Jeffrey Bergstrand, professor of finance at the University of Notre Dame’s Mendoza College of Business, delivered the Nov. 10 keynote address for the U.S. International Trade Commission’s (ITC) virtual conference "Recent Advances in Trade-Policy Modeling and Applications in Emerging Areas."
In his address, "Future Directions for Trade-Policy Modeling," Bergstrand provided new theoretical and statistical insights on the "modeling" of fixed trade costs and initial estimates indicating the overall benefits of reducing fixed trade costs found in deeper trade agreements are much larger — relative to the gains from further reductions in tariff rates on existing trade — than previously thought.
Bergstrand, who for 40 years has studied economic factors that explain bilateral trade flows between pairs of countries, believes free trade agreements, on average, have a large effect on trade flows and ultimately tend to raise standards of living in those countries. However, not everyone benefits. Some regions increase their standard of living as a result of trade agreements, while other areas experience a reduction. This suggests, Bergstrand said, that free trade agreements need to be accompanied by spending on education and infrastructure and tax policies to redistribute the gains and losses to ensure broader support.
During the last 20 years, the world's governments have been increasingly pursuing deeper economic integration agreements between countries which include provisions to reduce divergences in regulations and product standards and to lower the costs of customs administration. Such provisions tend to reduce "fixed trade costs," which are firms’ one-time costs for entering foreign markets, and can potentially increase trade and economic welfare significantly.
Bergstrand also testified Oct. 6 before the ITC, which is conducting a second thorough evaluation of the economic impacts of all U.S. trade agreements. The ITC released an initial report in 2016 that reflected Bergstrand’s decades of analysis and research. His methodologies, published in two 2007 papers in the Journal of International Economics, contributed to the 2016 ITC report, and his October 2020 testimony may be reflected in next year’s report.
“The methodology for estimating the U.S. trade, foreign direct investment and real income effects of U.S. free trade agreements is statistically sound,” Bergstrand said. “Due to these agreements, U.S. real incomes per capita rose on average between 0.2 - 0.3 percent.”
For the 2021 ITC analysis, Bergstrand recommends, as underscored in his keynote talk, incorporating recent other developments in economic methods to evaluate the overall gains from free trade agreements, but adjusted for distributional impacts by regions within the United States.
“Studies of the effect of China’s admission to the World Trade Organization, for example, have shown extensive dispersion in U.S. real income gains and losses from this event across different areas in the United States,” he said. “A recent study of NAFTA has shown similar pronounced negative effects in certain regions of the United States, notably, the Southeast. The 2021 analysis should provide some measure of the dispersion in the U.S. gains and losses across zones.”
Bergstrand says the 2021 analysis should also factor in the costs of prolonged unemployment.
“Recent work estimates the U.S. real income gains from China’s admission to the World Trade Organization are reduced by up to 2/3 when adjusted for costs of prolonged unemployment.”
A major part of Bergstrand’s research has been the construction — beginning some 20 years ago — of the NSF-Kellogg Institute Database on Economic Integration Agreements (EIA), utilized by the ITC in preparing its first report. The database categorizes all economic integration agreements among 195 countries annually from 1950-2012 into six different types and currently is being extended for 2013-2017. It has incorporated some 40,000 pairings of the countries for 63 years.
First supported by a National Science Foundation grant, the EIA database has since been maintained by the Kellogg Institute for International Studies, especially the Kellogg Institute’s International Scholars program. During the two decades since its establishment, 55 Notre Dame undergraduate and MBA students — including 15 undergraduate Kellogg Institute International Scholars — have contributed to the project by collecting and analyzing information and documentation on all the economic integration agreements in the world. The EIA database has been used globally by numerous academics over the years and by various government researchers and projects.
Bergstrand provided testimony in 2018 on the expected U.S. economic impacts of the United States-Mexico-Canada Agreement (USMCA), which was passed last year. As a research associate of CESifo, an international network of researchers based in Europe, Bergstrand’s research has been published in more than 50 articles and book chapters. He has served as a visiting scholar at the European Commission in Brussels, the Ifo Institute/University of Munich and ETH University in Zurich among other institutions.
Contact: Jeffrey Bergstrand, jbergstr@nd.edu