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Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade

Author

Listed:
  • Gabriel Felbermayr
  • Benjamin Jung
  • Mario Larch
  • Gabriel J. Felbermayr

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.

Suggested Citation

  • Gabriel Felbermayr & Benjamin Jung & Mario Larch & Gabriel J. Felbermayr, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," CESifo Working Paper Series 4175, CESifo.
  • Handle: RePEc:ces:ceswps:_4175
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    References listed on IDEAS

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    Cited by:

    1. Povilas Lastauskas, 2013. "Europe’s Revolving Doors: Import Competition and Endogenous Firm Entry InstitutionS," Cambridge Working Papers in Economics 1360, Faculty of Economics, University of Cambridge.
    2. Haaland, Jan I. & Venables, Anthony J., 2016. "Optimal trade policy with monopolistic competition and heterogeneous firms," Journal of International Economics, Elsevier, vol. 102(C), pages 85-95.
    3. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    4. Gabriel Felbermayr & Mario Larch, 2013. "The Transatlantic Trade and Investment Partnership (TTIP): Potentials, Problems and Perspectives," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(2), pages 49-60, August.
    5. Kohler Wilhelm & Jung Benjamin, 2017. "Wie vorteilhaft ist internationaler Handel?: Ein neuer Ansatz zur Vermessung der Gewinne," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(1), pages 32-55, April.

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    More about this item

    Keywords

    gravity equation; monopolistic competition; heterogeneous firms; Armington model; international trade; trade policy; gains from trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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