UCLA Emeritus Distinguished Professor John Riley has been awarded a honorary Doctorate of Commerce from the University of Canterbury, from where he graduated with a Bachelor of Science and a Master of Commerce in Economics in 1969. Professor Riley is one of the world leaders in the area of auctions and mechanism design.
The announcement can be found here.
Simon Board won the Spring 2023 Warren C. Scoville Distinguished Teaching Award for his new class “Econ 106S: Competitive Strategy”. This class uses a combination of economic principles and case studies to discuss the economic forces underlying successful business strategy. Specifically, it teaches students to identify sources of sustainable competitive advantage and to understand the dynamics of strategic interaction between firms. The class covers topics such as economics of scale, network effects, switching costs, and platform markets. Simon Board is the Benjamin Graham Centennial Chair of Value Investing at UCLA.
By Pablo Fajgelbaum
Pablo Fajgelbaum
In 2018-19, a major trade conflict started between the US and China. The US imposed tariffs on about $350 billion worth of Chinese imports, and China retaliated by levying tariffs on an additional $100 billion worth of imports, a retaliatory action allowed by WTO rules. Despite an agreement in January 2020 to halt further tariff hikes, the existing ones remain. The scale of this trade dispute is substantial. US tariffs affected around 18% of its imports, equivalent to 2.6% of its GDP, while China’s retaliation impacted 11% of its imports, equivalent to 3.6% of its GDP. The conflict’s magnitude and scope outstripped the 1930 Smoot-Hawley Tariff Act, the most notable protectionist move in over a century of US trade policy.
The escalation of tariff changes between the US and China in 2018-19 has had significant economic impacts on these two countries, as shown by previous research. In the paper “Trade War and Global Reallocations”, Professor Fajgelbaum and his coauthors P. Goldberg, P.J. Kennedy, A.K. Khandelwal, and D.Taglioni, examine how “bystander” countries’ exports changed in response to the tariff changes. In particular, they consider export responses of the largest 48 exporters to the US, China, and the rest of the world. They examine the heterogeneity in tariff responses by implementing an empirical specification that makes the elasticities of exports to US-China tariffs vary by importer, exporter, sector, and size of trade flows.
The research reveals that the US-China trade conflict impacted bystander countries in sometimes surprising ways. The average country boosted its exports to the US in products targeted by increased US-China tariffs, consistent with standard trade diversion effects. More surprising is that many countries also increased their exports to the rest of the world, while their exports to China remained largely unaffected by the tariffs. Overall, the findings suggest that the trade war generally enhanced trade opportunities for many countries, rather than just causing shifts in trade patterns across destinations.
The authors also show that the responses varied significantly across countries. For instance, some countries’ responses suggested that they substitute Chinese exports, while others responded as complements. Countries such as Vietnam, Thailand, Korea, and Mexico emerged as major export “winners” –in the sense of growing their exports– in global markets for products where US-Chinese trade declined. Meanwhile, a set of countries including Ukraine, Egypt, Israel, and Colombia, saw a decline in exports.
When digging deeper into the determinants of this heterogeneity, the authors find that variation in tariff elasticities by country largely drives the variation across countries, rather than pre-war product specialization patterns or variation in tariff elasticity by sector or size of trade flows.
Our study also underscores the interplay between supply and demand heterogeneity in the elasticities, indicating a substantial interdependence across export destinations. The paper develops a framework to categorize countries’ export responses based on the signs of their demand substitution with US and China and the slope of supply curves. For instance, countries such as Mexico, Malaysia, and the Czech Republic export goods that can substitute those from China and complement those from the US. Their exports benefited from the trade war due to the substitution effects and because they were operating along a downward sloping supply curve. These countries might have viewed the trade war as an opportunity, investing in new facilities, trade infrastructure, or trade and investment facilitation.
Alternatively, these countries might have enjoyed better credit reallocation conditions or they might have already been well integrated into global trade, allowing them to seize new exporting opportunities across various sectors.
In sum, the analysis reveals three main insights. First, there is large cross-country variation in the extent to which the trade war tariffs affected countries’ exports. Second, and somewhat surprisingly, for a subset of countries, global exports among products taxed by the US or China grew faster than untaxed products. Third, the analysis finds an important role for country factors in driving the responsiveness to tariffs, as opposed to more standard explanations related to sectoral scale elasticities and specialization patterns. This suggests that country-specific reforms and institutions may be important determinants for driving how countries’ exports respond in this new era of globalization.
The UCLA Department of Economics will recognize the students who are graduating with a degree in Economics or Business Economics at its commencement on Saturday June 17, at 6:00 p.m in Pauley Pavilion.
For more information go to: https://economics.ucla.edu/2023commencement.
Congratulations Class of 2023!
Professor Martha Bailey was elected a fellow of the society of labor economists. By the honorary title of Fellow, the Society recognizes labor economists who have made contributions of unusual distinction to the field. A complete list of Fellows can be found here.
The paper “Index Funds, Asset Prices and the Welfare of Investors” by UCLA Professor William Zame and coauthor Martin Schmalz (Oxford) was recently featured in Money. It concludes that, as index funds become cheaper and more widely available, the price of stocks will increase reducing their returns and therefore the investors’ welfare. The Money article can be found here.
