The annual European Research Workshop in International Trade (ERWIT) was held in Helsinki on 10–14 September 1997, with the Yrjö Jahnsson Foundation acting as hosts. The organizers were Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR), Anthony Venables (LSE and CEPR) and Mika Widgrén (Yrjö Jahnsson Foundation, Helsinki, and CEPR). Thirteen papers were presented.

The post-war period has been marked by significant trade liberalization between industrialized countries, and there is some evidence that long-term growth rates have increased. In ‘Knowledge Dissemination, Capital Accumulation, Trade, and Endogenous Growth’, Dan Ben-David (Tel Aviv University and CEPR), in a joint work with Michael B Loewy (University of Huston), presented a Solow-inspired model which helps to explain the possible positive correlation between trade liberalization and growth. The Solow framework was used because it has long been recognized that it fits well with major empirical facts, but the authors extended it to an open-economy endogenous growth model with knowledge accumulation. They assumed that trade gives a country costless access to knowledge accumulated in other countries, and that this spillover is an increasing function of the trade volume. They showed that even unilateral trade liberalization speeds up the long-term growth rate for all countries, but that the liberalizing country experiences a more positive stimulus than the other countries do.

Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR) agreed that there may be a positive link between openness, knowledge spillover, and growth, and appreciated the empirical background for the model. He did, however, question the assumption that countries are able to acquire knowledge costlessly from their trading partners, and further found it troubling that the model allows no trade in intermediate goods or capital. This point was also taken up by Rikard Forslid (Lunds Universitet and CEPR), who claimed that the growth rate may be more positively affected by trade in capital than by trade in goods.

In ‘The Geometry of Specialization’, Joseph Francois (Erasmus Universiteit, Rotterdam, Tinbergen Institute and CEPR) and Douglas Nelson (Tulane University) stated that division-of-labour/specialization models have become a standard analytical tool, along with competitive general-equilibrium models, in public finance, trade, growth, development and macroeconomics. Yet unlike more traditional models, the specialization models lack canonical graphical representation. This is because they are both new and complex, characterized by multiple equilibria, instability and emergent structural properties under parameter transformation. Given their prominence, the authors argued, the value of a simple graphical representation seems considerable. They developed such a framework, illustrating results from current research on specialization models and explaining why one sub-class of these models was particularly difficult to illustrate easily. Jan I Haaland (Norwegian School of Economics and Business Administration and CEPR) praised the authors for having developed a common, simplifying framework for geometric analysis of various models. Yet he also raised the question of how these illustration techniques might be used in practice.

In a joint work with Philippe Martin (Graduate Institute of International Studies, Geneva, and CEPR) and Gianmarco Ottaviano (Università di Bologna, CORE, Université Catholique de Louvain and CEPR), Richard Baldwin presented ‘The Geography of Take-Offs: A Model of Growth and Catastrophic Agglomeration’, which was a mathematical formalization of some of Rostow’s ideas of a development and growth process. There are two initially identical countries in the model, and the society can be described as primitive and traditional when trade costs are high. Moderate trade liberalization may lead to a certain agglomeration of the R&D sector to one of the countries if there are imperfect international knowledge spillovers, and it is during this phase that growth starts to take off. Further trade liberalization leads us to the third stage, which the authors described as the age of mass consumption. The growth rate is now even higher, because the R&D sector becomes completely localized in one nation.

The authors also discussed an extension of the model, with vertical linkages in the innovative sector. This is likely to increase the positive growth effects of trade liberalization in early stages, and to strengthen the agglomeration forces. Johan Torstensson (Lunds Universitet and CEPR) argued that the model may have important implications for welfare and policy analysis, since the country which ends up without any R&D sector may well be negatively affected by trade liberalization.

With reference to some empirical work, Gilles Duranton (LSE) argued that the role of agricultural productivity in a country’s industrialization process is unclear. In ‘Agricultural Productivity, Trade and Industrialization’, Duranton built a model which helps to explain this ambiguity, and where the level of trade costs in industrial goods plays a decisive role. When trade is expensive, a take-off requires a high agricultural productivity both to make it profitable to manufacture non-traded intermediate goods and to release labour to this activity. On the other hand, when international trade is inexpensive, low agricultural productivity may be beneficial because it gives the country a comparative advantage in industrial production (basically a Ricardian view). Though high agricultural productivity is harmful in this case, there exist multiple equilibria for some medium level of agricultural productivity. The model’s predictions are consistent with historical observations in several Western countries (high international transport costs) and recent experiences in some Asian countries (low international transport costs).

Kari Ahlo (Research Institute of the Finnish Economy) pointed out that productivity growth in agriculture and industrial production has been of about the same magnitude, and asked how this fact affected the model’s predictions. Arye Hillman (Bar-Ilan University) found it troubling that there were no institutions in the model, and emphasized that government interventions in the agricultural sector have been important empirically. He asked whether the model could explain why African countries typically tax agricultural production, while it is subsidized in Western industrialized countries.

