Working Paper: NBER ID: w18508
Authors: Lorenzo Caliendo; Fernando Parro
Abstract: We build into a Ricardian model sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production to quantify the trade and welfare effects from tariff changes. We also propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a multiplicative gravity equation. We apply our model and use our estimated elasticities to identify the impact of NAFTA's tariff reductions. We find that Mexico's welfare increases by 1.31%, U.S.'s welfare increases by 0.08%, and Canada's welfare declines by 0.06%. We find that intra-bloc trade increases by 118% for Mexico, 11% for Canada and 41% for the U.S. We show that welfare effects from tariff reductions are reduced when the structure of production does not take into account intermediate goods or input-output linkages. Our results highlight the importance of sectoral heterogeneity, intermediate goods and sectoral linkages for the quantification of the welfare gains from tariffs reductions.
Keywords: NAFTA; trade effects; welfare effects; tariff reductions; Ricardian model
JEL Codes: F10; F11; F13; F14; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tariff reductions (F13) | Mexico's welfare increase (H53) |
| Tariff reductions (F13) | Canada's welfare decrease (I38) |
| Tariff reductions (F13) | U.S. welfare increase (I38) |
| Tariff reductions (F13) | Increase in volume of trade (F10) |
| Increase in volume of trade (F10) | Mexico's welfare increase (H53) |
| Tariff reductions (F13) | Lower prices for tradable goods (F16) |
| Lower prices for tradable goods (F16) | Benefit for nontradable sectors (F14) |
| Tariff reductions (F13) | Deterioration of terms of trade for Mexico (F14) |
| Tariff reductions (F13) | Deterioration of terms of trade for Canada (N12) |
| Tariff reductions (F13) | Improvement of terms of trade for U.S. (F14) |