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An Inconvenient Truth: Welfare Losses From Asymmetric Reductions in Transportation Costs

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  • Wisarut Suwanprasert

Abstract

Recent empirical studies find that the magnitudes of reductions in bilateral shipping costs are asymmetric within country pairs. Motivated by these findings, I study the welfare effects of asymmetric reductions in transportation costs in Helpman and Itskhoki's [(2010). Labour market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137] model of international trade with heterogeneous firms and frictional labor markets. I show that sufficiently asymmetric reductions in bilateral transportation costs result in welfare losses in the importing country, while a uniform reduction in the bilateral transportation costs of both imports and exports always benefits both countries. This paper raises a cautionary note that the phrase ‘welfare gains from trade liberalization’ implicitly assumes an ‘approximately equal’ reduction in transportation costs.

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  • Wisarut Suwanprasert, 2023. "An Inconvenient Truth: Welfare Losses From Asymmetric Reductions in Transportation Costs," International Economic Journal, Taylor & Francis Journals, vol. 37(1), pages 71-81, January.
    • Handle: RePEc:taf:intecj:v:37:y:2023:i:1:p:71-81
    DOI: 10.1080/10168737.2023.2169868
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