Trade liberalisation and specialisation within and across industries

• Main Author: Thia, Jang Ping
• Published: London School of Economics and Political Science (University of London) 2008
• Subjects: 382
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645703

This thesis investigates three aspects of trade liberalisation. Chapter Two presents a model with business cycle uncertainty, monopolistic competition, and productively heterogeneous firms. The results show that greater trade liberalisation does not always lead to increased firm-level aggregate productivity, since weaker firms can export in the face of adverse home shocks. However, trade liberalisation dampens price-output fluctuations, and is welfare improving if countries have trade partners with uncorrelated shocks. This is a pro-globalisation result since it implies greater macroeconomic stability. Some empirical evidence is presented to support this view. Chapter Three introduces firm heterogeneity into an Economic Geography setting. The results show that even a small difference in the productivity distributions between two locations can have a significant impact on capital distribution - even as wage-rental rates remain the same across locations - if trade is free enough. It provides an alternative perspective to the Lucas Paradox. The model also shows why high sunk cost industries will locate in less risky locations (North) with greater trade liberalisation, while low sunk cost industries go the other way. Trade liberalisation accentuates these effects, and leads to a different North-South industrial specialisation. Chapter Four introduces worker skills heterogeneity into an Economic Geography setting. Trade liberalisation occurs in two separate waves. Manufacturing first agglomerates when goods trade is liberalised. The result shows that subsequent services trade liberalisation can lead to a loss in manufacturing (or de-industrialisation), changes in specialisation, and stagnation of manufacturing wages. As a consequence of trade liberalisation, there is inequality both within and between nations. The results also show that a relative increase in skilled workers may lead to greater (not less) skilled workers' premium if it encourages greater services agglomeration. The model is consistent with North-South development patterns.