Economic Effects of the North American Free-Trade Area on Australia and New Zealand
Journal of Economic Integration 9(1), March 1994, 1-28
by Mordechai E. Kreinin, and Michael G. Plummer
Abstract: The paper analyzes the effects of the North American Free-Trade (NAFTA) on Australia and New Zealand. Using a commodity matching technique, it identifies the industries that would be most affected by the preferential trading arrangement. Trade diversion obtains in a wide-range of disaggregated primary and manufactured commodity areas. Total trade diversion is estimated as a terms of trade effect. The effects of integration on trade in services and foreign investment flows are also evaluated.

Export Competition Between Centrally Planned Economies and Korea
Journal of Economic Integration 9(1), March 1994, 29-44
by Josef C. Brada, and Younglin Woo
Abstract: A key issue for the economies of Eastern European now undertaking the transition to capitalism is their ability to redirect their industrial exports toward the developed market economies. Previous studies of their competitiveness on these markets against goods from the Newly Industrializing Countries (NICs) tended to suggest that East European goods were not competitive. This paper compares the competitiveness of East Europe and Korea on major developed country markets. We find that competitiveness has a strong regional component which, when factored into export performance, suggests that East European manufacturers may be more competitive than previously believed.

Are Subsidies More Dangerous Than Dumping? Evidence from Wealth Effects for the Steel Industry
Journal of Economic Integration 9(1), March 1994, 45-61
by James C. Hartigan, Sreenivas Kamma, and Philip R. Perry
Abstract: The GATT permits its members to protect their constituent firms from unfair trade practices, such as dumping and subsidies, on the part of foreign firms and governments. In the U.S., for example, the investigative procedures, injury standards, and remedies are the same for dumping and subsidies. International legal scholars have argued that there is no inherent reason why they have to be identical. The present paper uses an event study to determine if there is a significant difference in the reaction by the capital market to subsidy and dumping decisions for the U.S. steel industry. Because there is evidence that the reactions differ systematically in an efficient market, there is justification for permitting a weaker industry standard and stronger remedy for subsidy investigations.

Financial Barriers in the Pacific Basin: 1982-1992
Journal of Economic Integration 9(1), March 1994, 62-79
by Menzie David Chinn, Jeffrey A. Frankel, and
Abstract: Interest rate links strengthened among some Pacific Rim countries over the period 1982-1992, even though substantial country barriers remain. The covered interest differential narrowed for Australia and New Zealand, as their programs of financial liberalization admitted them to the club whose members already included Canada, Hong Kong, Japan and Singapore. The covered interest differential actually increased slightly over certain subperiods in Japan and Canada, but the economic magnitudes were quite small, and are probably due to other factors besides the presence of capital barriers.

The Non-Equivalence of Specific and Ad Valorem Tariffs with Quality-Differentiated Goods
Journal of Economic Integration 9(1), March 1994, 80-93
by Howard J. Wall
Abstract: This paper is an extension of the literature inaugurated by Falvey that examines the effects of tariffs when the affected goods are quality-differentiated. I demonstrate that an ad valorem tariff may actually increase the sales and market shares of some imported qualities, and that the protection offered to the domestic industry may not be spread among all domestically produced qualities. A specific tariff also does not distribute the burden and benefits to all firms in the market. Only those qualities that are closest substitutes for imports will be affected. For either type of tariff, the total sales in the market contract only if the lowest quality is imported.

Government Debt and the Real Exchange Rate in an Overlapping Generations Model
Journal of Economic Integration 9(1), March 1994, 94-105
by Shuanglin Lin
Abstract: This paper examines the steady-state effect of government debt on the real exchange rate within a two-country overlapping generations model with production. It is demonstrated that, other things being constant, an increase in government debt depreciates the real exchange rate of the country with relatively higher capital elasticity of output, while it appreciates the real exchange rate of the country with relatively lower capital elasticity of output.

Industry Definition and Less Than Fair Value Pricing: an Analysis of ITC Practice
Journal of Economic Integration 9(1), March 1994, 106-127
by Nestor M. Arguea, and Richard K. Harper
Abstract: In reaching an injury determination in U.S. antidumping and antisubsidy cases, the potentially injured domestic industry and thus scope of an investigation must be defined. However, a systematic process of market definition has yet to evolve in ITC decision making, leaving the question to instead be considered on a case by case basis. Cluster analysis of commuter aircraft cases suggests that current ITC practice may often lead to a definition of domestic industry which is too narrow.

