Cities, Trade and Productivity

Trade and regional policies have been at the centre of public debate in many countries in recent years, as the relatively slow recovery from the Great Recession has unfolded. In particular, substantial sections of the public in advanced economies such as the US and the UK have started to support a combination of more protectionist international trade policies and more aggressive "place based" policies aimed at reducing inequality both across places and across people within their countries. Against this backdrop, the proposed research aims to inform the debate surrounding optimal geographic and international trade policies by studying the interactions between the forces that shape trade flows and the determinants of within-country economic geography. We believe an improved understanding of these forces will prove useful for policy design across a number of policy areas, including trade, urban planning and regional cohesion policies.

Theory and recent empirical findings suggest that we should expect important interactions between trade and internal economic geography. Recent research in international trade has established that trade liberalisation raises overall productivity by allowing larger, more productive firms to grow at the expense of smaller, less productive ones. Evidence from urban economics suggests that these productive firms tend to cluster together in the largest and most productive cities and regions. Taken together, these findings lead us to expect that trade liberalisations may have a substantial impact on regional disparities within countries. Equally, spatial policies that aim to reallocate economic activity across cities and regions within countries, such as employment subsidies aimed at boosting lagging regions, are likely to influence the reallocation of resources in response to changes in trade policy. In turn, this can have important implications for the size and distribution of the gains from international trade.

We plan to proceed in three steps. First, we plan to establish the key facts by conducting a comprehensive empirical analysis of the geography of exporting, importing and within country trade flows. Our main aim will be to understand the defining characteristics of cities and regions that tend to export a large share of their output or rely on imports for a large share of their overall consumption. These locations are likely to be most directly affected by shocks affecting international trade flows, such as changes in trade policy or restrictions associated to the ongoing Covid-19 pandemic. Second, we will develop models that can explain the key regularities uncovered in the data, with a particular focus on the geography of importing and exporting.

Finally, we plan to combine theory with rich data to analyse realistic policy scenarios. We plan to study the implications of trade openness for both productivity and welfare, with a view to determining whether the addition of internal geography to the analysis materially changes our estimates of the gains from trade. We also plan to assess the economic implications of policies aimed at tackling regional disparities, as well as the effects of planning restrictions that constrain the growth of successful locations. When performing these analyses, we will be guided by two key objectives. Firstly, we will aim to showcase how the effects of these policies differ in settings where economies are open to international trade as compared to previous work that focuses on closed economies. Secondly, we will analyse how the effects of these regional "levelling up" policies vary with the degree of trade openness in the countries of interest. This will allow us to answer questions such as whether restrictive planning in successful cities increases or decreases the benefits of trade liberalisation; or whether opening up to trade increases the cost of policies aimed at reducing within country regional inequalities.