A simple method to ex-ante quantify the unobservable effects of trade liberalization and trade protection

Mario Larch, Shawn Tan and Yoto Yotov

Journal of Comparative Economics, 2023, vol. 51, issue 4, 1200-1213

Abstract: We propose a simple and flexible econometric approach to quantify ex-ante the impact of comprehensive trade liberalization or protection with the structural gravity model. Specifically, we argue that the difference between the estimates of border indicator variables for affected and non-affected countries can be used to measure unobservable changes in bilateral trade costs in response to hypothetical policy changes. To demonstrate the effectiveness of our methods, we focus on the integration between the countries from the Central European Free Trade Agreement (CEFTA) and the European Union (EU); an important policy application that has not been studied before due to a lack of data. We overcome this challenge by utilizing a new dataset on trade and production that covers all EU countries and all CEFTA members (except for Kosovo). The partial equilibrium estimates that we obtain confirm the validity of our methods, while the corresponding general equilibrium effects point to significant and heterogeneous potential gains for the CEFTA countries from joining the EU. The proposed methods are readily applicable to other applications, e.g., Brexit or joining the World Trade Organization (WTO), and can also be extended to ex-post analysis.

Keywords: Unobserved trade costs; Trade policy; Structural gravity; CEFTA; EU (search for similar items in EconPapers)
JEL-codes: F1 F10 F13 F14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:51:y:2023:i:4:p:1200-1213

DOI: 10.1016/j.jce.2023.06.006

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