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Trade Liberalization, Price Distortions, and Resource Reallocation

  • Roberto Álvarez
  • Matías Braun

We construct a time-variant, price-based measure of trade distortions in 28 manufacturing industries for a large sample of countries over the last four decades, documenting facts consistent with the argument that changes in relative prices are an important channel through which an economy’s openness affects outcomes. First, we find that price distortions at the aggregate level are negatively associated with the degree of openness and the speed at which trade volume, exports, and imports grow. The negative association between trade outcomes and price distortions is fundamentally driven by the positive link between openness and price distortions. Second, increases in trade around the time of liberalization are positively related to a decline in aggregate price distortions for the sample of trade-liberalizing countries. Third, the extent of production reallocation is positively associated with the degree of relative price changes that occur around the time of liberalization, particularly across constant-return-to-scale sectors. Fourth, changes in relative prices at the industry level within countries are positively correlated with changes in output, productivity, and firm size, and negatively associated with the number of firms. Finally, we show that the neoclassical theory of trade does a poor job explaining how relative prices change during trade liberalization.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 374.

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Date of creation: Aug 2006
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Handle: RePEc:chb:bcchwp:374
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  1. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  2. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  3. Eric J. Bartelsman & John Haltiwanger & Stefano Scarpetta, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," Tinbergen Institute Discussion Papers 04-114/3, Tinbergen Institute.
  4. Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc.
  5. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  6. Scott Bradford, 2003. "Paying the Price: Final Goods Protection in OECD Countries," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 24-37, February.
  7. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoglu, 2002. ""Protection For Sale" In A Developing Country: Democracy Vs. Dictatorship," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 497-508, August.
  8. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, vol. 47(2), pages 295-320, April.
  9. Tybout, James & de Melo, Jaime & Corbo, Vittorio, 1990. "The effects of trade reforms on scale and technical efficiency : new evidence from Chile," Policy Research Working Paper Series 481, The World Bank.
  10. Phillip McCalman, 2004. "Protection for Sale and Trade Liberalization: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 81-94, 02.
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