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Trade Adjustment Dynamics and the Welfare Gains from Trade

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  • George Alessandria
  • Horag Choi
  • Kim Ruhl

Abstract

We introduce time and risk into the fixed-variable cost tradeoff in heterogeneous firm trade models: Investing in exporting gradually and stochastically lowers the costs of exporting. In the model, aggregate trade dynamics arise from producer-level decisions to invest in lowering their future variable export costs, and tariff reforms generate time-varying trade elasticities. The gains from reducing tariffs arise from substituting away from firm creation and towards exporting. This substitution is larger when new exporters are smaller and take longer to grow into successful exporters. The welfare gains from reducing tariffs are much larger than the long-run changes in consumption and the welfare gains cannot be recovered from a static model or from formulas based on those models. Comparing steady-state outcomes can predict a welfare loss from reform when the actual change is positive.
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Suggested Citation

  • George Alessandria & Horag Choi & Kim Ruhl, 2014. "Trade Adjustment Dynamics and the Welfare Gains from Trade," Working Papers 14-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:14-11
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    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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