NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Long and Short (Run) of Trade Elasticities

Christoph E. Boehm, Andrei A. Levchenko, Nitya Pandalai-Nayar

NBER Working Paper No. 27064
Issued in April 2020
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment

We propose a novel approach to estimate the trade elasticity at various horizons. When large countries change Most Favored Nation (MFN) tariffs, small trading partners that are not in a preferential trade agreement experience plausibly exogenous tariff changes. The differential growth rates of imports from these countries relative to a control group — countries not subject to the MFN tariff scheme — can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2017, and estimate the trade elasticity at short and long horizons using local projections (Jordà, 2005). Our main findings are that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about –0.7, and the long-run elasticity ranges from –1.5 to –2. The welfare-relevant long-run trade elasticity is about –0.6. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial market penetration costs to accessing new customers.

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Document Object Identifier (DOI): 10.3386/w27064

 
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