DP5348 Can Comparative Advantage Explain the Growth of US Trade?
We present a dynamic comparative advantage model in which moderate reductions in import tariffs can generate sizable increases in trade volumes over time. A fall in import tariffs has two effects on the volume of trade. First, for given factor endowments, it raises the degree of specialization of countries, leading to a larger volume of trade in the short run. Second, it raises the factor price of each country's abundant production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. A simulation exercise shows that a fall in import tariffs over time produces a disproportional increase in the trade share of output as in the data. Even when elasticities of substitution are not particularly high, moderate reductions in trade barriers lead to large trade volumes over time.
