Trade Adjustment Dynamics and the Welfare Gains from Trade

George Alessandria, Horag Choi, Kim Ruhl

NBER Working Paper No. 20663
Issued in November 2014, Revised in August 2018
NBER Program(s):International Finance and Macroeconomics, International Trade and Investment

We study how the transitions following a trade reform are shaped by the time it takes for new exporters to grow in the export market. We introduce time and risk into the fixed-variable cost tradeoff central to general equilibrium heterogeneous firm trade models: Investing in exporting gradually and stochastically lowers the costs of exporting. The model captures the tendency of new exporters to export on a small scale, to have low survival rates, and to take time to grow into large exporters. In the model, aggregate trade dynamics arise from producer-level decisions to invest in lowering their future variable export costs, and tariff reforms generate time-varying trade elasticities. We show that the gains from reducing tariffs arise from substituting away from firm creation and towards export capacity. This is in stark contrast to the static models that dominate the literature. The strength of this substitution is determined largely by the size of new exporters and their ability to grow into successful exporters. We calibrate the model and estimate the welfare gains from reducing tariffs, which differ substantially from the long-run changes in consumption or trade. We show that the welfare gain cannot be recovered from a static trade model or from formulas based on those models. Because aggregate trade grows slowly, the long-run effects are strongly discounted and, thus, are not the key determinants of the welfare gains from a change in trade policy. We also find that policy prescriptions based on static models can predict a loss from trade reform when our dynamic model predicts a gain.

download in pdf format
   (638 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20663

Users who downloaded this paper also downloaded* these:
Simonovska and Waugh w20495 Trade Models, Trade Elasticities, and the Gains from Trade
Foley and Manova w20634 International Trade, Multinational Activity, and Corporate Finance
Alessandria, Choi, Kaboski, and Midrigan w20616 Microeconomic Uncertainty, International Trade, and Aggregate Fluctuations
Fajgelbaum and Khandelwal w20331 Measuring the Unequal Gains from Trade
Costinot and Vogel w20585 Beyond Ricardo: Assignment Models in International Trade
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us