Volume 9 Number 2 June 1994

Strategic Lobbying and Antidumping
Journal of Economic Integration 9(2), June 1994, 129-155
by James E. Anderson
Abstract: Anti-dumping is often defended as a pressure valve which reduces more illiberal forms of protectionist pressure. In the domino dumping model of Anderson [1992, 1993] this need not be true as exporters dump to obtain market access in the event of a VER. The contribution of this paper is to show that anti-dumping opens a channel for strategic lobbying through which lobbying commitments can have favorable effects on the decisions of exporting firms, and through which antidumping enforcement can encourage lobbying. Thus a 'de-politicizing' institution can perversely be responsible for politicizing trade policy all the more.

Strategic Responses to Antidumping Laws and Legal Interpretations: Producing for Export Markets Using Lawyers and Other Factors of Production
Journal of Economic Integration 9(2), June 1994, 156-171
James H. Cassing
Abstract: This paper explores in the context of a stylized model of dumping some possible strategic responses to the use of "cumulation" and "threat of material injury" in dumping investigations. In particular, it is shown that these guidelines for investigations can change the payoff structure of competition abroad and thereby induce reduced competition and optimal -- from an individual firm point of view -- excess capacity.

The Economic Effects of Widespread Application of Anti-dumping Duties to Import Pricing
Journal of Economic Integration 9(2), June 1994, 172-197
by Patrick Conway, and Sumana Dhar
Abstract: We provide an analysis of the implications of widespread use of anti-dumping (AD) duties to welfare and sectoral resource allocation in the context of a computable general equilibrium model of trade among three open economies. Production of the dumped good has a decreasing-cost technology, thus allowing the endogeneity of the number of firms in the home and foreign markets.
AD duties in this general-equilibrium framework have the protective effects of the tariffs they are; the economies have the dual distortion of the original dumping and the imposed tariff. AD duties only promote free trade when they are effective in deterring anti-dumping duty. Firm entry in the dumping country or removal of transshipment restrictions are more effective anti-dumping policies than the AD duty.

Will GATT Enforcement Control Antidumping?
Journal of Economic Integration 9(2), June 1994, 198-213
by J. Michael Finger, and Kwok-Chiu Fung
Abstract: Why has the GATT dispute settlement process been so ineffective in disciplining the use of antidumping; what are the sources of this ineffectiveness and the likelihood that the process will become effective in the future? The paper concludes that GATT enforcement is not likely to provide effective discipline over national use of antidumping. Both the bureaucratic and the legal momentum of the GATT dispute settlement process are toward innocuous findings of procedural error that can be corrected without lifting the antidumping order under review. A legalistic approach implies a protectionist answer.

Learning about Enforcement: A Model of Dumping
Journal of Economic Integration 9(2), June 1994, 214-240
by Ronald D. Fischer, and Leonard J. Mirman
Abstract: We study the effects of uncertainty about the intensity of enforcement of antidumping regulations. The desire to avoid penalties alters the foreign firm's behavior. In the first period of a two period model, domestic and foreign firms have common beliefs that the government is a strong enforcer of antidumping regulations. After observing whether a penalty has occurred, firms update their subjective probabilities and adjust their behavior. In the first period firms act strategically to manipulate the information received by the foreign firm. The effect of this information on the choice variables depends on second order properties of the second period value function.

Welfare Effects of Introducing Antidumping Procedures in a Trade-Liberalizing Country
Journal of Economic Integration 9(2), June 1994, 241-259
by Michael O. Moore, and Steven M. Suranovic
Abstract: We analyze the national welfare consequences of trade liberalization when accompanied by the introduction of a resource-using antidumping process. The final welfare effect of liberalization depends critically on parameters that define the anti-dumping process, especially the size of the anti-dumping duties, the probability that a petition will be granted and the industry-incurred cost of seeking protection. Using a numerical simulation we generate liberalization scenarios which result in national welfare losses. We use these results to suggest ways to better assure that the reform of trade procedures results in a welfare improvement.

Pricing Behavior in the Presence of Antidumping Law
Journal of Economic Integration 9(2), June 1994, 260-289
by Thomas J. Prusa
Abstract: This paper examines the effect of antidumping (AD) law on the pricing behavior of foreign and domestic firms prior to the filing of an AD action. AD law affects firms in very different ways -- almost always distorting the foreign firm's strategy but often not altering the domestic firm's. We show that AD law creates a price floor for the foreign firm and causes it to raise its price. The domestic firm's response is significantly more complicated, in many instances resulting in feigned injury. These diverse effects imply that AD law has important welfare consequences even if duties are never levied.

