Trade Economics: Trade and financial market friction
Introduction Influenced by the traditional economics “dichotomy” framework for a long time, most of the studies on financial development and international trade have been carried out in parallel.With the rise of information economics and new institutional economics, the research paradigm of neoclassical economics has absorbed the concepts of information asymmetry, transaction cost and institution, and rapidly penetrated into the fields of finance and trade.The second and third generation financial development theories deeply discuss the function of financial system, the mechanism of economic growth and the reason of financial development.Faced with the challenge of empirical results such as “lost trade”, international trade studies try to seek the factors affecting the occurrence and development of trade from a broader perspective, and the “new” new trade theory represented by heterogeneous enterprise trade gradually emerges.The convergence of financial development and international trade is under such a background and has become a rapidly expanding academic frontier in the last decade.Under this research background, trade scholars combine the heterogeneity of the degree of financial friction between industries and the heterogeneity of the level of financial development between countries, and prove that financial development is another source of comparative advantage by revising the traditional trade model, which affects the international trade model and has achieved abundant results.Since capital, a very important component of production factors, comes from financial market, whether it will be adversely affected by trade flow, trade structure and comparative advantage has become another research focus of widespread attention by scholars.With the further evolution of financial development theory, scholars generally agree that there are a large number of unbalanced financial market development problems in the economy.This financial market development imbalance, or financial market friction, shows strong heterogeneity between countries and industries.What is the source of this heterogeneity?Is there an impact of trade liberalization?Does heterogeneity bring about changes in trade flows?When a country participates in international competition and integrates into the process of global economic integration, does capital price as a factor of production conform to SS theorem?Is factor price equalization realized?Along with these problems, scholars have begun theoretical exploration and empirical research in this aspect in recent years.The level of financial development of a country can be regarded as a state in which the demand and supply of finance reach a balance. The demand factors include the level of industrialization and economic development of the country.Supply factors include national legal origin, religion, culture, social capital endowment, interest groups and so on.The influence of trade on endogenous financial development is just along the two branches of demand and supply.From the perspective of demand, comparative advantage and trade structure influence financial development level, trade opening leads to the increase of individual economic income variability.Diversification of asset portfolio by means of financial markets and financial instruments can effectively disperse the uncertain risks brought by trade opening.Therefore, the opening of trade leads to the increase of economic individuals’ demand for insurance and risk aversion, thus driving the development of finance.In addition, according to the research of relevant scholars, trade opening is often accompanied by the expansion of social investment and the acceleration of technological innovation, which will also increase the demand for financing and promote financial development.The first Granger causality test found that a country’s risk-increasing policies (such as trade opening) and risk-reducing policies (such as improving asset markets) are interdependent, and the development of financial markets improves the ability of private risk diversification.In 2007, some scholars regarded the scale and quality of the financial system as a function of a country’s comparative advantage, and believed that the level of financial development was determined by the country’s production structure. The more developed a country’s industries with high financial intensity were, the higher the level of financial development would be.By constructing a theoretical model of two countries and two sectors, they demonstrate that with the opening of trade, countries with comparative advantages in products highly dependent on external financing will increase the production of such products, thus increasing the demand for external financing and promoting their own financial development.The opposite is true in another country.In the empirical test part, Vlaehos used export external financing demand as the explanatory variable, and the level of financial development as the explained variable.At the same time, the trade gravity equation is used to calculate the “natural openness” of a country to expand to the industry level, and the trade volume of each industry is predicted. Then, combined with the external financing dependence degree of the industry, the predicted value of the total external financing dependence degree of export is calculated, which is used as an instrumental variable to overcome the endogeneity problem in the empirical study.The empirical results based on panel data of 96 countries from 1970 to 1999 support their hypothesis that the level of financial development of a country is largely determined by its comparative advantage and trade structure.The most fruitful study of the effects of trade openness on capital flows and prices has been the model developed by Antrds and Caballero.Based on h-theory, this model discusses the relationship between trade and capital flow under the condition of non-homogenous financial development.When financial development and changes in financial dependence become important sources of comparative advantage, trade and capital flows are complementary for financially underdeveloped countries.Under the condition of non-homogeneity of financial friction between state and sector, trade and capital flow become the market mechanism to bypass the capital misallocation caused by