Economist and Jackson School Professor Lorenzo Caliendo’s research explores the varied effects of trade policy on economies, companies, and workers.
Economist and Jackson School Professor Lorenzo Caliendo’s research explores the varied effects of trade policy on economies, companies, and workers. In a new Q&A, he shares insight from his recent studies.
Responses have been edited for brevity and clarity.
What has your research shown about the effects of trade policy on economic welfare at the country-level?
My research on the effects of trade policy started with looking at the economic effects of the North American Free Trade Agreement (NAFTA). In this research, we proposed and extended new quantitative methodologies to evaluate and quantify the economic effects of NAFTA.
Importantly, in this research, we put a lot of emphasis on the fact that when Mexico, Canada, and the United States signed the agreement, they formed a regional value chain. What we found was that most of the goods that were traded were intermediate goods: goods that were produced in the United States and imported into Mexico in order to produce other goods that Mexico could export either to the United States, Canada, or to the rest of the world. One of our key findings was that by importing these intermediate goods via NAFTA, Mexico was able to export more goods.
Another important finding was that the largest positive welfare effects of NAFTA occurred for Mexico whereas less welfare effects were seen for Canada. Part of this was due to the fact that Canada and the United States already had a free trade agreement in place. This finding can also be attributed to the fact that countries that are more different from one another tend to benefit more from trading with one another.
Another important factor to keep in mind when evaluating the effects of free trade agreements is cross-sectoral linkages. That is, when you impose a tariff on one sector, the tariff will have an effect on that sector, but also on the entire value chain. Therefore, when we want to evaluate the effects of trade policy, we should consider these sectoral linkages seriously.
What does your research tell us about the effects of trade policy on the behavior of companies?
I conducted a series of studies investigating the effects of trade policy on firm entry and exit. When a firm decides to enter a country, it must decide which region it will enter. For example, producing goods in Detroit is quite different than producing goods in Texas. In the former, you may gain access to inexpensive real estate or capital. In the latter, depending on the sector, you may gain access to workers that you might not have had access to in Detroit.
Other important considerations for firms are where their suppliers are based and where their market is located. All of these things, in addition to the production location, we call the ‘market potential’.
What we found in the research, is that when you are thinking about the effects of trade policy on firm entry, you need to consider the fact that the spatial distribution of economic activities varies considerably. Therefore, trade policies may generate unintended consequences. For example, as a policy maker, you might expect that creating entry incentives for firms in the manufacturing center will lead to firms entering in the Midwest, where the manufacturing base in the United States has been located historically. In reality, that’s not necessarily the case.
What does your research tell us about the effects of trade policy on workers?
Part of my research on trade policy has been trying to understand the extent to which import competition has an effect on wages, workers’ employment, and welfare across spatially distant labour markets. This is driven by recent research that has shown that the export of cheap goods from China after the year 2000 (i.e., the ‘China Shock’) affected manufacturing workers in various regions of the United States differently.
What we found in our research is that the China Shock generated some displacement for workers in the manufacturing sector, however other sectors benefitted. The extent of the impact depends on how easy it is for workers to switch sectors or move to different regions. Any type of cost that is incurred to move across sectors or regions generates negative welfare effects. Therefore, policy makers need to contemplate that trade policy generates heterogenous effects across groups of workers with different skills, that are located in different regions, and working in different sectors. These heterogeneous effects should be seriously taken into account when designing trade policy.
Trade and migration policy are often interconnected. What does your research tell us about the effects of migration policy on countries and workers?
In 2004, the European Union (EU) allowed ten new members states to be part of the EU. As a consequence, the new member states experienced free mobility of its workers and gained access to the free trade agreements of the EU. However, not all EU member states opened to these ten new member states at the same time. We used this variation in the timing that countries opened to migrants from the ten new member states to investigate the economic consequences of changes in migration policy.
We found that, as a consequence of the fact that the United Kingdom was the first country to accept migrants from the new member states, it experienced more competition in the labor market compared to other countries.
We also found that Europe was better off as a result of the inclusion of the new member states, as including these states helped reduce trade and migration frictions in Europe. However, it took time for these benefits to be realized. In the short-term, workers with a high school education or lower experienced higher competition in the labor market.
What we learned is that the timing of migration policy matters. Moreover, as we saw previously, trade and migration policies tend to generate heterogenous effects across groups of workers in different sectors and different countries. Policy makers need to consider how to redistribute the benefits of these policies evenly.
In addition to your role at the Yale School of Management, you recently became a professor in the new Yale Jackson School of Global Affairs. What drew you to the Jackson School?
At the Yale Jackson School, you have access to researchers like Penny Goldberg, Jim Levinsohn, Arne Westad, Ken Scheve, Jennifer Gandhi, Chris Neilson, Aleh Tsyvinsky, and Ian Shapiro, to mention some. For me, joining was a no-brainer. How could I not be part of this group of excellent researchers working on important and policy-relevant research? In addition, the opportunity to be part of a professional school with a mission to educate future leaders made it an easy decision.
What advice do you give to students that you mentor or interact with?
I encourage students to really take advantage of the broader Yale community. Use all of the resources at Yale as much as possible. That includes interacting with the faculty and your peers. There is a group of amazing human beings at the Yale Jackson School that come from everywhere in the world, diverse, with very different interests and different experiences. Interaction with these peers can help you develop into a better global leader.
Second, learn about what has been done. Build over what has been done, always with an open mind. The new and best ideas are yet to be discovered. There are many problems yet to be solved.