Relating International Trade to the Housing Market: The Case of Tariff

Abstract

Tariff is probably one of the oldest form of taxation and there is a long history of tariff study. (For instance, see Irwin,1996), McCord (1970), and the reference therein.) Previous studies on tariff tend to ignore its impact on the housing market. Traditionally, the study of housing market and international trade have limited overlapping. To study the economic success of the Four Little Dragons, however, may pose a challenge to this methodology. These economies share several distinctive features. Typically, land is scare and drives the relative prices of housing prices to increase continuously, making real estate investment profitable to individuals. Economic growth in the aggregate level, nevertheless, is sustained by another competing investment, technological adoption. As new technology is typically embodied in new intermediate goods or capital goods, trading of intermediate goods is crucial. Therefore, a change in the tariff rate would affect the return of investing in technological adoption, and thus disturb the portfolio of individuals. Therefore, integrating international trade and housing market in a growth context would enhance our understanding of these economies. This paper takes a very preliminary step along this direction and builds a simple dynamic general equilibrium model to study the impact of tariff on the housing market. It extends Easterly et. al. (1993) (EKLR henceforth) by incorporating residential capital (or household capital), which is both durable consumption goods and asset here. The relative price of housing increases endogenously. Furthermore, this model is able to match the empirical findings that (1) the price of housing relative to the (non-durable) consumption goods increases over time, (2) the price of non-tradeables relative to the tradeables increases over time, and (3), the trading volume and the aggregate output grow at the same rate over a long time horizon. The model also enables us to obtain closed form solutions of the elasticity of the economic growth rate, housing stock growth rate, and housing prices growth rate, with respect to the tariff rate. It is found that the elasticity first mentioned is larger than the others. Hopefully, this paper provides a framework for further analysis and contributes to the synthesis of the dynamic trade theory and the housing market studies.