Welfare Effects Of Trade Liberalization Research Articles

Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market

The structural gravity model is the workhorse model in international trade to estimate the drivers of trade costs. We propose a new gravity estimation procedure that allows us to disentangle exogenous trade costs and endogenous aggregate markups under oligopoly. Our method can be easily implemented in standard gravity data sets, and we illustrate it by analyzing the competition and welfare effects of the European Single Market. We find that abolishing the European Single Market would increase domestic aggregate markups in EU member countries by 2 to 6 percent. Welfare effects of trade liberalization are larger due to changes in competition among domestic and foreign firms. Our findings highlight that evaluations of trade policy changes and trade cost reductions should also consider their effects on competition.

Economic Impact of Tariff Rate Quotas and Underfilling: The Case of Canned Fruit Exports from South Africa to the EU

Export trade provided for under tariff rate quotas (TRQs) is an important contributor to improving South Africa’s export access to European markets. The performance of exporter-administered TRQs has not received much research attention in the context of the below par market access utilisation of a given opportunity. The present study analysed how the country performed in terms of utilising its TRQ for canned pears, apricots, and peaches provided by the European Union (EU) for the period 2010 to 2019. The permit allocation system for TRQs in South Africa is described for further understanding of aspects of the TRQ system likely to affect quota fill. Performance was assessed in terms of yearly quota utilisation rates as well as welfare measured in equivalent variation calculated in a computable general equilibrium (CGE) trade model. The analysis found that the canned fruit TRQ exhibited a fill rate average of 61% for the past 10 years (2010–2019) and 49% for the period 2015–2019, thus falling far short of the goal of achieving full market access availed by the EU within the protocols of liberalised trade. The welfare effects of trade liberalisation confirmed the underutilisation of the TRQ indicated by a welfare loss, considering the difference in gains of an underutilised quota (USD 2497) and a fully utilised quota (USD 2530). The study highlights the importance of full utilisation of preferences.

The welfare effects of service trade liberalization: evidence from the Chinese movie industry

We examine the welfare effect of trade liberalization in the service industry by focusing on the Chinese movie industry. China has been maintaining an import quota of foreign movies since 1990s. Using a unique Chinese movie dataset, we first estimate a nested logit demand model. And based on the estimated demand parameters, we perform counterfactual tests by removing the movie import quota. Specifically, we quantify the loss to the domestic film makers due to greater competition with foreign competitors, and the gains to consumers from consuming more high quality movies. We find that after trade liberalization, the market share of domestic film makers falls by 21–22% on average during the sample period, whereas the gain in the consumer welfare is comparatively smaller with an increase of around 5–9%. We also find that if the domestic film makers react actively by either strategically changing the release dates or by improving the quality of the home-made movies, then the magnitude of decline in the producer welfare will reduce by a large extent.

Welfare implications of trade liberalization when revenue matters

ABSTRACT Some empirical studies have shown that many developing economies were unable to recover lost trade revenue from domestic taxes after implementing trade liberalizing policies. Ignoring the fiscal cost of trade liberalization when government spending is not completely wasteful may lead to misleading welfare estimates. We address these concerns by developing a model in which government spending augments the production function, enabling it to account for the role of revenue and its impact on welfare. The model is calibrated to capture the features of the Ghanaian economy. We find significant but lower welfare effects of trade liberalization when government spending on infrastructure plays an important role in the production process. The lower welfare impact of trade liberalization is explained by a decline in infrastructure spending caused by shortfalls in revenue emanating from tariff cuts. The implication of the study is that there are further welfare gains to trade liberalization but such gains are significantly reduced when fiscal costs are high. The role of revenue matters in evaluating the welfare implications of trade liberalization.

Structural Gravity and the Gains from Trade under Imperfect Competition: Quantifying the Effects of the European Single Market

We extend structural gravity models of bilateral trade flows to oligopolistic competition. We show that conventional gravity estimates do not only reflect trade costs but also market power. Our simple estimation procedure generalizes the standard gravity model and disentangles exogenous trade frictions and endogenous market power distortions. We use our estimated model to counterfactually increase trade costs by abolishing the European Single Market. We find that domestic firms’ markups in EU member countries increase by 2 to 6 percent. Importantly, welfare effects of trade liberalization are much more pronounced due to the change in competition among domestic and foreign firms.

