An Inconvenient Truth: Welfare Losses From Asymmetric Reductions in Transportation Costs

Wisarut Suwanprasert

International Economic Journal, 2023, vol. 37, issue 1, 71-81

Abstract: Recent empirical studies find that the magnitudes of reductions in bilateral shipping costs are asymmetric within country pairs. Motivated by these findings, I study the welfare effects of asymmetric reductions in transportation costs in Helpman and Itskhoki's [(2010). Labour market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137] model of international trade with heterogeneous firms and frictional labor markets. I show that sufficiently asymmetric reductions in bilateral transportation costs result in welfare losses in the importing country, while a uniform reduction in the bilateral transportation costs of both imports and exports always benefits both countries. This paper raises a cautionary note that the phrase ‘welfare gains from trade liberalization’ implicitly assumes an ‘approximately equal’ reduction in transportation costs.

Date: 2023
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DOI: 10.1080/10168737.2023.2169868

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