Risk and Risk Aversion Trade Content, Gains from Trade and Trade Policy

Appelbaum, Elie and Anam, Mahmudul and Chiang, Shin-Hwan (2024): Risk and Risk Aversion Trade Content, Gains from Trade and Trade Policy.

Abstract

Using a simple duopolistic trade model with demand uncertainty and an identical traded product, we show that we can view trade in goods as implicit exports/imports of risk and risk aversion. Specifically, we show that a relatively “risk-aversion abundant” country is more likely to be a net importer of the product – hence an importer of low risk-aversion. Similarly, a “relatively high-risk abundant” country is more likely to be the net exporter of the product - hence an importer of low risk. We also show that market correlations and differences in risk aversion and risk are sources of implicit risk-sharing and diversification gains from trade. Consequently, the relatively high-risk or high-risk-aversion country always gains from trade, whereas the other country will most likely gain unless markets are highly positively correlated. Furthermore, we re-examine the (Brander-Spencer) strategic export subsidy game in the context of uncertainty and find that because both efficient risk management and rent shifting need to be considered, contrary to conventional wisdom, the equilibrium policy regime may be an export tax rather than a subsidy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Patterns of Trade; Gains from Trade; Risk;Risk Aversion; Exports; Subsidies.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F1 - Trade > F15 - Economic Integration

References

Anam, M., and S.H. Chiang, (2003), \textquotedblleft Intraindustry Trade in Identical Products: a Portfolio Approach,Review of International Economics, 11, 1, 90-100.

Anderson, J.E., (1981), The Heckscher-Ohlin and Travis-Vanek theorems under uncertainty,Journal of International Economics, 11, 2, 239-247.

Appelbaum, E., and U., Kohli, (1997), \textquotedblleft Import price uncertainty and the distribution of income, Review of Economics and Statistics, 79, 4, 620-630.

Appelbaum, E. and M. Melatos, (2016), \textquotedblleft How Can Uncertainty Affect the Choice of Trade Agreements?\textquotedblright\ Economic Record, 92,297,153-172.

Appelbaum, E. and M. Melatos, (2024), \textquotedblleft Preferential Trade Agreements as Insurance,\textquotedblright\ Journal of International Money and Finance, forthcoming.

Appelbaum, E., (2022), “Implicit Trade in Risk and Risk Aversion,” Munich Personal RePEc Archive.

Baley, I., L. Veldkamp and M. Waugh, (2020), \textquotedblleft Can global uncertainty promote international trade?\textquotedblright\ Journal of International Economics, 126.

Batra, R. N., (1975), \textquotedblleft Production Uncertainty and the Heckscher-Ohlin Theorem,\textquotedblright\ Review of Economic Studies, 42, 130, 259-268.

Batra, R.N. and W.R. Russell, (1974), \textquotedblleft Gains from Trade Under Uncertainty,\textquotedblright\ The American Economic Review, 64, 6, 1040-1048.

Brander, J. and P. Krugman, (1983), \textquotedblleft A `reciprocal dumping’ model of international trade,\textquotedblright\ Journal of International Economics, 15, 3--4, 313-321.

Brander, J. and B. Spencer, (1985), \textquotedblleft ,Export subsidies and international market share rivalry\textquotedblright\ Journal of International Economics, 18, 1--2, 83- 100.

Cheng, L.K.,\ (1987), \textquotedblleft Uncertainty and economic self-sufficiency,\textquotedblright\ Journal of International Economics, 23, 1--2, 167-178.

Davis, D.R. and D.E., Weinstein, (2002), \textquotedblleft The Factor Content of Trade,\textquotedblright\ in Handbook of International Trade, E. Kwan Choi and James Harrigan, eds., New York: Blackwell.

Dumas, B., (1980), \textquotedblleft The theorems of international trade under generalized uncertainty,\textquotedblright\ Journal of International Economics, 10, 4, 481-498,

Feng, L., Z. Li and D.L. Swenson, (2017), \textquotedblleft Trade policy uncertainty and exports: Evidence from China’s WTO accession,\textquotedblright Journal of International Economics, 106, 20-36.

Gervais, A., (2018), \textquotedblleft Uncertainty, risk aversion and international trade,\textquotedblright\ Journal of International Economics, 115, 145-158.

Handley, K., (2014), \textquotedblleft Exporting under trade policy uncertainty: Theory and evidence,\textquotedblright\ Journal of International Economics, 94, 1, 50-66.

Helpman, E. and A. Razin, (1978), \textquotedblleft Uncertainty and International Trade in the Presence of Stock Markets,\textquotedblright\ The Review of Economic Studies, 45, 2, 239-250.

Helpman, E., (1984), \textquotedblleft The factor content of foreign trade,\textquotedblright\ Economic Journal, 94, 84--94.

Hoff, K., (1994), \textquotedblleft A reexamination of the neoclassical trade model under uncertainty,\textquotedblright\ Journal of International Economics, 36, 1--2, 1-27.

Levi, H. and H.M. Markovitz, (1979), \textquotedblleft Approximating Expected Utility by a Function of Mean and Variance,\textquotedblright\ American Economic Review, 69, 3, 308-17.

Logan T. Lewis, L.T, (2014), \textquotedblleft Exports versus multinational production under nominal uncertainty,\textquotedblright\ Journal of International Economics, 94, 2, 371-386.

Lim\~{a}o, N. and G. Maggi, (2015), \textquotedblleft Uncertainty and Trade Agreements,\textquotedblright\ American Economic Journal: Microeconomics, 7, 4, 1-42.

Novi, D. and A.M. Taylor, (2020), \textquotedblleft Trade and Uncertainty,\textquotedblright\ Review of Economics and Statistics, 2020, 104, 4, 749-765.

Pulley, L.B., (1983), \textquotedblleft Mean-Variance Approximations to Expected Logarithmic Utility,\textquotedblright\ Operations Research, 31, 4, 685-696.

Ruffin, R., (1974), \textquotedblleft International trade under uncertainty,\textquotedblright\ Journal of International Economics, 4,3, 243-259.

Todd, G.P. and H.M., Markowitz, (2000), Mean-Variance Analysis in Portfolio Choice and Capital Markets, Wiley.

Turnovsky, S. J. (1974), \textquotedblleft Technological and Price Uncertainty in a Ricardian Model of International Trade,\textquotedblright\ Review of Economic Studies, 40, 126, 201-217.

Vanek, J., (1968), \textquotedblleft The factor proportions theory: The N-factor case,\textquotedblright\ Kyklos, 21, 749-756.