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Trade diversion is reversed in the long run

Author

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  • Takumi Naito

    (Waseda University)

Abstract

We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive. (Copyright: Elsevier)

Suggested Citation

  • Takumi Naito, 2021. "Trade diversion is reversed in the long run," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 202-219, January.
  • Handle: RePEc:red:issued:19-116
    DOI: 10.1016/j.red.2020.07.002
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    More about this item

    Keywords

    Reverse trade diversion; Melitz model; Regional trade agreement; Endogenous growth; Transitional dynamics;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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