Beyond trade in goods: The role of investment and knowledge capital in applied trade policy

Csilla Lakatos, Purdue University

Abstract

International trade relations have long surpassed the traditional concept of exchange in goods. Trade related aspects of intellectual property rights and investment measures are among the emerging trade policy issues of the 21st century. The goal of this dissertation is to shed light on certain aspects of the role of investment and knowledge capital/intellectual property in applied trade policy. Essay 1 focuses on highlighting investment creation and diversion impacts of the preferential reduction of barriers to trade. More specifically, we focus on investment creation and diversion effects within the framework of the free trade agreement between China and ASEAN countries in a dynamic computable general equilibrium setting. We find clear evidence of investment diversion from the regions not signatory of the free trade agreement, however overall investment creation impacts dominate investment diversion effects and thus result in a welfare improvement for the world as a whole. Essays 2 and 3 are aimed to lay the foundations for quantifying knowledge capital and intellectual property in applied empirical analysis. In Essay 2, knowledge capital is obtained from firm level data on intellectual property assets and is measured by the value of copyrights, patents, licenses, trademarks and trade names, blueprints or building designs. We provide statistical evidence that knowledge capital is an input in production and we analyze substitution possibilities between knowledge capital and the other factors of production. Second, this work lays the foundation for quantifying knowledge capital in a computable general equilibrium framework. Finally, Essay 3 examines the role of intellectual property in the context of the dispute settlement process at the WTO. A significant contribution of this essay lies in the method used for quantifying trade related intellectual property. In line with international accounting standards, we model royalty services as a separate intermediate industry (subject to increasing returns). We explore the economy wide impacts of a no deal in the US-Brazil upland cotton dispute. As awarded by a WTO dispute settlement panel, Brazil would have been entitled to $591 million in retaliatory sanctions in goods sectors and $238 million in intellectual property sanctions. We find that Brazil's retaliation plan would have led to welfare gains for all countries except the US. Most importantly however, had Brazil not been allowed to retaliate in the form of suspension of intellectual property rights, the impact of trade retaliation alone would have been negative for both Brazil and the US, a case of shooting oneself in the foot to shoot at the other person's foot.

Degree

Ph.D.

Advisors

Hertel, Purdue University.

Subject Area

Agricultural economics

COinS