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Trade Policy is Real News: Theory and Evidence

Author

Listed:
  • George A. Alessandria
  • Carter B. Mix

Abstract

We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further-more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model.

Suggested Citation

  • George A. Alessandria & Carter B. Mix, 2021. "Trade Policy is Real News: Theory and Evidence," NBER Working Papers 28904, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28904
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    Cited by:

    1. Seneviratne, Prathi, 2025. "The unintended consequences of compensating trade’s losers," Economic Modelling, Elsevier, vol. 145(C).
    2. Francois de Soyres & Erik Frohm & Emily Highkin & Carter Mix, 2021. "Forward Looking Exporters," FEDS Notes 2021-10-06-1, Board of Governors of the Federal Reserve System (U.S.).
    3. Henrique Correa da Cunha & Vikkram Singh & Shengkun Xie, 2022. "The Determinants of Outward Foreign Direct Investment from Latin America and the Caribbean: An Integrated Entropy-Based TOPSIS Multiple Regression Analysis Framework," JRFM, MDPI, vol. 15(3), pages 1-22, March.
    4. Elshennawy, Abeer, 2025. "Anticipated trade policy: New insights from an intertemporal general equilibrium model for Egypt," Economic Modelling, Elsevier, vol. 146(C).
    5. George Alessandria & Oscar Avila, 2023. "Trade Integration, Industry Reallocation, and Welfare in Colombia," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 649-687, September.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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