Working Paper: CEPR ID: DP3728
Authors: Alejandro Cuat; Marco Maffezzoli
Abstract: We present a neoclassical two-country dynamic trade model in which moderate reductions in trade costs can generate sizable increases in trade volumes over time. In our setup, a fall in trade costs has two effects on the volume of trade. First, for given factor endowments, it raises the degree of specialization of countries, leading to a larger volume of trade in the short run. Second, it raises (lowers) the factor price of each country?s abundant (scarce) production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. This creates an additional effect on the future volume of trade that adds to the static and dynamic effects of future falls in trade costs. A simulation exercise shows that a fall in trade costs over time produces an exponential increase in the trade share of output, much in line with the data.
Keywords: Heckscher-Ohlin; International Trade
JEL Codes: F10; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in trade costs (F12) | Increase in trade volumes (F10) |
| Reduction in trade costs (F12) | Raises the degree of specialization (Y80) |
| Increase in specialization (F12) | Increase in trade volumes (F10) |
| Reduction in trade costs (F12) | Alteration of factor prices (F16) |
| Alteration of factor prices (F16) | Diverging paths of relative factor endowments (F16) |
| Diverging paths of relative factor endowments (F16) | Increase in specialization (F12) |
| Increase in specialization (F12) | Increase in future trade volumes (F17) |
| Reduction in trade costs (F12) | Nonlinear increase in trade share relative to output (F62) |
| Trade liberalization (F13) | Exacerbation of income disparities (I24) |