Trade Adjustment Dynamics and the Welfare Gains from Trade

47 Pages Posted: 24 Apr 2014

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Horag Choi

Monash University, Economics Department

Kim J. Ruhl

New York University (NYU), Leonard N. Stern School of Business - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 2014

Abstract

We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows.

Keywords: Sunk cost, fixed cost, establishment heterogeneity, tariff, welfare

Suggested Citation

Alessandria, George A. and Choi, Horag and Ruhl, Kim Joseph, Trade Adjustment Dynamics and the Welfare Gains from Trade (April 2014). NYU Working Paper No. 2451/33603. Available at SSRN: https://ssrn.com/abstract=2428709

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
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Horag Choi

Monash University, Economics Department ( email )

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Australia
+61-3-9903-2848 (Phone)

Kim Joseph Ruhl

New York University (NYU), Leonard N. Stern School of Business - Department of Economics ( email )

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Suite 9-160
New York, NY NY 10012
United States

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