CFCM Seminar: George Alessandria (University of Rochester)

Trade policy is real news: A quantitative analysis of past, present, and future trade costs (with Carter Mix)

Abstract: We evaluate the aggregate effects of changes in trade barriers when trade responds gradually to changes in trade policy from a dynamic exporting decision and trade pol-icy changes can be implemented with a lag. Our model offers insights into how the timing of changes in trade barriers affect the economy and how business cycle shocks affect trade. We find a fall in current trade barriers is expansionary while a decline in future trade barriers is recessionary on impact. Furthermore, canceling agreed upon declines in future trade barriers is expansionary in the short-run but substantially lowers medium-run growth. We capture the growth and trade factors driving the economy with movements in productivity, investment efficiency, the labor wedge, and trade costs. Business cycle shocks generate persistent fluctuations in trade flows as trade lags the demand for tradables, making trade-based approaches to measure trade costs suspect. We estimate the model to match US aggregate fluctuations and trade integration since1970. Our estimation yields a time series of trade costs and expected future trade costs. Forward-looking variables such as export participation help to identify future trade costs. Our model is well-suited to studying alternative unilateral and bilateral changes in current and future trade barriers being contemplated.