Gravity with unemployment

Quantifying the welfare effects of trade liberalization is a core issue in international trade. Existing frameworks assume perfect labor markets and therefore ignore the effects of aggregate employment changes for welfare. We develop a quantitative trade framework which explicitly models labor market frictions. To illustrate, we assess the effects of trade and labor market reforms for 28 OECD countries. Welfare effects of trade agreements are typically magnified when accounting for employment changes. While employment and welfare increase in most countries, some experience higher unemployment and lower welfare. Labor market reforms in one country have small positive spillover effects on trading partners.

Trade and growth with heterogeneous firms revisited

In a recent paper, Baldwin and Robert-Nicoud (2008) explore the growth and welfare effects of trade liberalization in a model with firm heterogeneity that allows for endogenous growth and a diversity of innovation mechanisms. Their main welfare conclusion is that freer trade has an unambiguously positive static effect while the sign of the dynamic effect, stemming from the change in the growth rate of varieties, depends on the type of technology imposed for innovations. This paper revisits these conclusions. By carefully following algebraic expressions in the original work, we point at inaccuracies and explore their consequences. Our main finding is that the sign of the static effect is not always positive. Consumers may experience an immediate loss from openness if the value of the firms they own decreases due to greater import competition. Moreover, the sign of the static effect on expenditure is always the opposite to that of the dynamic effect stemming from variety growth, so the results presented here highlight the existing tension between static and dynamic effects. Our results speak to the most recent literature on welfare effects in trade models.

International Trade and Unemployment: A Quantitative Framework

Quantifying the welfare effects of trade liberalization is a core issue in international trade. Existing frameworks assume perfect labor markets and therefore ignore the effects of aggregate employment changes for welfare. We develop a quantitative trade framework which explicitly models labor market frictions. To illustrate, we assess the effects of trade and labor market reforms for 28 OECD countries. Welfare effects of trade agreements are magnified when accounting for employment changes. While employment and welfare increase in most countries, some experience higher unemployment and lower welfare. Labor market reforms in one country have small positive spillover effects on trading partners. JEL-Code: F140, F160, F130.

The producer welfare effects of trade liberalization when goods are perishable and habit‐forming: the case of asparagus

AbstractAsparagus is a perishable, highly seasonal crop. We find that out‐of‐season imports of asparagus caused habit formation that increased demand in the U.S. growing seasons. We find that habit effects offset about 64% of the welfare losses to U.S. asparagus producers from increased Mexican imports under NAFTA and all of the U.S. producer welfare losses from increased Peruvian imports under the Andean Trade Preference Act. We estimate that the U.S. producer welfare losses from NAFTA are less than the annualized value of market loss assistance provided them in the 2008 Farm Bill.

Tariff evasion effects in quantitative general equilibrium

One consequence of tariff evasion is that a country’s average statutory import tariff rate deviates from the average applied tariff rate. We deliver an approach to estimate the average evasion rate in multi-country general equilibrium. We find evidence of significant average tariff evasion which leads to downward-biased estimates of the elasticity-of-substitution parameter in new trade theory models and associated upward-biased comparative static welfare effects of trade liberalization.

Trade Liberalization, Macroeconomic Adjustment, and Welfare: How Costly Are Nominal Rigidities?

It has long been argued that the presence of nominal rigidities could cause adverse macroeconomic adjustment to trade liberalization and thus reduce the benefits of freer trade. The paper explores the welfare cost of macroeconomic adjustment within the framework of new open economy macroeconomic models. The welfare effect of trade liberalization is decomposed into a steady-state efficiency gain and a transitional loss associated with wage-price stickiness and is estimated for a wide range of parameter values. The paper finds that while the transitional loss can be a substantial proportion of steady-state gains under fixed exchange rates, it is relatively small under a flexible exchange rate regime supported by a simple Taylor-type rule.

Strategic Environmental Policies and the Gains from Trade Liberalization

The literature on strategic environmental policy has not fully addressed welfare effects of trade liberalization from autarky. In a reciprocal market model of duopoly with transboundary pollution, we study how reductions in transport costs and import tariffs affect the Nash-equilibrium welfare of an environmental policy game as compared to any initial state including autarky. We show three patterns of gainfulness of trade depending on the interaction between marginal damage from pollution and the degree of transboundary pollution.

Welfare Effects of Trade Liberalization with Intra-Industry Reallocations: The Importance of Preferences and Market Failures

This paper shows that the novel gains from trade liberalization driven by intra-industry reallocations (Melitz (2003)) are not robust to changes in the preference structure. In the Melitz (2003) setting the unambigousness of the welfare effect depends crucially on the assumption of traditional CES preferences, which ensures equivalence of the market equilibrium and the social planner solution. For other preferences this equivalence is broken and trade liberalization may reduce welfare by magnifying market failures. An exact condition for trade liberalization to reduce overall welfare is derived under the assumptions of generalized CES preferences and a specific distribution (Pareto) of firm heterogeneity.

