Essays on International Trade and Development

Abstract

This dissertation consists of three chapters discussing the role of trade in development, as well as how development can facilitate trade. The first chapter studies the impact of financial frictions on firms' sourcing decisions of intermediate inputs. I set up a general equilibrium Baumol-Tobin inventory management model where heterogeneous firms pay for inputs before production and are subject to borrowing limits. The model implies that financial frictions restrict the sizes of orders made by the firms and distort the sourcing decisions by inducing firms to source from countries where they can make small and frequent orders. I then use Chinese firm-level data to validate the model. I find that (i) when sourcing a same product from a same country, more financially constrained firms make smaller orders; (ii) the import orders from neighboring countries (regions) of China are smaller and more frequent comparing to those from other countries, and firms tend to source from neighboring countries (regions) when financially constrained. The model is parameterized to match key features of the Chinese firm-level data. I find that financial reforms aimed at improving firms' access to external finance and policies that reduce the fixed costs of importing can mitigate the distortion in order sizes and sourcing decisions, thereby increase the gains from trade. The second chapter investigates how labor market frictions influenced total factor productivity (TFP) growth under a trade framework. By developing a model incorporating Schumpeterian growth theory and internal migration dynamics, the paper quantifies the impact of China's migration costs. These costs were initially high in 2000 but declined thereafter. From 2000 to 2005 alone, reducing migration costs enabled over 20 million workers to relocate from western to eastern China. The calibrated model illustrates that this migration, facilitated by lower migration costs, accounted for 52\% of the rise in China's TFP growth during this period. The third chapter investigates the impact of the US-China trade tension on trade relocation and explores the role of country-sector characteristics in facilitating the relocation of US imports. Specifically, we examine the interaction between a country's financial development and the financial dependence of an sector. Our findings indicate that countries with stronger financial development tend to gain a larger market share when China exits sectors characterized by high financial dependence for investment and working capitals. Moreover, we observe that the effect of this interaction is more pronounced when the country already possesses a significant initial market share in the sector, reflecting comparative advantages. As a result, financial frictions play a crucial role in shaping the relocation of US imports and can lead to reduced gains from trade for countries with less developed financial systems.