Abstract: How does trade liberalization affect wages? This is the first paper to consider in theory and data how the impact of final and intermediate input tariff cuts on workers' wages varies with the global engagement of their firm. Our model predicts that a fall in output tariffs lowers wages at import-competing firms, but boosts wages at exporting firms. Similarly, a fall in input tariffs raises wages at import-using firms relative to those at firms that only source locally. Using highly detailed Indonesian manufacturing census data for the period 1991 to 2000, we find considerable support for the model's predictions.

 Journal of Regional Science. 2008.
Abstract: Theories featuring multiple equilibria are now widespread across many fields of economics. Yet little empirical work has asked if such multiple equilibria are salient features of real economies. We examine this in the context of the Allied bombing of Japanese cities and industries in WWII. We develop a new empirical test for multiple equilibria and apply it to data for 114 Japanese cities in eight manufacturing industries. The data provide no support for the existence of multiple equilibria. In the aftermath even of immense shocks, a city typically recovers not only its population and its share of aggregate manufacturing, but even the specific industries it had before.

In Spatial Inequality and Develeopment, Ravi Kanbur and Anthony J. Venables, eds., Oxford: Oxford U. Pr., 2005.
Abstract: One account of spatial concentration focuses on productivity advantages arising from market size. We investigate this for forty regions of Japan. Our results identify important effects of a region's own size, as well as cost linkages between producers and suppliers of inputs. Productivity links to a more general form of market potential or Marshall-Arrow-Romer externalities do not appear to be robust in our data. The effects we identify are economically quite important, accounting for a substantial portion of cross-regional productivity differences. A simple counterfactual shows that if economic activity were spread evenly over the forty regions of Japan, aggregate output would fall by 5 percent.

In Ann Harrison, ed., Globalization and Poverty, Chicago: U. of Chicago Pr., 2007.

 NBER Working Paper Series, # 8971, June 2002.

The Economist "Economics Focus" column of May 30, 2002 discusses this paper.
Abstract: Two facts motivate this study. (1) The United States is the world's most productive economy. (2) The US is the destination for a broad range of net factor inflows: unskilled labor, skilled labor, and capital. Indeed, these two facts may be strongly related: All factors seek to enter the US because of the US technological superiority. The literature on international factor flows rarely links these two phenomena, instead considering one-at-a-time analyses that stress issues of relative factor abundance. This is unfortunate, since the welfare calculations differ markedly. In a simple Ricardian framework, a country that experiences immigration of factors motivated by technological differences always loses from this migration relative to a free trade baseline, while the other country gains. We provide simple calculations suggesting that the magnitude of the losses for US natives may be quite large -- $72 billion dollars per year or 0.8 percent of GDP.

 American Economic Review, 92:5, December 2002 (Lead Article); NBER Working Paper #8517, October 2001.
Paul Krugman's column referring to this paper is available at the NYT, October 3, 2001 [NYT registration required].
Abstract: We consider the distribution of economic activity within a country in light of three leading theories -- increasing returns, random growth, and locational fundamentals. To do so, we examine the distribution of regional population in Japan from the Stone Age to the modern era. We also consider the Allied bombing of Japanese cities in WWII as a shock to relative city sizes. Our results support a hybrid theory in which locational fundamentals establish the spatial pattern of relative regional densities, but increasing returns may help to determine the degree of spatial differentiation.  One implication of our results is that even large temporary shocks to urban areas have no long-run impact on city size.

Journal of International Economics, 59:1, January 2003 (Lead Article).
Abstract: The increasing returns revolution in trade is incomplete in an important respect - there exists no compelling empirical demonstration of the role of increasing returns in determining production and trade structure. One reason is that trade patterns of the canonical increasing returns models are a consequence simply of specialization, which all theories permit. Krugman (1980) shows that increasing returns models with costs of trade - economic geography - do allow a simple test: home market effects of demand on production. Davis and Weinstein (1996) reject the simple Krugman (1980) model on OECD data. Here we pair the model with a richer geography structure and find evidence of the importance of increasing returns, in combination with comparative advantage, in affecting OECD manufacturing production structure. The results underscore the importance of market access in implementing models of economic geography.

