The potential of carbon tariffs to restore competitiveness, avoid carbon leakage, and reduce global carbon emissions has been prominently discussed. To analyze the effects of carbon tariffs on trade, ...welfare, and carbon emissions, we develop a multi-sector, multi-factor structural gravity model that allows an analytical and quantitative decomposition of the emission changes into scale, composition, and technique effects. Our analysis shows that carbon tariffs are able to reduce world emissions, mainly via altering the production composition within and across countries, hence reducing carbon leakage. This reduction comes at the cost of lower world trade flows and lower welfare, especially for developing countries. Applying our framework to investigate the effects of the emission reduction pledges made by the Annex I countries in the Copenhagen Accord, we find that combining national emission targets with carbon tariffs would increase the Accord's effectiveness by lowering the leakage rate from 13.4% to 4.1% (with bootstrapped 95% confidence intervals of 11.5, 15.8 and 3.3, 4.9, respectively).
We propose a simple method to identify the effects of unilateral and non-discriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model. Specifically, we ...argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra-national trade flows. The use of intra-national sales allows identification of the effects of non-discriminatory trade policies such as most favoured nation tariffs, even in the presence of exporter and importer fixed effects. A byproduct of our approach is that it can be used to recover estimates of the trade elasticity, a key parameter for quantitative trade models. We demonstrate the effectiveness of our techniques in the case of most favoured nation tariffs and “time to export” as representative non-discriminatory determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country-specific characteristics as well as any non-trade policies.
Using a novel common econometric specification, we examine the measurement of three important effects in international trade that historically have been addressed largely separately: the (partial) ...effects on trade of economic integration agreements, international borders, and bilateral distance. First, recent studies focusing on precise and unbiased estimates of effects of economic integration agreements (EIAs) on members׳ trade may be biased upward owing to inadequate control for time-varying exogenous unobservable country-pair-specific changes in bilateral export costs (possibly decreasing the costs of international relative to intranational trade); we find evidence of this bias using a properly specified gravity equation. Second, our novel methodology yields statistically significant estimates of the declining effect of “international borders” on world trade, now accounting for endogenous EIA formations and unobserved country-pair heterogeneity in initial levels. Third, we confirm recent evidence providing a solution to the “distance-elasticity puzzle,” but show that these estimates of the declining effect of distance on international trade are biased upward by not accounting for endogenous EIA formations and unobserved country-pair heterogeneity. We conclude our study with numerical general equilibrium comparative statics illustrating a substantive difference on trade effects of EIAs with and without allowance for the declining effects of international borders on world trade.
This paper characterizes analytically the optimal tariff of a large one-sector economy with monopolistic competition and firm heterogeneity in general equilibrium, thereby extending the small-country ...results of Demidova and Rodríguez-Clare (JIE, 2009) and the homogeneous firms framework of Gros (JIE, 1987). The optimal tariff internalizes a mark-up distortion, an entry distortion, and a terms‐of-trade externality. It is larger when the dispersion of firm-level productivities is higher, and the country's relative size or relative average productivity is bigger. Furthermore, in the two-country Nash equilibrium, tariffs turn out to be strategic substitutes. Small or poor economies set lower Nash tariffs than large or rich ones. Lower transportation costs or smaller fixed market entry costs induce higher equilibrium tariffs and larger welfare losses relative to the case of zero tariffs. Similarly, cross-country productivity or size convergence, and higher firm-level productivity dispersion increase the global welfare loss due to non-cooperative tariff policies. These results suggest that post WWII trends have increased the relative merits of the WTO.
This paper introduces and describes the new International Trade and Production Database that can be used for statistical estimation (ITPD-E). The ITPD-E contains consistent data on international and ...domestic trade for 243 countries, 170 industries, and 17 years. The data are constructed at the industry level covering agriculture, mining, energy, manufacturing, and services, so that the ITPD-E describes nearly completely the traded sectors of each economy. The time period covered commences in 2000 and extends to 2016. The ITPD-E is constructed using reported administrative data and intentionally does not include information estimated by statistical techniques. This feature and the unprecedented coverage of industries and countries with consistent international and domestic trade data renders the ITPD-E well suited for estimation of economic models, e.g., the gravity model of trade. We demonstrate the usefulness of the ITPD-E by running standard gravity regressions.
