Essays in international trade [electronic resource]
Keywords: Economics.

The first chapter of this dissertation explores whether Rules of Origin (RoO) help to get to global free trade. Free Trade Agreements (FTAs) usually come with restrictions on the use of intermediate inputs in order for final goods to qualify for free trade. I focus on RoO, which limit expenses on nonmember country's intermediate inputs. In a three-country FTA formation game, I introduce international trade in intermediate inputs and RoO restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, measured by their input shares in foreign final goods production, global free trade is less likely to be a stable equilibrium outcome. Free riding is the main problem preventing countries from liberalizing trade. Countries are better off being nonmembers of FTAs between the other two countries relative to global free trade. Rules of Origin can solve this problem by limiting the benefits countries get from other countries' free trade agreements. In the case of asymmetric countries, an additional incentive exists for the smaller country not to join: such a country gives up more than it gains from joining an FTA for a sufficiently high degree of asymmetry in country sizes. I show that global free trade is a stable Nash Equilibrium under a larger region of asymmetric country parameter space in the case of RoO than without it. Therefore, it is shown that RoO is essential in order to attain global free trade. The second chapter examines similar questions in the case of Customs Unions (CUs). Similar to FTAs, CUs too come with restrictions on the use of intermediate inputs in order for final goods to qualify for free trade. In a three-country CU formation game, I introduce international trade in intermediate inputs and RoO restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, measured by their input shares in foreign final goods production, global free trade is less likely to be a stable equilibrium outcome. A CU nonmember country enjoys an indirect benefit from CU through intermediate inputs while maintaining a protected domestic market. RoO can solve this problem by limiting this free riding. In the case of asymmetric countries, two forces prevent global free trade: a) free riding b) exclusion motive - the smaller countries prefer to exclude the larger country from their CU and impose jointly optimal import tariffs. These two different effects generate the different impacts that RoO might have in CUs. RoO can deal with the free riding problem but cannot deal with the exclusion problem. RoO will make global free trade even less likely when the exclusion motive is binding. This implies that RoO do not always help to get to global free trade. For a relatively larger degree of globalization, I show that global free trade is a stable Nash Equilibrium under a larger region of asymmetric country parameter space in the case of RoO than without it. But, for a smaller degree of globalization level, the exclusion motive is stronger than the free riding effect and RoO make global free trade even less likely. So, the parameter space admitting global free trade as an equilibrium can shrink due to RoO. Therefore, it is shown that RoO can have helpful or detrimental effect on attaining global free trade, depending on the degree of globalization. In this way, it is established that CUs (with or without RoO), do not always represent 'building blocks' towards global free trade. The third chapter is focused on the Russian embargo on Georgian wine industry and measures its effects on labor productivity. Russia, the Republic of Georgia's largest neighbor and trading partner, started imposing economic sanctions on Georgia beginning in early 2006, by restricting the import of Georgian wine to Russia. I exploit this natural experiment to estimate the effects of the embargo on the Georgian wine industry. I show that the trade ban actually increased the productivity of wine producers. Not only did average labor productivity increase during the embargo the entire productivity distribution shifted to the right. The reason Georgian firms became more competitive is that they had to export to relatively unknown and more competitive markets. The trade restriction served as a facilitating force for reverse trade diversion. The following two main sources of improvement happened to be important. First, firms substantially decreased their employment during the embargo as they let the least productive workers leave. And second, the expenses on the intermediate inputs per liter of wine increased dramatically during the embargo, which led firms to produce better wine. The embargo positively affected exporters' productivity. Interestingly, the embargo did (indirectly) affect domestic producers as well. This can be explained by the fact that non-exporters were competing with highly productive exporters in the domestic market. This way the embargo positively affected the productivity of the whole industry.