Trade diversion is reversed in the long run

Takumi Naito

No 18-00008, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive.

JEL-codes: O1 O2 (search for similar items in EconPapers)
Date: 2018-08-24
New Economics Papers: this item is included in nep-int
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Journal Article: Trade diversion is reversed in the long run (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:vuecon-sub-18-00008

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