Mika Widgrén (Yrjö Jahnsson Foundation, Helsinki, and CEPR) presented a paper entitled ‘Non-cooperative Bargaining of National and Supranational Interests under Asymmetric Information’. Widgrén proposed a formal model that gave some insight into the bargaining processes that take place between the central (supranational) and local (national) governments in the EU. National governments are assumed to be better informed about national preferences than the supranational government, and this gives rise to asymmetric information. The main purpose of the paper was to analyse the relationship between the supranational player – who has the right to propose – and the national player – who has the right to accept, reject or amend – a proposition. Cases where the amendment opportunities are both known and unknown are discussed, and, in an extension, the informed player is also allowed to give signals to the uninformed player. Arye Hillman thought that the institutional structure should be combined with an economic structure. He further argued that an extension to a multiagent model would be desirable, since it is otherwise difficult to see how it is relevant for the EU. Also, Richard Baldwin emphasized that the relevance of the model for the EU should be made more clear.

In ‘Lobbying and the Structure of Protection’, Olivier Cadot (INSEAD), Jaime de Melo (Université de Genève and CEPR) and Marcelo Olarreaga (WTO and CEPR) extended the influence-driven model of trade-policy determination to include general-equilibrium effects on the supply side resulting from labour-market interaction and intermediate goods. The model’s predictions for the structure of protection were related to underlying taste and technology parameters, and the authors derived several analytical propositions that are consistent with the stylized results of the empirical literature. Finally, numerical simulations were carried out for archetypal ‘rich’ and ‘poor’ economies. It turned out that the endogenously determined structure of protection was broadly consistent with the observed pattern of protection in rich and poor countries, suggesting the usefulness of the approach. Akiko Suwa-Eisenmann (INRA, DELTA and CEPR) made the point that intermediate goods industries are less protected than final goods sectors. She also addressed questions that remained to be answered, such as how labour mobility, labour unions, unemployment benefits and increased concentration may affect the choice of structure and level of protection.

Sigbjørn Sødal (Agder College) presented a dynamic general-equilibrium model and used it to show how the combination of growth, firm-specific demand and irreversibility can be related to agglomeration of an industry. In ‘Irreversible Investments and Economic Geography’, Sødal’s results were analogous to those arising from static models based on product differentiation and internal economies of scale. A criterion for stability of agglomeration was developed, depending on trade costs, relative size of the industry and demand parameters. Agglomeration became a more stable equilibrium the larger the uncertainty and the slower the exogenous technological growth. Agglomeration also became more stable the larger the expected endogenous growth of demand at the firm level. In general, agglomeration was more likely the higher the overall degree of irreversibility in the economy. It was also most likely for intermediate trade costs.

Gianmarco Ottaviano (Università di Bologna, CORE, Université Catholique de Louvain, Università Bocconi and CEPR) questioned whether the technological growth rate necessarily should equal consumers’ discount rate. He also addressed the issue of how a possible geographic separation between entry and activation might affect the sustainability of agglomeration. Richard Baldwin noted that firms are assumed to be forward-looking while workers are not.

Examining the accuracy of the predictions of the theory of monopolistic competition regarding import volumes, Wolfgang Keller (University of Wisconsin and NBER) and Simon J Evenett (University of Michigan and the Brookings Institution) presented their joint work entitled ‘On Theories Explaining the Success of the Gravity Equation’. They assessed whether this theory accounted for the empirical success of the gravity equation. Arguing that certain factor endowment-based theories made the same prediction for import volumes, Keller and Evenett employed resampling techniques to address this model-identification problem. Extraneous information on the allocation of factor endowments in a given sample was used to identify which model was driving trade flows. It was found that the accuracy of the prediction of monopolistic competition theory improved in samples where the factor-endowment allocations generate a higher share of trade in differentiated goods. By an analogous criterion, Heckscher-Ohlin models make much less accurate predictions. The authors concluded that monopolistic competition theory is more likely to account for the success of the gravity equation, especially in explaining trade among industrial nations. Rikard Forslid discussed the merits of testing theories of trade in the kind of indirect manner employed in the paper.

Johan Torstensson (Lunds Universitet and CEPR), presented ‘Demand, Comparative Advantage and Economic Geography in International Trade: Evidence from the OECD’, written jointly with Erik Lundbäck (Lunds Universitet). The paper provided an empirical analysis of whether Heckscher-Ohlin or economic geography models best seemed to explain intra-OECD trade. Although the study was not conclusive, the results seemed more favourable to geography models than to factor-proportion theories. In particular, it was found that a demand bias in favour of domestic varieties (national preferences) seemed to lead to a net export of the product. There were indications, moreover, that country size affects net trade patterns. These results are consistent with economic geography, but not with Heckscher-Ohlin. Contrary to typical geography-model predictions, however, inter-industry demand biases do not always have a positive impact on net trade. Several seminar participants argued that relative factor endowments could not be expected to play a decisive role in trade between OECD countries. Pertti Haaparanta (Helsinki School of Economics) pointed out that there might be general-equilibrium restrictions to this kind of modelling, with consequences for the choice of right-hand-side variables. He also addressed the measurement problems related to the variables denoting demand bias and national preferences.

