Global Gains from Reduction of Trade Costs

TOPIC: 

GLOBAL GAINS FROM REDUCTION OF TRADE COSTS 

ABSTRACT

We derive a simple equation to calculate the global welfare impact of the simultaneous reduction of trade costs between multiple country-pairs. Interestingly, we find that we obtain the same equation for a broad class of trade models. Moreover, balanced trade is mostly not required for the equation to work, nor does trade elasticity need to be known. The global welfare impact only depends on two sets of statistics: (i) the ratio of bilateral trade flow between each pair of trading partners and global income; and (ii) the percentage change in exporting cost for each pair of trading partners. The class of models includes the many-country, many-good neo-classical-type model, and the Armington-type models such as Eaton and Kortum (2002), Krugman (1980), Melitz (2003) with Pareto distribution of firm productivity, and the extensions of these models to the multi-country and multi-sector case, multi-factor production technology, multi-stage production, the existence of intermediate good and the existence of a non-traded good sector in each country. We then apply the equation to estimate the global welfare impact of the worldwide reduction of international shipping costs in the last five decades. 

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Presenter

Edwin Lai
Hong Kong University of Science and Technology

Research Fields

International trade, Industrial organization, Economic growth and development, Technological change.

Date:

6 September 2013 (Friday)

Time: 

3.45pm - 5.15pm 

Venue: 

Seminar Room 5.1, Level 5
School of Economics 
Singapore Management University
90 Stamford Road
Singapore 178903