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Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade

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  • Gabriel J. Felbermayr
  • Benjamin Jung
  • Mario Larch

Abstract

Recent quantitative trade models treat import tariffs as pure cost shifters so that their effects are similar to iceberg trade costs. We introduce revenue-generating import tariffs, which act as demand shifters, into the framework of Arkolakis, Costinot and Rodriguez-Clare (2012), and generalize their gains from trade equation. Our formula permits easy quantification based on countries’ observed degrees of openness, tariff revenues, and on the gravity elasticities of tariffs and icebergs. Export selection drives a wedge between these two elasticities and matters for welfare gains. However, in all model variants, an analysis based on iceberg costs necessarily underestimates the true gains from trade relative to autarky. Our quantitative exercise suggests that the bias can be numerically significant. For countries with relatively high tariffs, our formula predicts 30-60% larger gains from trade when iceberg trade costs and/or tariffs are liberalized as compared to a pure reduction of iceberg trade costs.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4175.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4175

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Related research

Keywords: gravity equation; monopolistic competition; heterogeneous firms; Armington model; international trade; trade policy; gains from trade;

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References

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  1. Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu,, 2012. "Competition, Markups, and the Gains from," Department of Economics - Working Papers Series, The University of Melbourne 1145, The University of Melbourne.
  2. Svetlana Demidova & Andrés Rodríguez-Clare, 2007. "Trade Policy under Firm-Level Heterogeneity in a Small Economy," NBER Working Papers 13688, National Bureau of Economic Research, Inc.
  3. Matthew T Cole, 2011. "Distorted Trade Barriers," Working Papers, School Of Economics, University College Dublin 201105, School Of Economics, University College Dublin.
  4. Philipp J.H. Schröder & Allan Sørensen, 2011. "A welfare ranking of multilateral reductions in real and tariff trade barriers when firms are heterogenous," Economics Working Papers, School of Economics and Management, University of Aarhus 2011-18, School of Economics and Management, University of Aarhus.
  5. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers, Society for Economic Dynamics 433, Society for Economic Dynamics.
  6. Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 47-62, January.
  7. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 43(1), pages 41-62, February.
  8. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, Elsevier, vol. 89(1), pages 13-25.
  9. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1726-1768, September.
  10. Edmond, Chris & Midrigan, Virgiliu & Xu, Daniel Yi, 2013. "Competition, Markups, and the Gains from International Trade," Economics Series, Institute for Advanced Studies 299, Institute for Advanced Studies.
  11. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, Elsevier, vol. 37(3-4), pages 197-218, November.
  12. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  13. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 444-50, May.
  14. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  15. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2008. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," CER-ETH Economics working paper series 08/89, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  16. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9398, C.E.P.R. Discussion Papers.
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Cited by:
  1. Felbermayr, Gabriel & Larch, Mario, 2013. "The transatlantic trade and investment partnership (TTIP): Potentials, problems and perspectives," Munich Reprints in Economics, University of Munich, Department of Economics 20613, University of Munich, Department of Economics.
  2. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9398, C.E.P.R. Discussion Papers.
  3. Povilas Lastauskas, 2013. "Europe's Revolving Doors: Import Competition and Endogenous Firm Entry Institutions," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 464, Kiel Institute for the World Economy.

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