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Intersectoral distortions and the welfare gains from trade

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  • Tomasz Święcki

Abstract

How large are the welfare gains from trade when factors are misallocated due to domestic distortions? In this paper I provide a theoretical and a quantitative answer to this question by incorporating distortions to the allocation of labor across sectors into a Ricardian trade model. Applying the model to data for a diverse set of countries I find that (1) gains from trade for net exporters in sectors with low marginal product of labor are overstated in models that abstract from intersectoral distortions since in those countries trade tends to exacerbate the effect of domestic frictions; (2) the gains from implementing optimal tariffs are substantial in the presence of domestic frictions because trade policy can offset some of their negative effect; and (3), mitigating domestic frictions has a much larger potential payoff for countries when they are open to international trade

Suggested Citation

  • Tomasz Święcki, 2017. "Intersectoral distortions and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 104(C), pages 138-156.
    • Handle: RePEc:eee:inecon:v:104:y:2017:i:c:p:138-156
    DOI: 10.1016/j.jinteco.2016.10.011
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    Cited by:

    1. Manova, Kalina & Berthou, Antoine & Sandoz, Charlotte & Chung, John Jong-Hyun, 2019. "Trade, Productivity and (Mis)allocation," CEPR Discussion Papers 14203, C.E.P.R. Discussion Papers.
    2. Piyush Panigrahi, 2021. "Endogenous Spatial Production Networks: Quantitative Implications for Trade and Productivity," CESifo Working Paper Series 9466, CESifo.
    3. Akihito Asano & Michiru Sakane, 2023. "The welfare effects of partial tariff reduction in Japan," Working Papers e177, Tokyo Center for Economic Research.
    4. Piyush Panigrahi, 2021. "Endogenous Spatial Production Networks: Quantitative Implications for Trade & Productivity," Cowles Foundation Discussion Papers 2314, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    Keywords

    Gains from trade ; Labor distortions ; Optimal tariffs;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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