A Theoretical Framework With Application

GAINS FROM TRADE

Gains from trade

(1) GAINS FROM MOVING TO FREE TRADE FROM AUTARKY

THE GAINS FROM TRADE: DISSECTING THE CAUSES

• Differences between countries in the relative scarcity of goods

• Reflected in differences in (relative) prices in the absence of trade (autarky relative prices)

• Due to • Supply side differences

• Relative productivities

• Relative factor endowments

• Demand side differences• Differences in tastes

(2) GAINS FROM REMOVING DOMESTIC TRADE BARRIERS

(3) GAINS FROM TRANSPORT-COST REDUCTION (OR LIBERALIZATION) ABROAD

Note: Direction and magnitude of effect depends exclusively on the impact on the terms of trade (price of exports relative to price of imports)

HOW LARGE ARE THE GAINS FROM TRADE?THE CASE OF TARIFF LIBERALIZATION

THE GAINS FROM TRADE:ILLUSTRATIVE CALCULATIONS

THE GAINS FROM TRADE:ESTIMATES FROM SIMULATION MODELS

GAINS FROM TRADE: THREE APPROACHES• Three sets of simulations

• Own liberalization• Others’ liberalization• PTAs

• Size of effects depends on• Share of trade in GDP• Extent of market segmentation or price differential

• Terms of trade effects• They mute the gains from liberalization in some large countries (e.g.,

the U.S.)• They are responsible for some of the “perverse” (negative) effects in

the Table.

MAGNITUDE OF ACTUAL TARIFFS

Source: Bouet 2008

MAGNITUDE OF ACTUAL TARIFFS

Source: Bouet 2008

Estimates from World Bank referring to just tariff removal

A MORE RECENT STUDY (IFPRI)

Source: Bouet 2008

EMPIRICAL QUESTIONS• Why do the Bradford and Lawrence numbers differ so much from the World Bank

and IFPRI estimates?• What do these numbers imply for the magnitude of benefits for continued trade

liberalization (e.g., Doha)?• What features of the real world may lead us to inflate these numbers (or reduce

them)?• Scale economies: but can cut both ways• Externalities, imperfect competition and other market failures that may be alleviated or

aggravated by trade openness• Gains from product variety• Static versus dynamic efficiency gains (trade => productivity growth over time?)• Samuelson’s riposte: the terms-of-trade effects of other nations’ productivity gains• Peterson Institute: US richer by $1 trillion a year due to “past globalization”• Considerations of employment/unemployment?

Does capital flow from rich to poor nations?

Source: Prasad, Rajan and Subramanian (2006)

TRADE POLICY AND DISTRIBUTION: NOT EVERYONE WINS

From Mankiw

WILL EVERYONE’S WAGES BE SET IN SHANGHAI?

Source: Leamer

CAN TRADE EQUALIZE REAL WAGES ACROSS COUNTRIES• Head-to-head competition in standardized industrial products

• role of labor productivity

• Differentiated products• Degree of substitutability in demand

• Relationship-specificity of production

• Non-competing production• Soccer balls for high-tech products

• Do non-traded sectors shield workers from the forces of global competition?

TRADE: MAJOR ISSUES

• Trade and jobs• Job displacement versus unemployment

• Trade affects structure of employment, not amount

• But can cause unemployment in the short-run?

• The role of “Keynesian

• Adjustment costs• Differ from the “permanent” distributional effects discussed earlier

• Distributional effects go beyond any adjustment costs

POLICY QUESTIONS• The analogy with technological change

• objections?

• Is there such a thing as “unfair” trade?• Foreign country subsidies

• Worker repression in foreign country

• Procedural fairness

• Should we compensate losers?

• What criteria should we use?