Abstract: "Beyond Icebergs: Globalization as Biased Technical Change"
International trade generates more demand for certain factors than domestic trade. Exporting naturally requires more intensive use of skilled labor with the expertise in the areas such as international business, language skills, and maritime insurance, and the transoceanic transportation is more capital intensive than the local transportation. In the presence of such bias in factor demands, globalization caused by innovations in communication and information technology leads to a world-wide increase in the relative prices of the factors used intensively in international trade. Furthermore, a world-wide increase in the factors used intensively in international trade leads to globalization. To understand these effects, we develop a flexible approach to model costly international trade, which includes the standard iceberg approach as a special case. More specifically, we extend the Ricardian model of trade with a continuum of goods (Dornbusch, Fischer and Samuelson, 1977) by introducing multiple factors of production and by making technologies depend on destinations, i.e., whether they are supplied to the domestic market or the export market. If the two technologies differ only in total factor productivity, the model becomes isomorphic to the DFS Ricardian model with the iceberg cost. By allowing them to differ in the factor intensities, our approach enables us to examine the impacts of information technology on factor prices and globalization through channels, which cannot be captured by the iceberg approach.