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Trade Adjustment Dynamics and the Welfare Gains from Trade

Author

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  • George Alessandria
  • Horag Choi
  • Kim Ruhl

Abstract

We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows.

Suggested Citation

  • George Alessandria & Horag Choi & Kim Ruhl, 2014. "Trade Adjustment Dynamics and the Welfare Gains from Trade," NBER Working Papers 20663, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20663
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    Cited by:

    1. Tim Schmidt-Eisenlohr & Ryan Monarch, 2015. "Learning and the Value of Relationships in International Trade," 2015 Meeting Papers 668, Society for Economic Dynamics.
    2. Ramanarayanan, Ananth, 2017. "Imported inputs, irreversibility, and international trade dynamics," Journal of International Economics, Elsevier, vol. 104(C), pages 1-18.
    3. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael J., 2017. "Capital Accumulation and Dynamic Gains from Trade," Working Papers 2017-5, Federal Reserve Bank of St. Louis.
    4. Yaniv Yedid-Levi & Stefanie Haller & Doireann Fitzgerald, 2016. "How Exporters Grow," 2016 Meeting Papers 499, Society for Economic Dynamics.
    5. Cebreros Zurita Carlos Alfonso, 2016. "The Rewards of Self-Discovery: Learning and Firm Exporter Dynamics," Working Papers 2016-08, Banco de México.
    6. Michael E. Waugh, 2017. "Firm Dynamics and Immigration: The Case of High-Skilled Immigration," NBER Chapters,in: High-Skilled Migration to the United States and its Economic Consequences, pages 205-238 National Bureau of Economic Research, Inc.
    7. repec:pal:imfecr:v:65:y:2017:i:3:d:10.1057_s41308-017-0036-2 is not listed on IDEAS
    8. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 195-218.
    9. Kim J. Ruhl & Jonathan L. Willis, 2017. "New Exporter Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 703-726, August.
    10. Wyatt J. Brooks & Pau S. Pujolas, 2016. "Captial Accumulation and the Welfare Gains from Trade," Department of Economics Working Papers 2016-03, McMaster University, revised Jul 2017.
    11. Elhanan Helpman & Oleg Itskhoki, "undated". "Trade Liberalization and Labor Market Dynamics with Heterogeneous Firms," Working Paper 199161, Harvard University OpenScholar.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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