Working Paper: CEPR ID: DP10962
Authors: Lorenzo Caliendo; Robert Feenstra; John Romalis; Alan M. Taylor
Abstract: We show in a multi-sector, heterogeneous-firm trade model that the effect of tariffs on entry, especially in the presence of production linkages, can reverse the traditional positive optimal tariff argument. We then use a new tariff dataset, and apply it to a 189-country, 15-sector version of our model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 1990–2010. We find that the impact on firm entry was larger in Advanced relative to Emerging and Developing countries; that slightly more than three-quarters of the total gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round), with two-thirds of the remainder due to preferential trade agreements and one third due to the hypothetical movement to free trade; and that free trade would bring gains for some Emerging and Developing countries, in particular. Ten economies in our sample – including China, Hong Kong, India, Israel, Vietnam, and five more remote countries – would have benefited from going beyond free trade to subsidizing their imports in 1990, since their optimal tariffs are negative.
Keywords: Bilateralism; Gains from Trade; Input-Output Linkages; Monopolistic Competition; Multilateralism; Trade Policy
JEL Codes: F10; F11; F12; F13; F15; F17; F60; F62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tariffs (F13) | firm entry (M13) |
| firm entry (M13) | output of differentiated sectors (E20) |
| output of differentiated sectors (E20) | price index (C43) |
| price index (C43) | overall welfare (I31) |
| tariffs (F13) | overall welfare (I31) |
| reductions in tariffs (F13) | firm entry (M13) |
| Uruguay Round tariff cuts (F13) | total welfare gains (D69) |
| preferential trade agreements and movements towards free trade (F15) | total welfare gains (D69) |
| free trade (F10) | benefits for emerging and developing countries (O19) |