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: April 2017
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 use a multi-sector, heterogeneous-firm trade model to study the trade and welfare effects of commercial policy. We show 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 more than 90% of the gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round); and that for some countries, particularly some Emerging and Developing countries, there are additional gains from a further move to complete free trade. The countries gaining from the elimination of tariffs have a strong rank correlation with those that gain from a negative optimal tariff, which comprise one-quarter of the countries in the world.