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Global gains from reduction in trade costs

Author

Listed:
  • Edwin L.-C. Lai

    (Hong Kong University of Science and Technology)

  • Haichao Fan

    (Fudan University)

  • Han Steffan Qi

    (Hong Kong Baptist University)

Abstract

We develop a simple formula for computing the global welfare effect of reduction in bilateral trade costs, such as shipping costs or the costs of administrative barriers to trade. The formula is applicable to a broad class of perfect competition and monopolistic competition models and settings, including perfect competition with multi-stage production and Melitz’s (Econometrica 71(6):1695–1725, 2003) model with general firm productivity distribution. We prove that the underlying mechanism is the envelope theorem. We then extend our analysis to models with non-constant markups. Finally, we carry out some empirical applications to show the user-friendliness of the formula.

Suggested Citation

  • Edwin L.-C. Lai & Haichao Fan & Han Steffan Qi, 2020. "Global gains from reduction in trade costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 313-345, July.
    • Handle: RePEc:spr:joecth:v:70:y:2020:i:1:d:10.1007_s00199-019-01211-w
    DOI: 10.1007/s00199-019-01211-w
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    Cited by:

    1. Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
    2. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    3. Treb Allen & Costas Arkolakis & Yuta Takahashi, 2020. "Universal Gravity," Journal of Political Economy, University of Chicago Press, vol. 128(2), pages 393-433.
    4. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    5. Pengfei Wang & Danyang Xie, 2018. "Trade, Sectorial Reallocation, and Growth," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 49-74, May.
    6. Lukas Albrecht & Trevor Tombe, 2016. "Internal trade, productivity and interconnected industries: A quantitative analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 237-263, February.

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    More about this item

    Keywords

    Global welfare; Trade cost; Gains from trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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