Working Paper: NBER ID: w28904
Authors: George A. Alessandria; Carter B. Mix
Abstract: We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further-more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model.
Keywords: No keywords provided
JEL Codes: E3; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decreases in trade barriers (F19) | economic activity (E20) |
| expectations of lower future trade barriers (F17) | investment (G31) |
| expectations of lower future trade barriers (F17) | hours worked (J22) |
| expectations of lower future trade barriers (F17) | output (C67) |
| canceling an expected decline in future trade barriers (F17) | investment (G31) |
| canceling an expected decline in future trade barriers (F17) | output (C67) |
| cancellation of expected decline in future trade barriers (F13) | medium-run growth (O53) |
| growth post-GATT rounds (F69) | investment (G31) |
| growth post-GATT rounds (F69) | hours worked (J22) |