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Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades

Author

Listed:
  • Caliendo, Lorenzo
  • Feenstra, Robert
  • Romalis, John
  • Taylor, Alan M.

Abstract

Tariffs have fallen significantly around the globe over the last two decades. Yet very little is known about the trade, entry, and welfare effects generated by this unprecedented shift in trade policy. We use a heterogeneous-firm quantitative trade model to study the effects of observed changes in trade policy. Importantly, in our model, tariffs affect the entry decision of firms across markets, a channel that has been unduly overlooked in the literature. We first show how trade policy influences entry and selection of firms into markets. We then use a new tariff dataset, and apply a 189-country, 15-sector version of our model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 1990–2010. We find that the impact on firm entry was larger in Advanced relative to Emerging markets; that more than 90% of the gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round); that PTAs have not contributed much to the overall gains from trade; and that, with the exception of a few Emerging and Developing countries, most countries do not gain much (and some lose) from a move to complete free trade under zero tariffs.

Suggested Citation

  • Caliendo, Lorenzo & Feenstra, Robert & Romalis, John & Taylor, Alan M., 2015. "Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades," CEPR Discussion Papers 10962, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10962
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    More about this item

    Keywords

    bilateralism; gains from trade; input- output linkages; monopolistic competition; multilateralism; trade policy;
    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
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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