Reporting on joint work undertaken with David Greenaway, Robert Hine and Amanda Greenwood, Peter Wright (all University of Nottingham) addressed the question of how international trade affects wages. The prediction of the simplest Heckscher-Ohlin-Samuelson model is clear: when trade expands, rewards to a country’s relatively abundant factor will increase while those to its scarce factor will decline. Predictions from models with imperfect competition are more ambiguous. Earlier empirical research, primarily focusing on the effect of north-south trade on North American wages, indicated that trade had increased the wage gap between low- and high-skill workers in industrial countries. The magnitude of the skill premium was controversial, however. In ‘Does Trade Affect Wages? An Empirical Analysis of the UK’, Wright presented an empirical study, based on a specially constructed UK panel data set consisting of 167 industries. The results suggested that, on average, increases in trade – whether emanating from imports or exports – serve to decrease UK wages. On the other hand, no evidence was found to suggest that workers at the bottom end of the income scale were disproportionately affected by trade liberalization.

Håkan Nordström (World Trade Organization and CEPR) warned that there may be a specification problem in the model, since the econometric equation was not derived from any particular theory. He also noted that it would have been desirable to distinguish between high- and low-skill workers, rather than the top and bottom of the income scale, if the point of departure was the Stolper-Samuelson effect of trade. Riccardo Faini (Università degli Studi di Brescia and CEPR) suspected that the finding of a negative wage effect for exports might be rooted in an endogeinity problem in the estimated equation. Johan Torstensson pointed out that there may not be any reason to expect UK wages for low-skill workers to be negatively affected by trade, since a large share of the country’s trade takes place with advanced industrialized countries.

In ‘Trade under Uncertainty, Multinationals and Incomplete Insurance’, Gerda Dewitt (University of Glasgow) presented a partial-equilibrium model used to examine the international production allocation of a two-plant risk-averse multinational firm which is confronted with uncertainty with respect to foreign sales. The firm has price-discriminating monopoly power in both markets and faces increasing marginal costs of production in both plants, while producing an identical good. Dewitt focused on the question of how unequal insurance facilities in the firm’s home and host markets would influence its international production decision and its level of intra-firm trade. Heinrich Ursprung (Universität Konstanz) raised the question of why firms in this model have to set up production abroad. Johan Torstensson pointed out that the welfare analysis and conclusions were incomplete.

Andrea Fosfuri (Universitat Pompeu Fabra)

presented a paper on ‘Intellectual Property Protection, Imitation and the Mode of Technology Transfer’, which discussed some of the factors that determine whether a firm chooses to export to a foreign market, set up a subsidiary or license out the production. The empirical literature indicated that technologies transferred to subsidiaries generally were of a newer vintage than technologies transferred through licensing. One reason for this may be fear that the licensee might imitate the transferred technology. Fosfuri’s two-period model predicted that, unless imitation was costly or the market size was shrinking, the newest technology would not be transferred via a licence agreement. Moreover, foreign direct investment might be preferred if imitation was relatively inexpensive and fixed start-up costs in the foreign country small, while low transport costs favoured the export opportunity.

Dermot Leahy (University College Dublin and CEPR) pointed to some nice paradoxes, such as that lower imitation costs are not always good for the foreign country, and higher imitation costs are not necessarily advantageous for the home country. Leahy also suggested some extensions, such as the inclusion of incomplete information or the assumption that the licensee is unable perfectly to absorb the transferred technology.

Trade theories typically predict that a reduction in trade barriers will lead to an increase in specialization, and Mary Amiti (LSE and Universitat Pompeu Fabra) presented an empirical analysis of whether this had been true in the EU between 1968 and 1990. Furthermore, Amiti tested whether specialization patterns were consistent with trade theories. In ‘Specialization Patterns in Europe’, Amiti discussed several specialization indicators, their advantages and shortcomings, and proposed a new index. She found evidence of increased specialization for early joiners of the EU, and sought to explain why this had happened. Given that the EU countries have different relative factor endowments, Heckscher-Ohlin theory predicts that those industries with ‘high’ factor intensities should be the most geographically concentrated. This prediction was not supported by the evidence. There was some evidence, however, that industries with high economies of scale, and industries with significant vertical linkages, had become more concentrated. Both these findings were consistent with economic geography literature, and the former was also consistent with the so-called new trade theory.