By Andrew Atkeson
Andrew Atkeson
Since the early 1980’s, the residents of the United States (households, firms, and governments) have consistently spent more than they earn, and, as a result, the U.S. has run current account deficits with respect to the rest of the world for the past 40 years. And yet, even as late as 2007, the net foreign asset position of the United States, a measure of the market value of the net equity and debt claims that residents have on the rest of the world, was only mildly negative. How might these two observations be reconciled? How was it that U.S. residents were able to consistently spend in excess of their income without becoming deeply indebted to the rest of the world?
In important early work on this question, Pierre Olivier Gourinchas and Helene Rey argued that the answer to how these observations might be reconciled lay in the third observation that residents in the United States appeared to enjoy a special privilege: they appeared to enjoy capital gains on the assets that they held abroad well in excess of the capital gains that residents of the rest of world enjoyed on their assets in the U.S.
Over the course of the past decade since the Great Financial Crisis, however, the net foreign asset position of the United States has dramatically worsened, now standing at negative 60 percent of U.S. Gross Domestic Product (GDP). In a recent paper “The End of Privilege: A Re-examination of the Net Foreign Asset Position of the United States”, Professor Andy Atkeson and his co-authors Fabrizio Perri and Jonathan Heathcote analyze why the U.S. net foreign asset position has deteriorated so much. They find that two key developments explain a great deal of this big increase in the net liability of U.S. residents to the rest of the world. First, by the start of the past decade, foreign residents had acquired large equity claims on firms in the United States, both through their direct investments in U.S. subsidiaries and through portfolio investment in U.S. stock markets. Second, the market values of these equity claims on U.S. firms has boomed as stock prices in the U.S. have boomed over the past decade in a pattern not matched by foreign stock prices. Hence, over the past decade, at least ex-post, the apparent privilege enjoyed by U.S. residents has been reversed: foreign residents now appear to have enjoyed much larger capital gains on their assets in the U.S. than U.S. residents have earned on their assets abroad.
Professor Andy Atkeson and his co-authors then go on to ask what these developments might mean for the welfare of Americans? The data appear to give conflicting answers to this question. The boom in the valuation of U.S. corporations over the past decade has meant that U.S. residents have enjoyed record levels of financial net wealth relative to income at the same time that they have incurred record liabilities to the rest of the
world relative to income. To answer this question about the impact of these developments on the welfare of U.S. residents, they build a tractable valuation model of the U.S. corporate sector and of the impact of changes in the valuation of this sector on the U.S. current account and net foreign asset position that allows us to dig deeper into the underlying factors driving what they see in all these data.
Professor Andy Atkeson and his co-authors find that the most important factor driving the boom in the value of U.S. corporations is a dramatic increase in the profitability of these corporations relative to both historical experience and to what corporations are experiencing in the rest of the world. They find that the share of corporate value added that is flowing to owners of firms rather than to payments to labor, to taxes, or to investment in new fixed assets is now roughly twice as high as it was over the 50 years from 1950 to 2000 and has not occurred in other advanced economies for which data are available. Their model attributes this boom in profitability to a large increase in the market power of U.S. corporations. This boom in U.S. corporate profitability has been matched by a boom in corporate valuations. That is, they do not find that the decline in long-term real interest rates that the U.S. have experienced over the past few decades played a major role in accounting for the boom in the valuation of U.S. corporations.
With this more fundamental accounting of events over the past decade in hand, they are able to address the question of what these developments have meant for the welfare of Americans? Here their answer is negative. Certainly, Americans are receiving a smaller share of U.S. corporate value added in the form of labor earnings and tax revenue. But, to the extent that Americans are also owners of these firms, they are enjoying higher cash flows from their ownership claims on these firms. Absent substantial foreign ownership of U.S. firms, these two effects of an increase in market power of U.S. firms would roughly offset, leading to only a small impact on the welfare of U.S. residents overall. However, in a world in which residents of the rest of the world own a great deal of U.S. equity, then Americans lose out substantially as the market power of U.S. firms increases because much of these increased profits are send abroad to foreigners.
What implications does our work have for the evolution of the U.S. net foreign asset position going forward? Here Professor Andy Atkeson and his co-authors believe that the central lesson of our work is that, in our world in which U.S. residents and those in the rest of the world both hold large equity claims on each other, it will be the relative performance of stock markets in the U.S. and abroad that drive the U.S. net foreign asset position. They have already seen some of this in the data from 2022: as U.S. equities have fallen sharply in the past year, the U.S. net foreign asset position has improved. While they hesitate to make predictions about which stock market will do better, they
do believe that this factor, more than current account deficits, will be the key factor driving changes in the market value of U.S. net liabilities to the rest of the world.
UCLA Professor Juliana Londono-Velez was awarded the Spencer Foundation Large Research Grant on Education for her project “Merit financial aid for low-income students and social mobility.” The grant supports education research projects that contribute to the improvement of education.
More details can be found here.
UCLA Professor Martha Bailey was interviewed by PBS News Hour to discuss the increase in the U.S. fertility rate during the COVID pandemic.
The PBS video can be found here.
