A central statement of the theory of natural trading partners is that preferential trading with regional trading partners is less likely to be trade diverting and therefore geographically proximate partners are to be considered “natural” partners for preferential arrangements. This paper examines this question empirically. The analytical framework involves a general equilibrium model of preferential trade and an econometric model with tight links to this theory. This framework is used to implement tests of the natural trading partners hypothesis using U.S. trade data for the years 1964–95: Welfare changes that would result from preferential tariff reductions by the United States against various trading partners are first estimated, and correlations with bilateral “distance” measures (with and without controls for income levels) are then examined. Since the argument for “natural” trading partners is based on the greater likelihood of geographically proximate countries to be more significant trading partners, correlations between the welfare change estimates and bilateral trade volume are examined as well. Both geographic proximity and trade volume are found to have no effect. Thus this paper is unable to find any support for the natural trading partners theory in U.S. data.

The factor proportions model of international trade is one of the most influential theories in international economics. Its central standing in this field has appropriately prompted, particularly recently, intense empirical scrutiny. A substantial and growing body of empirical work has tested the predictions of the theory on the net factor content of a country’s trade with the rest of the world, usually under the maintained assumptions of factor price equalization and identical homothetic preferences across trading countries (or under quite specific relaxations of these assumptions). In contrast, this paper uses OECD production and trade data to test the restrictions (derived by Helpman) on the factor content of trade flows that hold even under nonequalization of factor prices and in the absence of any assumptions regarding consumer preferences. In a further contrast with most of the existing literature, which has focused on the factor content of a country’s multilateral trade, our tests concern bilateral trade flows, thereby enabling the examination of trade flows between only a subset of countries for which quality data (relatively speaking) are available. We find that restrictions implied by the theory cannot be rejected for the vast majority of country pairs considered in our analysis.

Using a matched employer-employee data set, we study the effects of trade liberalization on wage dispersion in Brazil across heterogeneous worker groups, keeping in mind that the assignment of workers to firms may be non-random and determined by the time-invariant productivity of workers specific to the firms with which they are matched. We find differential effects of trade reform on residual wage inequality across worker groups. High education workers experience greater increases in wage dispersion relative to low education workers following trade liberalization. This finding is broadly consistent with the theoretical predictions that emerge from models with heterogeneous firms, heterogeneous workers, and labor market frictions.

This paper develops a framework to study empirically the relationship between trade policy and individual income risk and to evaluate the associated welfare consequences. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, we find that trade policy changes have a significant short-run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

In popular discussion much has been made recently of the susceptibility of government policies to lobbying by foreigners. The general presumption has also been that such interactions have a deleterious effect on the home economy. However, it can be argued that, in a trade policy context, bending policy in a direction that would suit foreigners may not in fact be harmful: If the policy outcome absent any lobbying by foreigners is characterized by welfare-reducing trade barriers, lobbying by foreigners may result in reductions in such barriers and raise consumer surplus (and possibly improve welfare). Using a new data set on foreign political activity in the US, this paper investigates the relationship between trade protection and lobbying activity empirically. The approach taken in this paper is primarily a structural one. To model the role of foreign and domestic lobbies in determining trade policy, we develop first a theoretical framework building on the wellknown work of Our analysis of the data suggests that foreign lobbying activity has significant impact on trade policy -and in the predicted direction: Tariffs and non-tariff barriers (NTBs) are both found to be negatively related with foreign lobbying activity. We consider also extended specifications in which we include a large number of additional explanatory variables that have been suggested in the literature as determinants of trade policy (but that emerge from outside of the theoretical structure described above) and confirm the robustness of our findings in this setting.