DP10962 Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades

Author(s): Lorenzo Caliendo, Robert Feenstra, John Romalis, Alan M. Taylor
Publication Date: November 2015
Date Revised: June 2020
Keyword(s): bilateralism, gains from trade, input- output linkages, monopolistic competition, multilateralism, trade policy
JEL(s): F10, F11, F12, F13, F15, F17, F60, F62
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10962

We show in a multi-sector, heterogeneous-firm trade model that the effect of tariffs on entry, especially in the presence of production linkages, can reverse the traditional positive optimal tariff argument. We then use a new tariff dataset, and apply it to a 189-country, 15-sector version of our model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 1990-2010. We find that the impact on firm entry was larger in Advanced relative to Emerging and Developing countries; that slightly more than three-quarters of the total gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round), with two-thirds of the remainder due to preferential trade agreements and one third due to the hypothetical movement to free trade; and that free trade would bring gains for some Emerging and Developing countries, in particular. Ten economies in our sample - including China, Hong Kong, India, Israel, Vietnam, and five more remote countries - would have benefited from going beyond free trade to subsidizing their imports in 1990, since their optimal tariffs are negative.