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

62 Pages Posted: 7 Dec 2015

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: December 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.

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 (December 2015). NBER Working Paper No. w21768, Available at SSRN: https://ssrn.com/abstract=2699997

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

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HOME PAGE: http://faculty.som.yale.edu/lorenzocaliendo

Robert C. Feenstra

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

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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
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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)

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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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