 American Economic Review Papers and Proceedings, Forthcoming May 2002.

 In Ronald Findlay, Lars Jonung, Mats Lundahl, eds., Bertil Ohlin: A Centennial Celebration, 1899-1999, Cambridge: MIT Press, 2002.

 The Journal of the Japanese and International Economies, forthcoming.

American Economic Review, December 2001.
Abstract: A half-century of empirical work attempting to predict the factor content of trade in goods has failed to bring theory and data into congruence. Our study shows how the Heckscher-Ohlin-Vanek theory, when modified to permit technical differences, a breakdown in factor price equalization, the existence of non-traded goods, and costs of trade, is consistent with data from ten OECD countries and a rest-of-world aggregate.

Handbook of  International Trade, E. Kwan Choi and James Harrigan, eds., New York: Blackwell, 2002.

NBER Working Paper #8516, October 2001.
Abstract: The dominant paradigm of world trade patterns posits two principal features. Trade between North and South arises due to traditional comparative advantage, largely determined by differences in endowment patterns. Trade within the North, much of it intra-industry trade, is based on economies of scale and product differentiation. The paradigm specifically denies an important role for endowment differences in determining North-North trade. This paper provides the first sound empirical examination of this question. We demonstrate that trade in factor services among countries of the North is systematically related to endowment differences and large in economic magnitude. Intra-industry trade, rather than being a puzzle for a factor endowments theory, is instead the conduit for a great deal of this factor service trade.

American Economic Review, May 2000.
Abstract: The concept of the 'Integrated Equilibrium' has played an important role in the development of the theory of international trade. In spite of the fact that all observers understand that it is not literally a description of the world that we live in, approaches based on this concept have been very influential in discussion of real world policies. In this paper, we discuss some of the key empirical limitations of this concept and suggest directions that future empirical and theoretical work needs to go once we recognize the limits of integrated equilibrium thinking.

Integration and Trade, Vol. 4, No. 10, 2000.

European Economic Review, February 1999.
Abstract: There are two principal theories of why countries or regions trade: comparative advantage and increasing returns to scale. Yet there is virtually no empirical work that assesses the relative importance of these two theories in accounting for production structure and trade. We use a framework that nests an increasing returns model of economic geography featuring "home market effects" with that of Heckscher-Ohlin. We employ these trade models to account for the structure of regional production in Japan. We find support for the existence of economic geography effects in eight of nineteen manufacturing sectors, including such important ones as transportation equipment, iron and steel, electrical machinery, and chemicals. Moreover, we find that these effects are economically very significant. The latter contrasts with the results of Davis and Weinstein (1996), which found scant economic significance of economic geography for the structure of OECD production. We conclude that while economic geography may explain little about the international structure of production, it is very important for understanding the regional structure of production.

American Economic Review, June 1998. Reprinted in Worth Series in Outstanding Contributions: International Economics, Edward Leamer, ed. (2001), Worth: NY.
Abstract: I consider trade between a flexible wage America and a rigid wage Europe. In a benchmark case, a move from autarky to free trade doubles European unemployment. American wages rise to the European level. Entry of the unskilled "South" to world markets raises European unemployment. Europe's commitment to the high wage wholly insulates America from the shock. Immigration to America raises American income, but lowers European income dollar-for-dollar, while European unemployment rises. Absent South-North migration of the unskilled from 1970-90, Europe could have maintained the same wage with from one-eighth to one-fourth less unemployment.

American Economic Review, December 1998.
Abstract: Does national market size matter for industrial structure? This has been suggested by theoretical work on "home market" effects, as in Krugman (1980, 1995). In this paper, I show that what previously was regarded as an assumption of convenience -- transport costs only for the differentiated goods -- matters a great deal. In a focal case in which differentiated and homogeneous goods have identical transport costs, the home market effect disappears. The paper discusses available evidence on the relative trade costs for differentiated and homogeneous goods. No compelling argument is found that market size will matter for industrial structure.