A computable general equilibrium analysis of the welfare effects of trade liberalization under different market structures

Using a static world computable general equilibrium model with 16 sectors and 14 regions, this paper compares welfare effects of trade liberalization of the perfectly competitive model and eight imperfectly competitive models. Our main findings are as follows. First, the size of the welfare impact systematically depends on the type of model. Second, the welfare impact of the perfectly competitive model is not necessarily smaller than those of imperfectly competitive models. Third, the integrated market model tends to have a larger welfare impact than the segmented market model. Fourth, the model with the fixed number of firms tends to have a small welfare impact. Finally, the variety effect tends to have a stronger influence on the welfare effects of liberalization than do scale and markup effects. Differences in the models can be viewed as differences in the economic structures of the regions being analyzed, and therefore the analysis in this paper makes it possible to derive policy implications with regard to the relationship between economic structure and trade liberalization.

A Dynamic Reciprocal Dumping Model of International Trade

This paper constructs a differential game model of reciprocal dumping to reconsider the welfare effects of trade liberalization (tariff reductions). We show that welfare in autarky exceeds welfare in trade for any tariff level, namely that any trade is detrimental. Comparing our result with a static result, we discuss that the closed-loop property of feedback strategies in differential games plays a significant role in our argument.

Trade liberalization in a differentiated duopoly reconsidered

Constructing a model of differentiated Cournot duopoly, we consider welfare effects of trade liberalization (i.e. reductions in transport costs). We examine both multilateral trade (i.e. the firms in both countries export bilaterally) and unilateral trade, under which foreign entry is possible but the home firm cannot export. Some new results on trade gains under differentiated oligopoly are proved and their implications are discussed.

Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade

Traditional CGE models with Armington assumption fail to capture the extensive margin of trade, thereby underestimate the trade and welfare effects of trade opening. To address this problem, this paper introduces the Melitz (2003) theoretical framework with firm heterogeneity and fixed exporting costs into a global CGE model. Some illustrative simulations show that the introduction of firm heterogeneity improves the ability of CGE model to capture the trade expansion and welfare effects of trade liberalization. Under the case of global manufacturing tariff cut, the estimated gains in welfare and exports are more than double of that obtained from standard Armington CGE model. Sensitivity analysis also indicates that model results are sensitive to the shape parameters of firm productivity distribution, suggesting the need of further empirical work to estimate the degree of firm heterogeneity.

Gains from trade in used goods: Evidence from automobiles

I investigate the welfare effects of trade liberalization by exploiting a natural policy experiment in the economy of Cyprus. A 1993 law relaxed import restrictions on used vehicles and enabled the importation of second-hand Japanese automobiles into the country. This led to a dramatic shift of consumer purchases from new to used cars and a substantial expansion of the overall market. Welfare gains computed from a structural demand system average $2000 per purchaser per year over a four-year period after the policy change. The findings are suggestive of the potential for substantial gains from liberalizing trade in used goods.

A Meta-Analysis of General and Partial Equilibrium Simulations of Trade Liberalisation under the Doha Development Agenda

Model-based simulation of welfare effects is commonly used to make a case for trade liberalisation and to inform participants a nd stakeholders in trade negotiations. However, the simulated welfare effects of trade liberalisation vary greatly, even across studies that model similar liberalisation scenarios. This

Modelling fish trade liberalisation: Does fish trade liberalisation result in welfare gains or losses?

Recent research has on the basis of general equilibrium models warned that trade liberalisation in non-optimally managed renewable resources might cause over-exploitation and reduced steady-state welfare. Welfare effects of trade liberalisation in open access and optimal management are found case specific and dependent on factors such as the country's status as importer or exporter, the state of the fish stocks and the size of the countries on the world market. The present paper develops an alternative partial equilibrium framework capable of identifying welfare effects of fish trade liberalisation also in the presence of complex but realistic management schemes, such as regulated open access and regulated restricted access. The case dependency known from the general equilibrium analysis is confirmed, but the introduction of realistic fisheries management schemes in the partial equilibrium model extended this case dependency. The welfare effect of trade liberalisation in an exporter country is negative under open access, but was found positive under regulated restricted access in the present paper.