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

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  • Jung, Benjamin
  • Felbermayr, Gabriel
  • Larch, Mario

Abstract

We derive a simple equation for the welfare gains from trade when tariffs are liberalized or iceberg trade costs fall. Covering various one-sector trade models that may or may not feature extensive margins and imperfect competition, we generalize the analysis of Arkolakis, Costinot and Rodriguez-Clare (2012) to encompass revenue-generating import tariffs. Our formula permits easy quantification based on countries’ observed degrees of openness, their tariff revenues, and gravity elasticities. We show analytically that an analysis based on iceberg costs necessarily underestimates the welfare gains from trade relative to autarky. Our quantitative exercise for 41 countries suggests that the bias can be numerically significant. For countries with relatively high status quo tariffs, our formula predicts 30-60\% larger gains from trade than the icebergs only approach.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19542.

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Date of creation: 2013
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Publication status: Published in Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung - Session: Trade and Heterogeneity E08-V3 (2013)
Handle: RePEc:lmu:muenar:19542

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  1. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  2. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2012. "Competition, Markups, and the Gains from International Trade," NBER Working Papers 18041, National Bureau of Economic Research, Inc.
  3. Neary, J Peter, 1991. "Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?," CEPR Discussion Papers 560, C.E.P.R. Discussion Papers.
  4. 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.
  5. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Munich Reprints in Economics 20591, University of Munich, Department of Economics.
  6. 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.
  7. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 41-62, February.
  8. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2008. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," Department of Economics - Working Papers Series 1056, The University of Melbourne.
  9. Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu,, 2012. "Competition, Markups, and the Gains from," Department of Economics - Working Papers Series 1145, The University of Melbourne.
  10. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andrés Rodríguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," NBER Working Papers 13933, National Bureau of Economic Research, Inc.
  11. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
  12. 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 2011-18, School of Economics and Management, University of Aarhus.
  13. Matthew T Cole, 2011. "Distorted Trade Barriers," Working Papers 201105, School Of Economics, University College Dublin.
  14. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  15. Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, vol. 26(1), pages 47-62, January.
  16. Arnaud Costinot & Andrés Rodríguez-Clare, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," NBER Working Papers 18896, National Bureau of Economic Research, Inc.
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Cited by:
  1. Gabriel J. Felbermayr & Mario Larch, 2013. "The Transatlantic Trade and Investment Partnership (TTIP): Potentials, Problems and Perspectives," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(2), pages 49-60, 08.
  2. Povilas Lastauskas, 2013. "Europe's Revolving Doors: Import Competition and Endogenous Firm Entry Institutions," Kiel Advanced Studies Working Papers 464, Kiel Institute for the World Economy.
  3. Arnaud Costinot & Andrés Rodríguez-Clare, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," NBER Working Papers 18896, National Bureau of Economic Research, Inc.

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