Volume 9 Number 3 September 1994

On the Feasibility of Economic Cooperation in East Asia: Perspectives from Trade Creation and Trade Diversion
Journal of Economic Integration 9(3), September 1994, 291-311
by Deng-Shing Huang, and Jenn-Hwa Tu
Abstract: This paper attempts to measure the feasibility of economic cooperation in East Asia from an economic point of view. To approach this issue, we decompose the effect of economic cooperation into trade creation (TC) and trade diversion (TD) by using the well-known revealed comparative advantage (RCA) index. Diversity in the RCA indices among member countries should be closely related to the magnitude of TC. On the other hand, TD occurs in the case of a union in goods in which the outside region as a whole has a comparative advantage. In addition, members who suffer from TD will be those that have a low RCA index and thus have to import.
The results show that the export structures differ quite significantly between ASEAN and the NICs. Based on the RCA index, we would expect an intra-regional trade creation effect in the case of commodity groups 1 (agriculture), 2 (mining), 31 (food, beverages and tobacco), 32 (textiles), 33 (wood & products) and 39 (other manufactures) if ASEAN and the NICs form a union. Since Japan has a revealed comparative advantage in commodity groups 37 (basic metals) and 38 (metal manufactures), excluding it from the union would induce TD in these goods and the importing member countries will thus suffer.
Therefore, if Japan is included into the union, trade diversion in the case of goods 37 and 38 disappears, and trade creation follows. However, for goods 31 (food, beverages and tobacco), 34 (paper and products), and 35 (chemicals), in which these ten countries, as a whole, have a comparative disadvantage compared with the rest of the world, TD is inevitable. Again, countries that have to import or have a comparative disadvantage in these goods will suffer from trade diversion.

Policy Toward International Capital and Labor Flows under Free Trade and Complete Specialization
Journal of Economic Integration 9(3), September 1994, 312-326
by Fathali Firoozi
Abstract: In a developed free trade environment, a plausible outcome is that different countries specialize in production of different commodities. This study examines a country's optimal policy toward international flows of labor and capital in a model where the trading countries completely specialize in production of different commodities and no restriction on commodity trade exists. Under variable terms of trade, the results demonstrate the interdependence between optimal policies a country toward international flows of labor and capital.

The Impact of Southern Regional Trading Arrangements on Trade Regime Bias: Some Evidence for CARICOM
Journal of Economic Integration 9(3), September 1994, 327-345
by Chris Milner
Abstract: Trade regime bias, in particular anti-export bias, is likely to be a feature of 'southern' regional trading blocs of small, relatively inefficient countries, with relatively high external tariffs. This paper explores the reasons for this, and provides evidence of the pattern of trade regime bias prevailing in two CARICOM countries, Barbados and Trinidad. The paper also investigates the extent to which trade regime bias can be lowered through country-specific policy reforms, such as the lowering of non-tariff barriers, and the extent therefore to which regional commitments may constrain trade policy reform in developing countries.

The Heckscher-Ohlin Model with Endogenous Sector-Specific Capital
Journal of Economic Integration 9(3), September 1994, 346-369
by Jürgen Meckl
Abstract: This paper considers the long-run properties of a dynamic specific-factors model with endogenous capital stocks providing a dynamic foundation for the Heckscher-Ohlin model. The long-run equilibrium is fully determined by a static Heckscher-Ohlin model in primary factors although capital rentals may not be equal between sectors. All theorems of the static model carry over to the present model's steady state as long as countries diversify. Primary-factor endowments determine long-run comparative advantage and long-run capital stocks. Capital endowments are completely irrelevant for the determination of the long-run trade pattern.

Theoretical and Empirical Analysis of Consistency in the Exchange Rate Expectation Formation Process
Journal of Economic Integration 9(3), September 1994, 370-392
by Swarna D. Dutt
Abstract: This paper undertakes a two step test of consistency in the foreign exchange rate expectation formation process. In step one the General Extrapolative Model (GEM) is used with level of exchange rate survey forecasts. In step two the changes in levels of exchange forecasts are used to test consistency applying the cointegration methodology, thus taking non-stationarity into account. The thorny issue of the risk premium is avoided by using survey data on actual experts expectations. The GEM upholds (rejects) consistency in the short (long) forecast horizon, but the cointegration results confirm consistency and hence rationality in expectation formation across all horizons.

Empirical Tests of New Growth Theory: Openness and Growth
Journal of Economic Integration 9(3), September 1994, 393-415
by Jati K. Sengupta
Abstract: New growth theory has stressed the role of export externality and increasing returns to scale in promoting sustained growth. This paper discusses these sources of economic growth in Asian NICs (newly industrializing countries) in recent times by applying some modern econometric tests based on cointegration and other methods. Countries such as Japan, Korea and Taiwan are considered as examples for empirical applications of the broad tenets of the new growth theory.

