Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades

65 Pages Posted: 1 Dec 2015 Last revised: 16 Jun 2020

See all articles by Lorenzo Caliendo

Lorenzo Caliendo

Yale University - School of Management

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

John Romalis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Alan M. Taylor

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: November 2015

Abstract

We show in a multi-sector, heterogeneous-firm trade model that the effect of tariffs on entry, especially in the presence of production linkages, can reverse the traditional positive optimal tariff argument. We then use a new tariff dataset, and apply it to a 189-country, 15-sector version of our model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 1990-2010. We find that the impact on firm entry was larger in Advanced relative to Emerging and Developing countries; that slightly more than three-quarters of the total gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round), with two-thirds of the remainder due to preferential trade agreements and one third due to the hypothetical movement to free trade; and that free trade would bring gains for some Emerging and Developing countries, in particular. Ten economies in our sample - including China, Hong Kong, India, Israel, Vietnam, and five more remote countries - would have benefited from going beyond free trade to subsidizing their imports in 1990, since their optimal tariffs are negative.

Keywords: bilateralism, gains from trade, input- output linkages, monopolistic competition, multilateralism, trade policy

JEL Classification: F10, F11, F12, F13, F15, F17, F60, F62

Suggested Citation

Caliendo, Lorenzo and Feenstra, Robert C. and Romalis, John and Taylor, Alan M., Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades (November 2015). CEPR Discussion Paper No. DP10962, Available at SSRN: https://ssrn.com/abstract=2697595

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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HOME PAGE: http://faculty.som.yale.edu/lorenzocaliendo

Robert C. Feenstra

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
916-752-9240 (Phone)
916-752-9382 (Fax)

National Bureau of Economic Research (NBER)

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John Romalis

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alan M. Taylor

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org

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