The Growth of World Trade: Production Costs, Trade Barriers, and Product Appeal

Abstract

In this paper, I decompose the growth of disaggregated bilateral trade flows into the contributions of changes in aggregate expenditure, number of varieties, trade costs, product appeal, production costs, and multilateral resistance terms. I obtain theoretically consistent empirical measures for these characteristics by estimating the structural parameters of a model of international trade that features variable marginal production costs and differences in product appeal. The empirical analysis suggests that changes in expenditures, trade barriers, and number of varieties explain, respectively, about 14, 12, and 5 percent of the growth of trade flows. Most of the remaining variation is explained by changes in product appeal. Consistent with the Linder hypothesis, the measures of product appeal are positively correlated with exporter productivity and trading partners’ income similarity. Counterfactual analysis shows that the welfare gains associated with reasonable increases in product appeal are of the same order of magnitude as the gains associated with a complete removal of policy barriers.