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Icebergs versus tariffs: A quantitative perspective on the gains from trade

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

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 University of Tuebingen, Faculty of Economics and Social Sciences in its series University of Tuebingen Working Papers in Economics and Finance with number 53.

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Date of creation: 2013
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Handle: RePEc:zbw:tuewef:53

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Keywords: Gravity Equation; Monopolistic Competition; Heterogeneous Firms; Armington Model; International Trade; Trade Policy; Gains from Trade;

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  1. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
  2. Matthieu Crozet & Pamina Koenig, 2007. "Structural gravity equations with intensive and extensive margins," EconomiX Working Papers 2007-36, University of Paris West - Nanterre la Défense, EconomiX.
  3. 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.
  4. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-50, May.
  5. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November.
  6. 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.
  7. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  8. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  9. Matthew T Cole, 2011. "Distorted Trade Barriers," Working Papers 201105, School Of Economics, University College Dublin.
  10. Gabriel J. Felbermayr & Benjamin Jung & Mario Larch, 2011. "Optimal Tariffs, Retaliation and the Welfare Loss from Tariff Wars in the Melitz Model," CESifo Working Paper Series 3474, CESifo Group Munich.
  11. 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.
  12. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  13. 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.
  14. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
  15. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers 9398, C.E.P.R. Discussion Papers.
  16. 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.
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Cited by:
  1. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers 9398, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.

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