American Economic Review, June 1997.
Abstract: The Heckscher-Ohlin-Vanek (HOV) model of factor service trade is a mainstay of international economics. Empirically, though, it is a flop. This warrants a new approach. We test the HOV model with international and Japanese regional data. The strict HOV model performs poorly because it cannot explain the international location of production. Restricting the sample to Japanese regions provides no help, inter alia giving rise to what Trefler (1995) calls the "mystery of the missing trade." However, when we relax the assumption of universal factor price equalization, results improve dramatically. In sum the HOV model performs remarkably well.

Journal of Political Economy, October 1997.
Abstract: There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Which is most important in practice? The large volume of intra-OECD trade is frequently cited as critical evidence on this question. It is argued that comparative advantage, unlike scale economies, is incapable of accounting for the large volume of trade between seemingly similar economies. This is a theoretical claim. In this paper, I show that it is possible to give an account of this trade based on comparative advantage. The elements that may give rise to a large volume of North-North trade are traced to identifiable features of technology and endowments.

European Economic Review, November 1998.
Abstract: Arguably the most important development in recent decades in US factor markets is the decline in the relative wage of the unskilled. By contrast, in Europe it is undoubtedly the rise and persistence of unemployment. Technology has been identified as a key reason for the rising US wage inequality, while labor market rigidities are often cited as a key reason for European unemployment. This paper seeks to provide a unified account of these major factor market developments. It models the impact of technical change on relative wages and unemployment in a world in which one country has flexible and the other rigid labor market institutions. The results depart significantly but sensibly from what one would expect in a fully flexible wage world. Stylized facts help to narrow the field to a few candidates to account for these factor market developments.

Abstract: This paper develops a first test of the new economic geography. It nests a simple version of the Krugman (1980) model with a multi-factor version of Heckscher-Ohlin. Economic geography is identified by the presence or absence of home market effects of demand on production. Application of this model to OECD manufacturing production data finds little support for economic geography in a pooled specification. Individual industry runs provide some evidence of economic geography effects. However their economic significance appears quite limited.

Journal of International Economics, November 1995.
Abstract: The large volume of intra-industry trade is often cited as a critical element favoring trade theories based on increasing returns and imperfect competition over those with constant returns and perfect competition. The former provide an elegant account of intra-industry trade, while the latter, it is often argued, cannot. This paper provides an account of intra-industry trade based squarely on comparative advantage. The key is to introduce elements of Ricardian trade theory within the Heckscher-Ohlin framework. This is appropriate, as essential characteristics of intra-industry trade imply that technical differences matter. Increasing returns, in short, are not necessary for intra-industry trade.

D. Greenaway, R. Upward, and K. Wakelin, eds., Trade, Investment, Migration and Labour Market Adjustment, Palgrave Macmillan, 2003.

Abstract: This paper develops a simple framework for examining human capital accumulation, unemployment, and relative wages in a global economy. It builds on the models of Davis (1997a,b) of trade between a flexible wage America and a rigid wage Europe. To this it adds a model of human capital accumulation based on Findlay and Kierzkowski (1983). A variety of comparative statics are examined, including changes in educational capital and population, entry of new countries to the trading world, technical change, and a productivity slowdown. We derive the consequences for the skilled-to-unskilled wage gap, unemployment, and skill composition.

Abstract: Empirical work relating trade liberalization and income distribution has identified an important anomaly. The Stolper-Samuelson theorem suggests that trade liberalization will shift income toward a country's abundant factor. For developing countries, this suggests liberalization will principally benefit the abundant unskilled labor. Yet extensive empirical studies have identified many cases with a contrary result. This paper develops a simple theoretical hypothesis to account for this anomaly. It shows that countries which are labor abundant in a global sense may see wages decline with liberalization if they are capital abundant in a local sense. The current absence of empirical work that would allow us to identify the relevant local abundance implies that virtually all assertions regarding anticipated distributional consequences of trade liberalization are without foundation.

Trade, Welfare, and Econometrics: Essays in Honor of John S. Chipman James Melvin, James Moore, and Ray Riezman, eds., New York: Routledge. Forthcoming.

Regionalization of the World Economy, Jeffrey Frankel, ed., Chicago: U. Of Chicago Pr. and National Bureau of Economic Research, 1998.

Published in the Eastern Economic Journal, Fall 1996.