this paper what we know about foreign trade and in what ways our understanding has improved as a result of the last 20 years of research

I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative

The last few decades have seen a spectacular integration of the global economy through trade. The rising integration of world markets has brought with it a disintegration of the production process, however, as manufacturing or services activities done abroad are combined with those performed at home. I compare several different measures of foreign outsourcing, and argue that they have all increased since the 1970s. I also consider the implications of globalization for employment and wages of low-skilled workers, and for trade and regulatory policy, such as labor standards. The last few decades have seen a spectacular integration of the global economy through trade. The share of imports (or exports) in GDP for the United States has approximately doubled in the last two decades, and if intra-OECD trade is omitted, the same is true for the OECD countries generally. Trade does remain a seemingly small fraction of U.S. GDP. This is not surprising in view of the fact that large economies trade less with others, and more internally. But the modest share of trade in total national income hides the fact that merchandise trade as a share of merchandise value-added is quite high for the U.S. and the OECD, and has been growing dramatically. In fact, if one focuses on merchandise trade relative to value-added, the world is much more integrated today than at any time during the past century.

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We examine whether two important theories of trade, the Heckscher-Ohlin theory and the Increasing Returns theory, can account for the empirical success of the so-called gravity equation. Since versions of both theories can predict this equation, we tackle the model identification problem by conditioning bilateral trade relations on factor endowment differences and on the share of intra-industry trade. Only for large factor endowment differences does the Heckscher-Ohlin model predict perfect production specialization in different countries as well as the gravity equation, and trade is purely in goods produced with different factor intensities. Our empirical analysis yields three findings. First, the predictions of the perfect specialization versions of both theories are rejected by the data, and so are unlikely explanations for the empirical success of the gravity equation. Second, a model of imperfect specialization that includes both increasing returns and factor endowments as sources of trade has a mixed performance: it correctly predicts more differentiated goods production when the level of intra-industry trade is greater, however, the predicted link to factor proportions in tenuous. Third, the predictions of a model with imperfect specialization that relies solely on factor endowment differs find support in the data. These results suggest that factor endowments and increasing returns explain different components of the international variation of production patterns and trade volumes.

The simple gravity equation explains a great deal about the data on bilateral trade flows, and is consistent with several theoretical models of trade. We argue that alternative theories nevertheless predict subtle differences in key parameter values, depending on whether goods or homogeneous or differentiated, and whether or not there are barriers to entry. Our empirical work for differentiated goods delivers results consistent with the theoretical predictions of the monopolisticcompetition model, or a reciprocal-dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocaldumping model with barriers to entry. JEL Classification Number: F10, F12 Keywords: homogeneous; empirical; theoretical; simulation; Cournot-Nash; reciprocal dumping.

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In this paper we estimate the early effect of the European Monetary Union (EMU) on trade. We use a panel data set that includes the most recent information on bilateral trade for 22 developed countries from 1992 through 2002. During this period 12 European countries formally entered into a currency union. This is a unique event that allows us to study the effect of currency union among a relatively homogeneous group of industrial countries. Controlling for a host of other factors, we find that the effect of EMU on bilateral trade between member countries ranges between 5 and 10 percent, when compared to trade between all other pairs of countries, and between 9 and 20 percent, when compared to trade among non-EMU countries. In addition, we find no evidence of trade diversion. If anything, our results suggest that the monetary union increases trade not just with EMU countries, but also with the rest of the world.

The large volume of intra-industry trade is often cited as a critical element favoring trade theories based on increasing returns and imperfect competition over those with constant returns and perfect competition. The former provide an elegant account of intra-industry trade, while the latter, it is often argued, cannot. This paper provides an account of intra-industry trade based squarely on comparative advantage. The key is to introduce elements of Ricardian trade theory within the Heckscher-Ohlin framework. This is appropriate, as essential characteristics of intra-industry trade imply that technical differences matter. Increasing returns, in short, are not necessary for intra-industry trade.

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