Essays in International Economics

During the recent years the degree of trade integration has been increasing significantly across the world. In that sense, countries have been developing strategic partnerships, subscribing Free Trade Agreements to increase the amount of trade between partners. At the same time, this higher level of integration generates concerns about the effects of global financial crisis and recessions. In these three essays I explore some implications of trade integration on firm's production decisions considering differences across firms and products.
In chapter 1, I use the exponential growth in Chinese exports from 2001 to 2006 to evaluate the effects of a competition shock from a low-wage competitor on exporters from a developing country. In particular, this research considers heterogeneous quality upgrading strategies of Peruvian apparel firms in response to an influx of low-cost Chinese apparel goods. Using firm-level data from Peruvian customs and a survey of Peruvian manufactures, I find that more productive firms upgrade their product quality to differentiate them from low-cost and low-quality Chinese apparel goods. Conversely, less productive Peruvian firms, which are not able to increase their quality, react by reducing their prices. Finally, I also find evidence that the average quality of Peruvian apparel products increase during 2001 to 2007.
In chapter 2, I evaluate the effect of access to low-cost inputs from China on a firm's export outcomes. In a heterogeneous firms model, the use of low-cost inputs reduce the firm's marginal cost, increasing firm exporting at both the extensive and intensive margin. The reduction in cost allows a firm to become a new exporter, and current exporters become more competitive and increase their level of exports. The model considers firms producing two different quality varieties of a given good: a high-quality variety (HQV), which is intensive in high-quality inputs sourced from OECD countries; and a low-quality variety (LQV), which is intensive in low-quality inputs sourced from non-OECD countries. I find initial evidence of the two main predictions of the model using firm-level data from Peruvian Customs: 1) Inputs imported from China, which are of lower quality than inputs imported from OECD countries, are used proportionally more in the production of the low-quality variety after a tariff reduction of inputs imported from China. 2) A group of firms becomes more competitive and starts exporting the low-quality variety, whereas the current exporters increase the proportion of sales of the low-quality variety in their total sales.
The final chapter exploits the fact that when products are more complex, they become more sensitive to imperfect contracting. Therefore, industries exhibit different degrees of contractual vulnerability. We build a simple theory in which: (i) exporters are paid after delivery of the goods, and (ii) a complementarity exists between (procyclical) contract enforcement at the importing-country level and contract vulnerability at the industry level. In this environment, an adverse aggregate shock (e.g., a recession or financial crisis) in an importing country generates a disproportional decline in imports in more contractually vulnerable industries. Using disaggregated bilateral trade data for many countries from 1989 to 2000, and exploiting the variation in contractual dependence across manufacturing industries, we find robust empirical support for the model's predictions. The estimated effects of this new mechanism in the literature on crises and trade are statistically and economically significant. Our analysis employs different industry measures of contractual vulnerability, including a novel indicator that reflects payment defaults among firms.