Global gains from reduction in trade costs

Abstract

We derive a simple equation to calculate the global welfare impact of the simultaneous reduction of trade costs between multiple country-pairs. Interestingly, we …nd that we obtain the same equation for a broad class of trade models. Moreover, balanced trade is mostly not required for the equation to work, nor does trade elasticity need to be known. The global welfare impact only depends on two sets of statistics: (i) the ratio of bilateral trade ‡ow between each pair of trading partners and global income; and (ii) the percentage change in exporting cost for each pair of trading partners. The class of models includes the many-country, many-good neo-classical-type model, and the Armington-type models such as Eaton and Kortum (2002), Krugman (1980), Melitz (2003) with Pareto distribution of …rm productivity, and the extensions of these models to the multi-country and multi-sector case, multi-factor production technology, multi-stage production, the existence of intermediate good and the existence of a non-traded good sector in each country. We then apply the equation to estimate the global welfare impact of the worldwide reduction of international shipping costs in the last …ve decades.

Welfare Implications of Solving the Distance Puzzle: Global Evidence from the Last Two Centuries

“…Therefore, consistent with studies such as by Lai, Fan, and Qi (2015), the welfare e¤ects of a change in trade costs (in percentage terms) depend on the weighted average of the percentage changes in bilateral trade costs, where weights are bilateral expenditure shares. As is evident, the right hand side of Equation 16 also considers changes in preferences, which is important to capture welfare changes due to the e¤ects of distance on preferences versus on trade costs as in studies such as by Hummels and Schaur (2013) or Yilmazkuday (2016).…”

Global Firms

“…Firms produce horizontally differentiated varieties within the industry under conditions of monopolistic competition. 3 The existence of fixed production costs implies that a firm drawing a productivity below the " zero-profit productivity cutoff " would make negative profits from producing and hence chooses instead to exit the industry. Fixed and variable costs of exporting ensure that only those active firms that draw a productivity above a higher "export productivity cutoff " find it profitable to export.…”

“…Each of these responses reallocates resources toward 2 See also and Melitz and Ottaviano (2008). 3 For alternative approaches to firm heterogeneity, see Bernard et al (2003) and Yeaple (2005). 4 While the original model focuses on exporting, this framework is extended to incorporate foreign direct investment (FDI) as an alternative mode for servicing foreign markets in Helpman, Melitz, and Yeaple (2004). high-productivity firms and raises aggregate productivity through a change in industry composition.…”

Optimal Transport Networks in Spatial Equilibrium

“…Various papers measure the first-order impact of changes in bilateral trade costs on world welfare(Atkeson and Burstein, 2010;Burstein and Cravino, 2015;Lai et al 2015; or in trade costs in specific links of a transport network on country-level welfare (Allen and Arkolakis, 2019) around an observed equilibrium. The right-hand side of (9) could be used for a similar purpose, given a specific set of changes in trade costs.…”