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Trade Policy is Real News: Theory and Evidence

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Abstract
We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further- more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model.

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  • George Alessandria & Carter Mix, 2021. "Trade Policy is Real News: Theory and Evidence," International Finance Discussion Papers 1330, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1330
    DOI: 10.17016/IFDP.2021.1330
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    Cited by:

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    2. Henrique Correa da Cunha & Vikkram Singh & Shengkun Xie, 2022. "The Determinants of Outward Foreign Direct Investment from Latin America and the Caribbean: An Integrated Entropy-Based TOPSIS Multiple Regression Analysis Framework," JRFM, MDPI, vol. 15(3), pages 1-22, March.
    3. George Alessandria & Oscar Avila, 2023. "Trade Integration, Industry Reallocation, and Welfare in Colombia," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 649-687, September.

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    More about this item

    Keywords

    Trade Policy; Business Cycles; Sunk Costs; Gains from Trade;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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