Working Papers

The Mutable Geography of Firms' International Trade: Evidence and Macroeconomic Implications [Slides][Online Appendix I: UK Results] [Online Appendix II: Additional China Results]

Exporters add and drop destination markets in response to a variety of global, national and industry-specific shocks. This paper develops empirical measures of these market changes and documents a set of key stylized facts using the customs databases of China (2000-2006) and the United Kingdom (2010-2016). First, I find within-firm changes in destination markets involve large trade values and 30-40% of all market changes involve simultaneously adding and dropping markets. Second, around 20% of within-firm market changes are driven by fluctuations in bilateral exchange rates and local CPI measures. Taken together, these facts suggest that firms face large destination-specific fluctuations in the demand for their products. Third, while adding and dropping markets, firms simultaneously adjust prices and quantities across all other destinations they serve. I build a multi-country general equilibrium model to investigate the channels that can generate the observed data patterns and study the aggregate implications of mutable markets (within-firm market changes) on the distribution of markups, trade volumes, and welfare. Applying the multi-country model to analysis of a bilateral trade war, I find that aggregate productivity for countries directly involved in the trade war drops more (1-2%) and that of countries not involved rises more (8-10%) when firms endogenously vary their markets in response to the new conditions of competition in local markets induced by the bilateral trade war.

Winner of the RoWE Young Economists Prize at the 21st European Trade Study Group (ETSG) Annual Conference

Markets and Markups: A New Empirical Framework and Evidence on Exporters from China with Giancarlo Corsetti, Meredith Crowley, and Huasheng Song; R&R American Economic Review
[Appendix][Online Appendix]

Exporting firms frequently change the set of foreign markets they serve: changes in the pattern of destinations for a firm's product convey information on unobservable factors affecting pricing and market participation. Building on this insight, we show how to construct a "trade-pattern" fixed effect estimator that helps reduce omitted variable and selection biases in analyses of pricing-to-market. Using this estimator and a new product classification, we document substantial markup elasticities to the exchange rate among exporters of highly differentiated goods, accounting for half of China's exports. Conversely, we find little evidence of pricing-to-market in the trade of less differentiated goods.

Winner of the Emerald Best Paper Award at the 2018 China Finance Review International Conference

Invoicing and the Dynamics of Pricing-to-market: Evidence from UK Export Prices around the Brexit Referendum with Giancarlo Corsetti and Meredith Crowley [VoxEU] [Slides]
R&R Journal of International Economics

Analyzing the large and persistent sterling depreciation following the Brexit referendum, we provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in the dynamics of exchange rate pass-through (ERPT) and pricing to market. We find that, while ERPT is high for transactions invoiced in producer currency and low for sales invoiced either in a vehicle or in the destination market currency, these differences strikingly narrow within six quarters. Notably, the weaker currency did not translate into a persistent gain in price competitiveness for UK exports. We also find that firms price-to-market, i.e., adjust markups to bilateral exchange rate and CPI movements, only when they invoice sales in the destination-market currency. Finally, we document that the aggregate shares of invoicing currency remain remarkably stable over time and do not respond to the Brexit shock. Yet, at a granular level, UK firms invoice in multiple currencies—even when shipping a product to the same destination— and switch currencies over time.

Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports with Meredith Crowley and Oliver Exton; R&R European Economic Review

The renegotiation of a trade agreement introduces uncertainty into the economic environment. We exploit the natural experiment of the Brexit referendum to estimate the impact of uncertainty associated with trade agreement renegotiation. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level, we estimate entry (exit) in 2016 would have been 5.0% higher (6.1% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.

Media Coverage: VoxEU; The Economist (2018, 2019); The Financial Times; The Telegraph

Dominant Currency Dynamics: Evidence on Dollar-invoicing from UK Exporters with Meredith Crowley and Minkyu Son [Slides]

How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.

The Value of Deep Trade Agreements in the Presence of Pricing-to-Market with Meredith Crowley and Thomas Prayer

Do preferential trade agreements (PTAs) lead to greater market integration, more intense competition and less market power for firms? In this paper, we integrate the detailed data on 257 preferential trade agreements from the World Bank’s Deep Trade Agreements (DTA) database with administrative customs datasets of product-level exports by firms from thirteen developing and emerging countries to estimate the responsiveness of firm-level exports, export prices, and destination-specific markups to trade and domestic policy commitments enshrined in deep trade agreements. Our preliminary findings suggest that both the direct and indirect effects of deep trade agreement provisions on export sales are quantitatively significant. Perhaps more interestingly, we find suggestive evidence of a pro-competitive effect of PTAs.

Work in Progress

Firm Level Pass Through: A Machine Learning Approach [Slides]

Understanding how exporters react to exchange rate shocks is important for evaluating international shock transmissions and setting the optimal international monetary policy. Empirical studies have documented huge heterogeneity in the degree to which different firms and products respond to exchange rate shocks. In addition, estimates of exchange rate pass through (ERPT) are time varying and depend on observed and unobserved variables in a nonlinear way. This paper proposes a machine learning algorithm that systematically detects determinants of ERPT and estimates ERPT at the firm-level in a large-scale custom dataset. The accuracy of the algorithm is tested on simulated data from an extended multi-country version of Atkeson and Burstein (2008). Applying the algorithm to China’s custom data from 2000-2006, this paper estimates the ERPT of China’s exporters and documents new evidences on the nonlinear relationships among market structures, unit value volatility and ERPT.

Retail Dynamics and Trade Elasticity Puzzle

Op-Eds

The Sterling Depreciation and UK Price Competitiveness, 26 August 2019, VoxEU, with Giancarlo Corsetti and Meredith Crowley

The Impact of Brexit Uncertainty on UK Exports, 21 January 2019, VoxEU, with Meredith Crowley and Oliver Exton

A Granular Analysis of the Exposure of UK Exports to EU Tariffs, Quotas and Antidumping under ‘No Deal’, 13 December 2017, VoxEU, with Giancarlo Corsetti, Meredith Crowley and Oliver Exton