Essays on International Trade, Growth, and Development

Abstract

This dissertation consists of three chapters focusing on the role of international trade in growth and development. The first chapter surveys the literature on trade and development, using China as a case study. The chapter begins with an introduction to two widely used micro-level datasets that are crucial for studying the Chinese economy. Using these datasets, I explore and summarize aggregate patterns in China's export growth, complementing existing literature with empirical evidence. Next, I review the broader literature on how international trade fosters economic development and growth. The chapter concludes by examining a unique aspect of China's trade structure: processing trade. This exploration discusses the characteristics of processing trade and analyzes its potential benefits and implications for China's economic development. The second chapter explores a specific channel through which international trade impacts growth: high-skill immigration and its relationship to multinational enterprise (MNE) talent offshoring. This topic is particularly relevant in the context of ongoing debates about immigration policy, especially in the United States. When countries tighten immigration policies, firms face challenges in hiring foreign high-skilled workers due to increased visa sponsorship costs or cap restrictions. In response, firms can adopt an alternative strategy: establishing foreign affiliates and engaging researchers overseas, rather than hiring expensive domestic labor. To analyze this phenomenon and its implications for growth, this chapter develops a dynamic model integrating international trade, MNE activities, innovation processes, and immigration dynamics. A critical assumption is that MNEs can segment their innovation process and deploy researchers to foreign affiliates. Calibrated to U.S. aggregate data on trade and MNE activities, the results show that existing immigration restrictions explain 47.8 percent of observed MNE talent offshoring. The chapter further shows that eliminating these restrictions could benefit the overall economy through more efficient process innovation and higher product innovation, leading to gains in total productivity and aggregate welfare. The third chapter focuses on developing countries and examines how resource mis- allocation influences firms’ technology investment decisions and impacts trade gains. While economists and policymakers widely view international trade as one of the fundamental drivers of economic development, developing economies often face barriers that prevent them from fully exploiting its benefits. One such barrier is the misallocation of production factors, typically stemming from policy distortions such as preferential access to land and capital, selective taxes and subsidies, and various industrial policies. This chapter conducts a quantitative study to assess how resource misallocation affects firms’ exporting and technology upgrading decisions, and consequently, the gains from trade and productivity growth. The study constructs a two-country Melitz model with firm-specific distortions, extending the work of Bai et al. 2024 by introducing research and development (R&D) investment choices. This extension is particularly relevant given the surge in R&D expenditure and growing emphasis on innovation in many developing economies, including China. A quantitative assessment using Chinese manufacturing data reveals that allowing firms to upgrade technology further reduces welfare gains from trade in this second-best environment. This is because misallocation distorts firms’ R&D decisions, therefore trade liberalization encourages the growth of less productive but subsidized firms. This drives up costs for more productive yet taxed firms, resulting in a further reduction of trade gains. Even with additional R&D subsidies aimed at correcting distortions in innovation decisions, results remain unchanged. The chapter also addresses the optimal sequencing of policy reforms in developing countries and underscores the importance of structural reforms to maximize trade gains in these economies.