Global Gains from Reduction of Trade Costs

42 Pages Posted: 16 Jan 2013 Last revised: 30 Nov 2013

See all articles by Edwin L.-C. Lai

Edwin L.-C. Lai

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Haichao Fan

Hong Kong University of Science & Technology (HKUST)

Han Steffan Qi

Hong Kong University of Science & Technology (HKUST)

Date Written: September 26, 2013

Abstract

We derive a simple equation to calculate the global welfare impact of the simultaneous reduction of trade costs between multiple country-pairs. Interestingly, we find that we obtain the same equation for a broad class of trade models. Moreover, balanced trade is mostly not required for the equation to work, nor does trade elasticity need to be known. The global welfare impact only depends on two sets of statistics: the ratio of bilateral trade flow between each pair of trading partners and global income; and the percentage change in exporting cost for each pair of trading partners. The class of models includes the many-country, many-good neo-classical-type model, and the Armington-type models such as Eaton and Kortum (2002), Krugman (1980), Melitz (2003) with Pareto distribution of firm productivity, and the extensions of these models to the multi-country and multi-sector case, multi-factor production technology, multi-stage production, the existence of intermediate good and the existence of a non-traded good sector in each country. We then apply the equation to estimate the global welfare impact of the worldwide reduction of international shipping costs in the last five decades.

Keywords: global welfare, trade cost, gains from trade

JEL Classification: F10, F12, F13

Suggested Citation

Lai, Edwin L.-C. and Fan, Haichao and Qi, Han Steffan, Global Gains from Reduction of Trade Costs (September 26, 2013). Available at SSRN: https://ssrn.com/abstract=2201360 or http://dx.doi.org/10.2139/ssrn.2201360

Edwin L.-C. Lai (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Haichao Fan

Hong Kong University of Science & Technology (HKUST) ( email )

Department of Economics
Clear Water Bay
Kowloon, 999999
Hong Kong

Han Steffan Qi

Hong Kong University of Science & Technology (HKUST) ( email )

Department of Economics
Clear Water Bay
Kowloon, 999999
Hong Kong

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