financial friction in southern countries.From the perspective of the countries of the South, trade integration has increased the relative prices of production in unconstrained sectors and the real income of capital in the countries of the South.Trade did not equalize the price of factors of production, and eventually the return on capital in southern countries was higher than that in northern countries.Trade integration has narrowed the gap between north and south in terms of real returns to capital, which are higher in the financially underdeveloped south.Despite the differences in relative factor endowment and relative factor intensity, their model produced an anti-Stol-Passamuelson effect. The wage rent rate of southern countries showed a downward trend after trade liberalization, and the wages of workers in southern countries decreased, but their wages were still lower than those in northern countries.The most distinctive feature of the model is the assumption that three types of people live in a country: enterprise capitalists, rentier capitalists and workers.The K unit capital endowment of the country is jointly owned by the enterprise capitalist and the rentier capitalist. UK belongs to the enterprise capitalist, and (1-u)K is owned by the rentier capitalist.L is the total number of workers and the total capital minus labor ratio in an economy is KL.In terms of demand and production, the model uses Copulglas utility function to represent consumer utility level and industry production function.Product and Labour markets are perfectly competitive and factors of production can move freely between sectors.Producers in sector 2 are free to use factors according to price W and freedom.If producers in sector 1 can also use factors in terms of W and 0, then the marginal conversion rate MRT=1, the relative price of good 2 is P =1, and sector 1 will use labor and capital in the economy proportionally.But the model assumes that there is financial friction in sector 1.Due to the complexity of the production process in sector 1, only entrepreneurs can apply technology in this sector, and investors are only willing to lend -1 % of the capital endowment owned by entrepreneurs.0 times capital.Therefore, the capital I invested by entrepreneurs is I ≤K(>1).If it is large enough, the capital available to the entrepreneur is unlimited, and the entrepreneur can allocate the n portion of the capital of the economy to invest in sector 1.The proportion of capital invested by entrepreneurs subject to financial constraints.N In the closed economy, sector 1 in southern countries cannot get adequate capital input due to financial constraints, leading to a decrease in the capital-labor ratio of sector 1 with financial constraints, while sector 2 receives more capital.In the case of market clearing, the wages of workers are determined by the marginal product value of sector 1, while the rental rate of capital is determined by the marginal capital value of sector 2.The increase of financial constraints in sector 1 will reduce the relative prices of products in the sector without financial constraints, reduce the rent rate of real capital, reduce real wages and welfare, and increase the wage rent rate, so that rentier capitalists will suffer disproportionately from the loss caused by financial underdevelopment.At this time, if capitalists are allowed to lease their capital abroad, capital flight from financially underdeveloped countries will be caused by the liberalization of commodity 1 trade.In an open economy, the price of good 1 and good 2 becomes an exogenous given.Northern countries specialize in sector 1 due to less financial friction, resulting in lower relative prices in sector 1.Under the influence of trade integration, the resources of financially developed northern countries are transferred to sector 2(the sector without financial constraints);In southern countries, due to excessive financial friction, they specialize in sector 2, which leads to high relative price of sector 1. As the wage-rent rate is determined by the marginal product ratio of sector 2, high relative price directly leads to a decline in wage-rent rate.Capital rental rates in the south have increased.In the process of trade integration, countries without financial advantages will lead to the rise of capital prices, which is inconsistent with the prediction of SS theorem.Model analysis, the commodity prices by external market under the condition of a given assumption, if the assumption that capital can’t flow freely, when financial friction is less than the south of the northern countries financial frictions, free trade equilibrium in southern countries the financial dependent 1 a net importer of goods, free trade can’t realize the factor price equalization, the northern national wage rate will further at this timeIt is higher than that of southern countries, but the ratio of variable rents in capital capital of southern countries is higher than that of northern countries, while the financial constraint of southern countries is further worsened.The assumption that capital is mobile, because the rental rates of capital in the countries of the South are higher than in the countries of the north, will result in capital flowing to the countries of the South.However, due to the financial constraints of southern countries, more capital flows into sector 2, which further increases the trade flow of sector 2 in southern countries, indicating that trade and capital flows are complementary.Methods The effects of capital flows depend on the degree of trade integration.If the trade friction is assumed at this time, such as the proportion of T in south China’s export commodity 2 disappears in the transportation, there is a unique level of trade friction, finance so that when T<In yuan, the capital rent rate in the north is lower than that in the south (A<5);When t>When, gold >3, thus when <Capital flows to southern countries;t>Capital flows to northern countries.Conclusion When there is trade friction, trade integration and capital flow do not satisfy price equalization.Based on the above model analysis, the influence mechanism of the development of trade liberalization on financial market and capital price is explained theoretically in the case of differences in financial frictions.The model proves that SS theorem is not valid for the equalization of market price of capital.