Trade, Law, and Product Complexity

Abstract

Abstract-How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller argue that bad institutions located in the importer's country deter international trade because they enable economic predators to steal and extort rents at the importer's border. We complement this research and show how good institutions located in the exporter's country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions affect international as well as domestic transaction costs in complex and simple product markets. International transaction costs are a part of the costs of trade. Domestic transaction costs affect complex and simple products differently, thereby changing a country's comparative advantage in producing such goods. We find ample empirical evidence for these predictions: countries that have good institutions tend to export more complex products and import more simple products. Furthermore, institutions have a stronger influence on trade via production costs (comparative advantage) than through international transactions costs. International institutions seem to operate as substitutes for domestic institutions, because good domestic institutions are less important for promoting exports in those countries that have signed the New York Convention.

Contracting institutions and product quality

“…Weak property rights' protection and poor contract enforcement reduce overall trade flows (Anderson and Marcouiller, 2002;De Groot et al, 2004). Contracting enforcement also influences specialization: countries with weak institutions are less likely to export complex, differentiated goods; they also specialize away from goods that require many different inputs, or those that require relationship-specific investments (Ranjan and Lee, 2007;Berkowitz et al, 2006;Levchenko, 2007;Nunn, 2007).…”

Law, Trade, and Development

“…2 The share of complex goods in overall exports is generally low in countries with underdeveloped institutions such as the Sudan, while this share is much higher in countries with developed institutions such as Switzerland. Good institutions are important for complex exports because competent judges are required to understand the details of a disputed trade contract and good legal infrastructure is needed to enforce these intricate court rulings (Berkowitz, Moenius and Pistor, 2006). This raises the following question: if a country has bad institutions, how large an improvement in institutions is necessary for it to be able to export more complex goods?…”

“…To guide our empirical analysis, we sketch a Ricardian model based on Berkowitz, Moenius and Pistor (2006) that delivers three predictions about the impact of institutional reform.…”

“…Anderson and Marcouiller (2001) conduct theoretical and empirical work showing how bad institutions in the importer's country can deter trade. Berkowitz, Moenius and Pistor (2006), Levchenko (2007) and Nunn (2007) all analyze the relationship between quality of institutions and international trade flows and trade structures. Svaleryd and Vlachos (2001) show how good financial institutions enable a country to be open to international trade; Subramanian, Rodrik and Trebbi (2004) show that institutions in fact cause trade; Rauch (1999) and Casella and Rauch (2003) highlight the role of informal networks.…”

International Standards and Trade

“…Berkowitz et al (2006) show how good institutions in the exporter country enhance international trade. They argue, from a theoretical point of view, that this is of special relevance in the case of trade in complex products, where it is hard to write a complete contract covering all relevant characteristics of the product.…”