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The Impact of Trade Agreements on Consumer Welfare

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  • Berlingieri, Giuseppe
  • Breinlich, Holger
  • Dhingra, Swati

Abstract

A central tenet of international economics is that trade liberalization provides welfare gains. This paper contributes to the literature on gains from trade by estimating how trade agreements impact the consumer price index, and by quantifying the sources of their impact on welfare. We infer quality of imported products by estimating demand-side elasticities for the European Union (EU) between 1993 and 2013. Having inferred quality, we estimate the contribution of lower prices, better quality and greater variety to welfare gains from trade agreements. Joining a trade agreement increases welfare through access to higher quality imports. Quality rises by 7% on average, which translates into a cumulative reduction in the consumer price index of 0.18% during the period. Ignoring the quality channel under-estimates the gains from trade agreements because unit values were not significantly impacted by the new agreements.

Suggested Citation

  • Berlingieri, Giuseppe & Breinlich, Holger & Dhingra, Swati, 2016. "The Impact of Trade Agreements on Consumer Welfare," CEPR Discussion Papers 11148, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11148
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    3. F. Banu Demir, 2011. "Trading Tasks and Quality," Economics Series Working Papers 582, University of Oxford, Department of Economics.
    4. Blonigen, Bruce A. & Soderbery, Anson, 2010. "Measuring the benefits of foreign product variety with an accurate variety set," Journal of International Economics, Elsevier, vol. 82(2), pages 168-180, November.
    5. Hottman, Colin & Redding, Stephen J. & Weinstein, David E., 2014. "What is Firm Heterogeneity in Trade Models? The Role of Quality, Scope, Markups, and Cost," CEPR Discussion Papers 10133, C.E.P.R. Discussion Papers.
    6. Gloria Sheu, 2014. "Price, Quality, and Variety: Measuring the Gains from Trade in Differentiated Products," American Economic Journal: Applied Economics, American Economic Association, vol. 6(4), pages 66-89, October.
    7. 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.
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    Cited by:

    1. Lisandra Flach & Florian Unger, 2016. "Quality and Gravity in International Trade," CESifo Working Paper Series 6080, CESifo Group Munich.
    2. Swati Dhingra & Gianmarco Ottaviano & Veronica Rappoport & Thomas Sampson & Catherine Thomas, 2017. "UK Trade and FDI: A Post-Brexit Perspective," CEP Discussion Papers dp1487, Centre for Economic Performance, LSE.
    3. Juan Carluccio & Erwan Gautier & Sophie Guilloux-Nefussi, 2018. "Dissecting the Impact of Imports from Low-Wage Countries on French Consumer Prices," Working papers 672, Banque de France.
    4. Lisandra Flach & Fabian Gräf, 2018. "The Impact of Trade Agreements on World Export Prices," CESifo Working Paper Series 7032, CESifo Group Munich.

    More about this item

    Keywords

    Elasticity; FTA; Quality; Trade agreement; Unit Values; Variety;

    JEL classification:

    • F1 - International Economics - - Trade
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • F6 - International Economics - - Economic Impacts of Globalization
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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