Immigration in Less Developed Countries: A Theoretical Note
Journal of Economic Integration 9(3), September 1994, 416-425
by Manash Ranjan Gupta
Abstract: The effects of an inflow of immigrant labour force on unemployment and social welfare are analyzed in a Harris-Todaro economy. It is shown that an inflow of immigrant labour force lowers unemployment, improves the income-distribution and raises the social welfare if there is perfect capital-mobility between the urban sector and the rural sector. But the results will be opposite to these in the non-shiftable capital model.

Volume 9 Number 4 December 1994

Aggregate Exchange Rate Pass-Through: Instability and Inference
Journal of Economic Integration 9(4), December 1994, 427-443
by William R. Melick
Abstract: The instability displayed by aggregate, econometric specifications of pass-through has been cited as evidence in favor of theoretical models of pass-through that allow for hysteresis. This paper argues that 1) An unstable econometric specification should not be used as evidence in favor of a theoretical model, and 2) Aggregate models of pass-through are very uninformative, given the different market structures that are likely to be aggregated.

Welfare-Enhancing Import Subsidies
Journal of Economic Integration 9(4), December 1994, 444-470
by John Dutton
Abstract: The concept of "comparative preference" is developed. It is shown using this concept in a model analogous to that of Itoh and Kiyono that a subsidy on imports of a good may be beneficial to the importing country. Two sets of models are developed to demonstrate when and why import subsidies may be welfare-enhancing to the importer. One set includes three goods and two countries and the other includes two goods and three countries. For each set, propositions are illustrated for a simple model with specific functional forms using the phenomenon of comparative preference. Propositions are also presented in more detail with general models. The roles of key parameters are explained and optimal subsidy expressions are derived. Relationships with alternative tariff policies are explained.

A Synthesis of the Keynesian and Monetarist Approaches to the Short-run Theory of the Balance of Payments
Journal of Economic Integration 9(4), December 1994, 471-488
by Pekka Ahtiala
Abstract: The paper generates the approaches as special cases of a general model, finding out the assumptions necessary to produce their propositions. The monetarist propositions essentially follow from perfect capital mobility, whereas those of the Keynesian elasticity-absorption approach are a consequence of the "Keynesian neutral monetary policy" assumption. This and the fixed-income version of the monetarist approach turn out to be independent special cases of the general model, each approach Abstract:ing from what the other is analyzing. However, the "orthodox neutral monetary policy" version of the Keynesian approach nests the basic monetarist model. Several results, such as the additional assumptions required for the monetarist effects and the inappropriateness of describing this approach as a long-run theory are also derived.

On the Participation of Local Capital in a Foreign Enclave -- A General Equilibrium Analysis
Journal of Economic Integration 9(4), December 1994, 489-501
by Sugata Marjit
Abstract: We provide a general equilibrium analysis of a "joint venture" between local and foreign capitalists in an export sector of a small economy. When, due to political reasons, the local government is unable to alter the tariff rates drastically, promoting such joint-ventures improves national welfare. Our results obtained earlier in a "full employment" context continue to hold in a model with unemployment.

Dividend and Monetary Policy and the Differential Tax Treatment of Capital Gains in a Two-Country World
Journal of Economic Integration 9(4), December 1994, 502-524
by Marcelo Bianconi
Abstract: This paper adopts a representative-agent infinite-horizon two-country two-good framework and shows how the interdependence of monetary, fiscal, and dividend policy affects the cost of capital in a world of integrated capital markets under flexible exchange rates. The main implications are: (i) nominal variations in capital gains assign a role for the differentiation of capital gains taxes depending on the type of asset held; (ii) whereas the capital gains tax is assumed to be residence-based, the inflation tax is shown to be inherently a source-based tax.

Are Imports and Exports of Australia Cointegrated?
Journal of Economic Integration 9(4), December 1994, 525-533
by Mohsen Bahmani-Oskooee
Abstract: Few studies in the literature have investigated the response of Australian external accounts to macroeconomic policies by directly constructing and estimating some reduced form models. In this paper we offer an alternative method of testing the effectiveness of those policies by investigating the long-run convergence between Australian imports and exports. The application of cointegration technique revealed that Australian imports and exports are indeed cointegrated with cointegrating coefficient very close to unity indicating that indeed Australia's macroeconomic policies have been effective in the long-run.

Liberalized Exchange Rate Management System and Devaluation in India: Trade Balance Effect
Journal of Economic Integration 9(4), December 1994, 534-542
by Rajat Acharyya
Abstract: This paper examines the short run trade balance effects of the recent exchange rate policies in India in terms of the extended Jones-Corden [1976] model. With rigidity of money wage rate as the target of concurrent fiscal policy, a change in the LERMS formula improves trade balance only if non-tradeables are relatively labour-intensive. A devaluation might still fail to improve trade balance, on the other hand, in presence of imported input. The Jones-Corden condition thus gets modified in presence of imported input.