Trade, Law and Product Complexity

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.

Quality of institutions and the BRIC countries agro-food exports

“…Empirical papers find evidence supporting a hypothesis that IQ is an important determinant of sectoral export performances (e.g. Blanchard and Kremer, 1997;Berkowitz et al, 2006;Levchenko, 2007;Ranjan and Lee, 2007;Nunn, 2007;Méon and Sekkat, 2008;Martincus and Gallo, 2009;Hansen et al, 2011). A better IQ can ensure a better contracting environment and their enforcement, and greater transparency with their direct and indirect effects for countries' export patterns.…”

Foreign direct investment and macroeconomic risk

“…That these stylized facts of macro risks across countries is a driving factor to the sensitivity of vertical versus horizontal FDI activity corroborates the institutional consideration of international allocation of resources. Much progress has been made on linking institutional analysis to international trade; Anderson and Marcouiller (2002), Berkowitz et al (2006), Blomberg and Hess (2006), Greif (1992), Levchenko (in press), Marin and Schnitzer (2002), Nunn (2007), Rauch (1999), Rodrik et al (2004), and Svaleryd and Vlachos (2005). As a corollary to cross-border trading in goods in the presence of institutional risks, multinationals likewise face a risk that their investment will be expropriated for the simple reason that international contracts are practically impossible to enforce (Thomas and Worral, 1993).…”

Competitiveness of the European Automobile Industry in the Global Context

“…Berkowitz et al (2006), Chor (2008) as well as Barattieri (2014) search for the sources of comparative advantages and demonstrate how transport cost, transaction cost or trade cost bias the results of the comparative advantage analyses. Moenius (2006) proves RSCA is an adequate measure of comparative advantage, although it does not have signifi cant predictive power.…”