Abstract
This paper presents a structural general equilibrium model to analyze the effects on trade, welfare, and gross domestic product of common transport infrastructure. The model builds on Caliendo and Parro (2015) to allow for changes in trade costs due to improvements in transportation infrastructure, financed through domestic taxation, connecting multiple countries. The model highlights the trade impact of infrastructure investments through cross-border input-output linkages. This framework is then used to quantify the impact of the Belt and Road Initiative. Using new estimates on the effects on trade costs of transport infrastructure related to the initiative, the model shows that gross domestic product will increase by up to 3.4 percent for participating countries and by up to 2.9 percent for the world. Because trade gains are not commensurate with projected investments, some countries may experience a negative welfare effect due to the high cost of the infrastructure.
Highlights
IntroductionCountries have for a long time cooperated to reduce trade costs resulting from tariffs and other policy barriers to international trade
Through trade agreements, countries have for a long time cooperated to reduce trade costs resulting from tariffs and other policy barriers to international trade
The model builds on structural general equilibrium models used for trade policy analysis, allowing to consider the effect that transport infrastructure has on trade costs through the reduction in shipping time and on government budget and taxation
Summary
Countries have for a long time cooperated to reduce trade costs resulting from tariffs and other policy barriers to international trade. Relative to quantitative models for trade policy analysis, the study of common transport infrastructure requires information on the changes in bilateral trade costs associated to the changes in shipping times due to the new infrastructure and estimates of the cost of building the transportation infrastructure for each country Despite its complexity, this framework presents the advantage that regardless of the number of sectors and how complicated the interactions between sectors are, the model can be reduced to a system of one equation per country. The model is well suited to analyze the shock due to common transport infrastructure It shows that when a sector experiences a decrease in the price of its imported inputs as shipping times/trade costs fall, it passes on the associated reduction in production costs to downstream industries, propagating the benefits across the world.
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