Working Paper: NBER ID: w27064
Authors: Christoph E. Boehm; Andrei A. Levchenko; Nitya Pandalai Nayar
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 effects on 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 (Jordà, 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; Tariffs; Welfare Gains
JEL Codes: F0; F1; F14; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous tariff changes (F14) | trade flows (F10) |
| exogenous tariff changes (F14) | short-run elasticity (H32) |
| exogenous tariff changes (F14) | long-run elasticity (H30) |
| short-run elasticity (H32) | long-run elasticity (H30) |
| exogenous tariff changes (F14) | trade flows adjustment over time (F14) |
| trade flows adjustment over time (F14) | long-run elasticity (H30) |