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Phase out tariffs, phase in trade?

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  • Besedes, Tibor
  • Kohl, Tristan
  • Lake, James

Abstract

An important stylized fact in the empirical Free Trade Agreement (FTA) literature is that member trade flows gradually increase over time following an FTA. Baier and Bergstrand (2007) suggest two explanations: tariff phase-out and delayed pass-through of tariffs into import prices. We examine these hypotheses using 1989–2016 U.S. import growth and product-level data on the tariff phase-out negotiated under NAFTA and the earlier Canada-U.S. FTA. We do not find evidence supporting either hypothesis. While products receiving tariff cuts do show delayed import growth relative to products with unchanged tariffs, the delay in import growth does not correspond to delays in the timing of tariff cuts. We also show that tariff cuts are fully and immediately passed through to U.S. importers as there are virtually no changes in the prices received by exporters either in the short run or the long run. Rather, we find evidence for an important role played by NAFTA tariff cuts reducing the impact of frictions that, in turn, allow for a spatial expansion of imports across the U.S.

Suggested Citation

  • Besedes, Tibor & Kohl, Tristan & Lake, James, 2020. "Phase out tariffs, phase in trade?," Journal of International Economics, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:inecon:v:127:y:2020:i:c:s0022199620301008
    DOI: 10.1016/j.jinteco.2020.103385
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    6. Carter Mix & George Alessandria, 2017. "The Global Trade Slowdown: A Dynamic Approach," 2017 Meeting Papers 907, Society for Economic Dynamics.
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    9. Khan, Shafaat Yar & Khederlarian, Armen, 2021. "How does trade respond to anticipated tariff changes? Evidence from NAFTA," Journal of International Economics, Elsevier, vol. 133(C).
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    More about this item

    Keywords

    Free trade agreements; CUSFTA; NAFTA; Trade; Phase-out; Tariffs; Extensive margin;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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