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

Listed author(s):
  • Caliendo, Lorenzo
  • Feenstra, Robert
  • Romalis, John
  • Taylor, Alan M.

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10962.

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Date of creation: Nov 2015
Handle: RePEc:cpr:ceprdp:10962
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  1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
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  12. Ralph Ossa, 2014. "Trade Wars and Trade Talks with Data," American Economic Review, American Economic Association, vol. 104(12), pages 4104-4146, December.
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  14. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  15. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  16. Manfred Lenzen & Daniel Moran & Keiichiro Kanemoto & Arne Geschke, 2013. "Building Eora: A Global Multi-Region Input-Output Database At High Country And Sector Resolution," Economic Systems Research, Taylor & Francis Journals, vol. 25(1), pages 20-49, March.
  17. Chang-Tai Hsieh & Nicholas Li & Ralph Ossa & Mu-Jeung Yang, 2016. "Accounting for the New Gains from Trade Liberalization," NBER Working Papers 22069, National Bureau of Economic Research, Inc.
  18. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 511-540, July.
  19. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  20. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 1-44.
  21. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2015. "The welfare consequences of import tariffs: A quantitative perspective," Journal of International Economics, Elsevier, vol. 97(2), pages 295-309.
  22. Robert C. Feenstra & John Romalis & Peter K. Schott, 2002. "U.S. Imports, Exports, and Tariff Data, 1989-2001," NBER Working Papers 9387, National Bureau of Economic Research, Inc.
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