Working Paper: NBER ID: w8515
Authors: James E. Anderson; Eric van Wincoop
Abstract: International economic integration yields large potential welfare effects, even in a static constant returns competitive world economy. Our method is novel. The effect of border barriers on trade flows is often inferred from gravity models. But their rather atheoretic structure precludes welfare analysis. Computable general equilibrium models are designed for tight welfare analysis, but lack econometric foundation. Our method combines these approaches. Gravity models based on Anderson's (1979) interpretation are full general equilibrium models of a special simple sort. In Anderson and van Wincoop (NBER WP 8079, 2001) we develop and estimate this structure, then calculate the comparative static effects on trade flows of border barriers. In this paper we further deploy the model to explore the comparative statics of welfare with respect to borders, to currency unions and to NAFTA. Our NAFTA exercise does a much better job of replicating the actual trade flow changes than do computable general equilibrium models. An interesting implication is that terms of trade changes are very important, even for small' countries such as Mexico.
Keywords: International Trade; Welfare Effects; Border Barriers; Economic Integration; Gravity Models
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| border barriers (F55) | trade (F19) |
| border barriers (F55) | welfare (I38) |
| economic integration (F15) | trade (F19) |
| economic integration (F15) | welfare (I38) |
| border barriers (F55) | trade (OECD countries) (F19) |
| border barriers (F55) | welfare (OECD countries) (I38) |
| currency unions (F36) | trade flows (F10) |
| removal of tariff barriers under NAFTA (F15) | trade flows (F10) |
| non-rent border barriers (F55) | welfare implications (I30) |
| reduction in tariffs (F13) | imports (F14) |
| reduction in tariffs (F13) | real income (D31) |
| presence of rents (R21) | welfare implications of border barriers (F55) |
| trade costs (F19) | policy analysis (D78) |