A large class of models with CES utility and iceberg trade costs are now known to generate isomorphic “gravity equations.” Economic interpretations of these gravity equations vary in terms of two ...basic elements: the exporter's “mass” variable and the elasticity of trade with respect to true ad valorem “trade costs.” In this paper, we offer three potential contributions. First, we formulate and estimate a structural gravity equation based on the standard Krugman model of monopolistic competition and increasing returns. In the context of this model, a key parameter, the elasticity of substitution in consumption (σ), can be estimated precisely – even without observable true ad valorem trade-cost measures – using exporter's population and observable variables that influence trade costs. Second, in the empirical context of the well-known McCallum Canadian–U.S. “border puzzle,” our approach – allowing estimation of σ – yields considerably different general equilibrium comparative static trade-flow and economic welfare effects than those in an Armington endowment economy and assumed values of σ. Moreover, our predicted trade flows and GDPs are highly correlated with their respective observed values in the case of bilaterally symmetric or asymmetric Canadian–U.S. border effects. Third, a Monte Carlo analysis confirms unbiased and precise estimates of all coefficients, the elasticity of substitution, and comparative statics using our approach.
► We formulate a structural gravity equation based upon a Krugman-type trade model. ► The elasticity of substitution can be estimated without ad valorem trade-cost data. ► We implement the model with empirical data and using Monte Carlo simulations. ► We estimate unbiased and precise coefficients, elasticities, and comparative statics.
The quantitative trade literature often does not distinguish between tariffs and iceberg trade costs. This paper explores qualitatively and quantitatively how this distinction matters for the gains ...from trade. Most obviously, tariffs generate government revenues, while icebergs do not. In models of monopolistic competition, they may also affect entry. Finally, depending on whether they are modeled as cost or demand shifters, tariffs may have different implications on profits, entry, and, in turn, on the elasticity of trade flows and welfare. We show that the welfare formula by Arkolakis, Costinot, and Rodriguez-Clare (2012) requires qualification, even in the simple single-sector case. We find that the quantitative welfare consequences of cost- versus demand-shifting tariffs can be important.
•We investigate the role of tariffs in the framework of Costinot and Rodriguez-Clare (2014).•We study the difference of import tariffs that act either as demand shifters or cost shifters.•We highlight the role of tariff revenue and selection for the welfare effects of this modeling choice.•The tariff modeling choice can have important quantitative consequences.
Structural new trade theory models have never been used to evaluate and quantify the role of preferential trade agreement (PTA) membership for trade in a way which is consistent with general ...equilibrium. Apart from filling this gap, the present paper aims at delivering an empirical model which takes into account both that PTA membership is endogenous and that the world matrix of bilateral trade flows contains numerous zero entries. These features are treated in an encompassing way by means of (possibly two-part) Poisson pseudomaximum likelihood estimation with endogenous binary indicator variables in the empirical model.
Critics of the proposed Transatlantic Trade and Investment Partnership (TTIP) dismiss its potential welfare gains as small compared with its risks. We contribute to this debate by investigating the ...driving forces behind the magnitudes of the estimated welfare gains using the structurally estimated general equilibrium trade model by Egger and Larch (2011) for 173 countries. In our baseline scenario, the TTIP amounts to a reduction of ad valorem trade costs across the Atlantic between 16 and 26 percentage points. We find that the TTIP could yield substantial gains for the EU (3.9%), the United States (4.9%), and the world (+1.6%). While welfare gains are heterogeneous within the EU, the TTIP does not systematically favour richer or more central member states. The majority of third countries would be negatively affected (0.9% on average). We identify as key drivers for the magnitudes of the welfare effects different assumptions about trade cost specifications, about the assumed trade cost reducing potential of the TTIP, about different levels of aggregation, and about the regulatory spill-overs of the TTIP on third countries. Our insights on the drivers for the welfare effects help to understand differences across current evaluations of the TTIP.
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