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Tariffs and welfare in new trade theory models

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  • Felbermayr, Gabriel
  • Jung, Benjamin
  • Larch, Mario

Abstract

Arkolakis, Costinot and Rodriguez-Clare (ACR, 2012) prove that, conditional on the change in openness, the welfare gains from foreign trade reforms are quantitatively identical across single-sector trade models with radically different micro-foundations. We generalize this result to domestic and multilateral trade reforms. And we extend it to cover revenue generating import tariffs. This gives rise to a new type of welfare isomorphisms across models and liberalization scenarios and allows deriving a structurally identical optimal tariff formula. In contrast to the case of iceberg trade costs, welfare formulas based on tariff reforms are highly nonlinear and build on different types of trade elasticities and openness indices. Most importantly, the ACR iceberg formula necessarily underestimates the gains from trade. A stylized calibration of the model shows that the underestimation can be large.

Suggested Citation

  • Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2012. "Tariffs and welfare in new trade theory models," University of Tuebingen Working Papers in Economics and Finance 41, University of Tuebingen, Faculty of Economics and Social Sciences.
  • Handle: RePEc:zbw:tuewef:41
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    References listed on IDEAS

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    1. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
    2. Gabriel Felbermayr & Benjamin Jung, 2011. "Sorting It Out: Technical Barriers to Trade and Industry Productivity," Open Economies Review, Springer, vol. 22(1), pages 93-117, February.
    3. Gabriel Felbermayr & Julien Prat, 2011. "Product Market Regulation, Firm Selection, And Unemployment," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 278-317, April.
    4. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    5. Gabriel Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.
    6. Benjamin Jung, 2012. "Optimal fixed cost subsidies in Melitz-type models," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(1), pages 87-108, February.
    7. Matthew Cole, 2011. "Not all trade restrictions are created equally," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(3), pages 411-427, September.
    8. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-450, May.
    9. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
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    11. Balistreri, Edward J. & Rutherford, Thomas F., 2013. "Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms," Handbook of Computable General Equilibrium Modeling, Elsevier.
    12. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2010. "Trade and welfare: Does industrial organization matter?," Economics Letters, Elsevier, vol. 109(2), pages 85-87, November.
    13. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, vol. 89(1), pages 13-25.
    14. Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, vol. 26(1), pages 47-62, January.
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    16. Ariel Burstein & Jonathan Vogel, 2011. "Factor Prices and International Trade: A Unifying Perspective," NBER Working Papers 16904, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gabriel Felbermayr & Mario Larch & Finn Krüger & Lisandra Flach & Erdal Yalcin & Sebastian Benz, 2013. "Dimensionen und Auswirkungen eines Freihandelsabkommens zwischen der EU und den USA," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 62, April.
    2. repec:bpj:pewipo:v:18:y:2017:i:1:p:32-55:n:2 is not listed on IDEAS

    More about this item

    Keywords

    Gravity Equation; Monopolistic Competition; Heterogeneous Firms; Armington Model; International Trade; Trade Policy; Gains from Trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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