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Trade diversion is reversed in the long run

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  • Takumi Naito

    (Vanderbilt University and Waseda University)

Abstract

We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive.

Suggested Citation

  • Takumi Naito, 2018. "Trade diversion is reversed in the long run," Vanderbilt University Department of Economics Working Papers 18-00008, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-sub-18-00008
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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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