Heterogeneous effects of economic integration agreements

Scott Baier, Jeffrey Bergstrand and Matthew Clance

Journal of Development Economics, 2018, vol. 135, issue C, 587-608

Abstract: It is now widely accepted that economic integration agreements (EIAs) and other trade-policy liberalizations contribute to nations' economic growth and development and help alleviate poverty. However, the economic effects of such policies vary across countries' economic structures; for instance, developing countries face higher fixed trade costs (partly due to higher government border-crossing costs and weaker port infrastructures). We offer three potential contributions. First, we extend a standard Melitz general equilibrium trade model with firm heterogeneity to show how variable-cost and fixed-cost “trade elasticities” associated with trade liberalizations are heterogeneous and endogenous to levels of country-pairs' bilateral policy and non-policy, variable and fixed trade costs – even allowing for CES preferences and an untruncated Pareto distribution of productivities. Using associated comparative statics, we provide several explicit predictions of the heterogeneous (variable- and fixed-cost) bilateral extensive-margin, intensive-margin, and trade elasticities. Second, we provide empirical support for the theoretical hypotheses. Trade elasticities vary across particular settings. Third, we demonstrate the relevance of these theoretical and empirical results for ex ante trade-flow predictions of potential EIAs. For instance, we show that a 10 percent lower average per capita income of a country-pair is associated with a 60 percent higher partial EIA effect. Moreover, we show empirically that 95–99 percent of the welfare (or probability) estimates of EIA liberalizations between 1,358 North-North, North-South, and South-South country-pairs can be explained by our heterogeneous EIA partial treatment effects.

Keywords: International trade; Economic integration agreements; Gravity equation; Welfare (search for similar items in EconPapers)
JEL-codes: F1 F13 F63 O10 O24 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304387818304644
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:135:y:2018:i:c:p:587-608

DOI: 10.1016/j.jdeveco.2018.08.014

Access Statistics for this article

Journal of Development Economics is currently edited by M. R. Rosenzweig

More articles in Journal of Development Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().