Working Paper: CEPR ID: DP5348
Authors: Alejandro Cuat; Marco Maffezzoli
Abstract: We present a dynamic comparative advantage model in which moderate reductions in import tariffs can generate sizable increases in trade volumes over time. A fall in import tariffs 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 the factor price of each country's abundant production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. A simulation exercise shows that a fall in import tariffs over time produces a disproportional increase in the trade share of output as in the data. Even when elasticities of substitution are not particularly high, moderate reductions in trade barriers lead to large trade volumes over time.
Keywords: Heckscher-Ohlin; International Trade
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in import tariffs (F14) | Increase in degree of specialization among countries (F69) |
| Increase in degree of specialization among countries (F69) | Increase in trade volumes in the short run (F10) |
| Reduction in import tariffs (F14) | Increase in factor price of abundant production factor (F16) |
| Increase in factor price of abundant production factor (F16) | Diverging paths of relative factor endowments across countries (F16) |
| Diverging paths of relative factor endowments across countries (F16) | Increase in degree of specialization over time (L23) |
| Increase in degree of specialization over time (L23) | Larger volume of trade in the future (F10) |
| Reduction in import tariffs (F14) | Increase in trade share of GDP (F19) |
| Dynamic responses to trade liberalization (F69) | Disproportional increase in trade share of GDP (F62) |