Essay on The Workhorse Quantitative Models Of International Trade

Essay on The Workhorse Quantitative Models Of International Trade

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The workhorse quantitative models of international trade imply that the aggregate effects of trade barriers and the welfare gains from trade can be inferred from data on aggregate bilateral trade flows. Some of these models feature rich micro-level market structures, and all of them have the desirable feature that the amount of data required to make predictions regarding aggregate
variables – such as income, welfare, and trade flows – is quite low. As Arkolakis et al. (2012) have shown, for a large class of such models, the welfare gains from trade are a function of only the share of domestic goods in aggregate expenditure and the elasticity of bilateral trade flows with respect to variable trade costs, regardless of the underlying micro-level structure of the model. However, the restrictions of these models which make them so analytically tractable and conducive to quantitative analysis require the implicit assumption either that there is no trade arising from comparative advantage across products or that countries’ patterns of comparative advantage take a very special form, both of which imply that the effect of trade barriers on aggregate trade flows
is independent of the composition of those trade flows.
In this paper, I relax these restrictions, developing a model with the flexibility to allow for arbitrary patterns of comparative advantage across products for every country, while maintaining much of the analytical tractability of aggregate models. I show that these patterns of product-level comparative advantage can interact in non-trivial ways to influence the effects of trade barriers on aggregate bilateral trade flows and welfare. Using data on product-level bilateral trade flows, I find countries’ patterns of comparative...

... middle of paper ...

advantage products. In the case of the welfare gains from trade relative to autarky, this implies that countries whose domestic trade flows are concentrated in relatively few products experience greater gains from trade. It turns out that this tends to be the case for low-income countries. I also consider the welfare effects of the growth of Chinese exports and find that the gains from
trade are highly dependent on the similarities of countries’ patterns of comparative advantage with China’s in foreign markets. By contrast, an aggregate model predicts that the gains from China’s growth are driven by countries’ geographical proximity to China because, if the relative prices of countries’ exports are assumed to be affected uniformly, countries benefit from the lower prices of
Chinese exports in proportion to the share of their expenditure devoted to Chinese goods.

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