Search Results

International trade involves the movement of goods across borders, while immigration pertains to the movement of people across national boundaries. These two phenomena are strongly correlated. To some extent, the similarity between barriers to trade and migration explains this correlation, with distance being a crucial factor in both trade and migration. Geographically closer countries tend to engage in both trade and migration because of closer cultural connections. Immigration is itself also an important determinant of trade flows. Migrant networks play a vital role in reducing trade barriers by improving information sharing and facilitating business connections. This, in turn, leads to an increase in both exports and imports between countries. As trade increasingly relies on efficient firm and supplier matching, particularly within global supply chains, the influence of migrant networks becomes more significant. Finally, immigration also drives demand for goods and services from migrants’ home countries. Migrants often maintain strong ties to their home countries and prefer consuming products and services from those regions. This preference fosters increased bilateral trade flows between the home country and the country of immigration. In summary, international trade and immigration are closely linked, and understanding the interplay between international trade and immigration is crucial for comprehending the dynamics of the global economy.

This article reviews recent studies on the impact of financial frictions on international trade. We first present evidence on the relation between measures of access to external finance and export decisions. We then present an analytical framework to analyze the impact of financial frictions on firms’ export decisions. Finally, we review recent applications of this framework to investigate the impact of financial frictions on international trade dynamics across firms, across industries, and in the aggregate. We discuss related empirical, theoretical, and quantitative studies throughout.

The gravity model of international trade states that the volume of trade between two countries is proportional to their economic mass and a measure of their relative trade frictions. Perhaps because of its intuitive appeal, the gravity model has been the workhorse model of international trade for more than 50 years. While the initial empirical work using the gravity model lacked sound theoretical underpinnings, the theoretical developments have highlighted how a gravity-like specification can be derived from many models with varying assumptions about preferences, technology, and market structure. Along the strengthening of the theoretical roots of the gravity model, the way in which it is estimated has also evolved significantly since the start of the new millennium. Depending on the exact characteristics of regression, different estimation methods should be used to estimate the gravity model.

The political economy of protection is a field within economics, but it has significant overlap with its sister discipline, political science. For a political economy of protection, one needs at a minimum two types of economic agents: political decision makers who provide protection, and economic agents who are protected or even actively seek protection. The typical political economy scenario leads to an economic outcome that is not Pareto-optimal: From a general welfare perspective, the political interaction is not desirable. An important task of political economy research is to explain why and how political interaction takes place. For the first part of the question, it appears clear that if protection is actively sought, the protection seeker intends to benefit from his activities. However, if the policymakers were truly interested in Pareto optimality and welfare maximization, they would refuse to protect. Hence a crucial assumption in the political economy literature is that the politicians’ objective function differs from the general welfare function. For the second part of the question, theoretical political economy models consider either the election campaign phase when politicians are eager to win a majority of votes (preelection models) or the phase when the politicians have been elected and may benefit from the spoils associated with holding office (postelection models). Whereas in the election phase, politicians have an incentive to cater to the interests of that part of the electorate that is considered pivotal for the election outcome, in the postelection phase they may be open to, for example, special interest group (SIG) influences from which they derive utility. A first wave of theoretical political economy models originates from the 1980s. Building on these early advances, more elaborate models have been proposed. The most prominent one is the Grossman–Helpman protection for sale (PfS) model. It delivers a postelection general equilibrium framework of trade policy determination. In this common agency model, industry interest groups act as principals and offer the government a menu of contracts of campaign contributions in exchange for trade policy. The PfS model predicts that industries that lobby for protection will obtain trade protection in equilibrium, whereas nonlobbying industries will face import subsidies. Numerous papers have evaluated the PfS model empirically and found that the implied weight on contributions in the governmental welfare function and the implied share of the population represented by lobbies are both very high. Remedies for this surprising result exist, but it has also been argued that the found empirical regularities may be spurious. At the beginning of the 21st century, the majority of political economy literature is still theoretical, but better data availability increasingly offers the opportunity to empirically test theoretical results. A number of challenges remain for the political economy literature, however. In particular, more work is required to better understand policymaker interests. Moreover, an incorporation of political economy aspects into the new trade theory models that allow for intra-industry trade and firm diversity appears to be a promising avenue for future research.

A recent body of literature on quantitative general equilibrium models links the creation and diffusion of knowledge and technology to openness to international trade and to the activity of multinational firms. The unifying theme of this literature is methodological: productivities are Fréchet random variables and arise from Poisson innovation and diffusion processes for ideas. The main advantage of this modeling strategy is that it delivers closed-form solutions for key endogenous variables that have a direct counterpart in the data (e.g., prices, trade flows). This tractability makes the connection between theory and data transparent, helps clarify the determinants of the gains from openness, and facilitates the calculation of counterfactual equilibria.