Working Paper

Globalization with Capital Integration and Spatial Entry working paper.

Abstract
What does it mean when factories ”leave” a country? In standard trade models with heterogeneous firms entry, trade liberalization reallocates productive resources toward more productive domestic firms, leaving aggregate productive capacity unchanged. Yet factory closures are often accompanied by asset sales and new investments abroad, suggesting that productive capacity can relocate across national borders. To study this mechanism, I extend the Melitz (2003) model by introducing an integrated capital market in which capital flows freely across locations while labor remains immobile. Using exact hat algebra and a 2017 region-by-region trade matrix covering the 50 U.S. states, Washington, D.C., and China, I quantify the effects of President Trump’s 2018 tariffs on Chinese imports. The model-predicted percentage change in the number of firms is positively correlated with the change in the number of establishments reported by the County Business Patterns (CBP) across states. Additionally, I find that workers in all U.S. regions experience welfare gains from the tariffs, and these gains are positively correlated with Republican vote share in the 2016 presidential election.