic heterogeneous-firms trade model that is closely akin to Melitz (2003). The positive and normative properties of the model are studied in a manner intended to highlight the core economic logic of the model. The paper also studies the impact of greater openness at the firm-level and aggregate level, focusing on changes in...

In this paper, we evaluate the impact of Turkey's membership on EU voting. The aspects that we discuss are decision-making efficiency and the distribution of power in the EU's leading decision making body the Council of Ministers. We compare two alternative Council voting rules: those accepted in the Treaty of Nice and implemented by the Accession...

This paper explores the impact of trade on growth when firms are heterogeneous. We find that greater openness produces anti- and pro-growth effects. The Hopenhayn–Melitz-model selection effects raises the expected cost of introducing a new variety and this tends to slow the rate of new-variety introduction and hence growth. The pro-growth effect st...

In this paper, I wish to provide an outsider's perspective on Asian regionalism. My basic point is that I believe that regionalism has not really started in East Asia, but it may, provided at least one major free trade agreement (FTA) gets signed with Japan - a Korea-Japan being perhaps the most likely at the moment.

This paper shows that allowing for agglomeration alters some of the conclusions of the recent heterogeneous-firms trade models. It also shows that allowing for heterogeneous firms alters some of the conclusions of standard new economic geography models. JEL H32, P16.

This paper examines whether electoral motives and government ideology influence short-term economic performance. I employ data on annual GDP growth in 21 OECD countries over the 1951-2006 period and provide a battery of empirical tests. In countries with two-party systems GDP growth is boosted before elections and, under leftwing governments, in th...

This Paper details the positive and normative effects of reciprocal trade liberalization when firms have endogenously determined, heterogeneous productivity levels. We show that trade liberalization leads to: (i) an anti-variety effect (the number of varieties consumed drops) in contrast to the well-known Krugman variety effect; and (ii) a Stolper-...

Melitz (2003) demonstrates that greater trade openness raises industry productivity via a selection effect and via a production re-allocation effect. Our comment points out that the set-up assumed in the Melitz model displays a trade off between static and dynamic efficiency gains. That is, although freer trade improves industry productivity in a l...

This Paper studies some of the many options facing EU leaders when choosing a viable voting system for the EU25+. It provides quantitative estimates of the efficiency and power distributions of the various EU voting schemes that are being considered. It also provides intuition on how various aspects of voting rules affect decision-making efficiency...

It has long been known that enlargement would have dramatic implications for EU decision-making: a structure designed for six would simply collapse under the weight of 25 or more members. This is why EU leaders have been searching for a viable voting-system reform, which will be discussed again in June 2004. This policy brief studies the many optio...

The basic structure of the core-periphery (CP) model is astoundingly familiar to trade economists. Take the classroom Dixit-Stigliz monopolistic-competition trade model with trade costs, add in migration driven by real wage differences, impose a handful of confusing normalisations, and voila, the CP model! The fascination of the CP model stems in n...

[Introduction]. The ongoing Intergovernmental Conference (IGC 2003) must re-shape Giscard d’Estaing’s draft into a Constitutional Treaty that can be signed and subsequently ratified by all 25 members of the enlarged European Union. Things are not going well. The most obvious sticking point concerns the reform of voting rules in the EU’s key decisi...

We review the theoretical links between growth and agglomeration. Growth, in the form of innovation, can be at the origin of catastrophic spatial agglomeration in a cumulative process à la Myrdal. One of the surprising features of the Krugman [Journal of Political Economy 99 (1991) 483–499] model, was that the introduction of partial labor mobility...

This paper examines whether electoral motives and government ideology influence short-term economic performance. I employ data on annual GDP growth in 21 OECD countries over the 1951-2006 period and provide a battery of empirical tests. In countries with two-party systems GDP growth is boosted before elections and, under leftwing governments, in th...

The standard race-to-the-bottom result is curious in one respect. If a nation wants to attract foreign capital, providing the optimal level of public amenities (and thus charging the optimal tax rate) would seem optimal. This conjecture fails in the standard tax competition model since foreign capital ignores host nation amenities. While this assum...

The global welfare implications of home market effects in trade models with monopolistic competition are little understood. This pa-per proposes a simple model in which such implications can be easily analyzed. It shows an overall tendency of monopolistically competi-tive sectors to inefficiently cluster in locations that offer market access advant...

Gravity type models are widely used in international economics. In these models the inclusion of time-fi0xed regressors like geographical or cultural distance, language and institutional (dummy) variables is often of vital importance e.g. to analyse the impact of trade costs on internationalization activity. This paper assesses the problem of param...

This paper considers tax competition and tax harmonization in the presence of agglomeration forces and falling trade costs. With agglomerative forces operating, industry is not indifferent to location in equilibrium, so perfectly mobile capital becomes a quasi-fixed factor. This suggests that the tax game is something subtler than a race to the bot...

This article formalizes the theoretical interconnections among four post-industrial revolution phenomena--the industrialization and growth take-off of rich northern nations, massive global income divergence, and rapid trade expansion. In stages-of-growth model, the four phenomena are jointly endogenous and are triggered by falling trade costs. In t...

In 1977 a seminal paper was published by Avinash Dixit and Joseph Stiglitz that revolutionized the modeling of imperfectly competitive markets. It launched what might be called the second monopolistic competition revolution, which has been far more successful than the first one, initiated by Edward Chamberlin and Joan Robinson in the 1930s. In this...

This paper presents a simple framework in which the location and the growth rate of economic activities are endogenous and interact. We show that the nature of the equilibrium and of the relation between growth and location depends fundamentally on whether capital is assumed to be mobile (in which case we interpret it as physical capital) or immobi...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

This paper introduces a new approach to the analysis of endogenous growth effects and uses it to illustrate two novel trade-and-growth links. The approach's simplicity allows us to introduce scale economies and imperfect competition into the R&D and financial intermediation sectors of a Romer-Grossman-Helpman endogenous growth model. We show that t...

Small nations fear that FTAs with larger, richer nations will erode their industrial bases. These concerns are recognized in FTA and multilateral talks: small nations may explicitly or implicitly maintain higher trade barriers. Using a model where symmetric liberalization de-industrializes small, poor nations, we characterize the path of protection...

We present a model where long-run growth and industrial location are jointly endogenous by introducing Romerian product innovation growth into Krugman's core-periphery model. We focus on stability, showing that growth is a powerful centripetal force, but that knowledge spillovers are a powerful centrifugal force. Integration policies that lower the...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...