Working Paper: CEPR ID: DP14645
Authors: Christoph Boehm; Andrei Levchenko; Nitya Pandalainayar
Abstract: We propose a novel approach to estimate the trade elasticity at various horizons. When countries change Most Favored Nation (MFN) tariffs, partners that trade on MFN terms experience plausibly exogenous tariff changes. The differential growth rates of imports from these countries relative to a control group -- countries not subject to the MFN tariff scheme -- can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2018, and estimate the trade elasticity at short and long horizons using local projections (Jorda 2005). Our main findings are that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about -0.76, and the long-run elasticity ranges from -1.75 to -2.25. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial convexities in the costs of adjusting export participation.
Keywords: trade elasticity
JEL Codes: F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 1% increase in tariffs (F69) | 0.76% decrease in trade flows (F69) |
| Exogenous tariff change (F14) | trade flows (F10) |
| tariff-inclusive long-run elasticity around 1 (F14) | large gains from trade (F10) |
| long-run elasticity (1.75 to 2.25) (H31) | larger response of trade flows to changes in tariffs (F12) |
| addressing endogeneity (C51) | larger elasticities in absolute value (D11) |