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Free trade: what are the terms-of-trade effects?

  • Carsten Kowalczyk

    ()

  • Raymond Riezman

    ()

AbstractChanges in trade policy affect a nation's economic welfare through terms-of-trade and volume-of-trade effects. A move to global free trade would imply higher world economic welfare equal to the sum of all nations' volume-of-trade, or efficiency, effects. Since the sum of the terms-of-trade effects across all nations is zero, terms-of-trade effects are contentious. Konishi, Kowalczyk and Sj�str�m (2003) have shown that if customs unions do not affect trade with non-member countries, immediate global free could be achieved if free trade were proposed together with international sidepayments equal to the terms of trade effects. How large would these terms of trade effects, and hence transfers, be? This paper presents estimates from a simple computable general equilibrium model of a world economy of perfect competition. We show that, in some cases, terms-of-trade effects are small compared to efficiency gains, and transfers are not necessary for free trade. In other cases, terms-of-trade gains may account for more than 50% of a country's gains from free trade and transfers could be large.

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File URL: http://hdl.handle.net/10.1007/s00199-008-0407-z
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 41 (2009)
Issue (Month): 1 (October)
Pages: 147-161

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Handle: RePEc:spr:joecth:v:41:y:2009:i:1:p:147-161
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  1. Syropoulos, Constantinos, 2002. "Optimum Tariffs and Retaliation Revisited: How Country Size Matters," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 707-27, July.
  2. Carsten Kowalczyk & Tomas Sjostrom, 1993. "Bringing GATT into the Core," NBER Working Papers 4343, National Bureau of Economic Research, Inc.
  3. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 5, pages 53-66 World Scientific Publishing Co. Pte. Ltd..
  4. Jones, Ronald W, 1969. "Tariffs and Trade in General Equilibrium: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 418-24, June.
  5. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 4, pages 45-51 World Scientific Publishing Co. Pte. Ltd..
  6. Carsten Kowalczyk & Raymond Riezman, 2009. "Trade Agreements," CESifo Working Paper Series 2660, CESifo Group Munich.
  7. Riezman, Raymond, 1985. "Customs unions and the core," Journal of International Economics, Elsevier, vol. 19(3-4), pages 355-365, November.
  8. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  9. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
  10. Earl L. Grinols & Kar-yiu Wong, 1991. "An Exact Measure of Welfare Change," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 428-49, May.
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