Scott L. Baier

The growth of world trade: tariffs, transport costs, and income similarity

Abstract In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327–377] stated that the answer to the fundamental question “Why has world trade grown?” remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [Helpman, E., 1987. Imperfect competition and international trade: Evidence from fourteen industrial countries. Journal of the Japanese and International Economies 1 (1) 62–81] and Hummels and Levinsohn (1995) [Hummels, D., Levinsohn, J., 1995. Monopolistic competition and international trade: Reconsidering the evidence. Quarterly Journal of Economics 110 (3) 799–836] is increased similarity of countries’ incomes. The purpose of this study is to disentangle from one another (and from income growth) the relative effects of transport-cost reductions, tariff liberalization, and income convergence on the growth of world trade among several OECD countries between the late 1950s and the late 1980s. In the context of the model, the empirical results suggest that income growth explains about 67%, tariff-rate reductions about 25%, transport-cost declines about 8%, and income convergence virtually none of the average world trade growth of our post World War II sample.

International Trade, Regional Free Trade Agreements, and Economic Development

In 1991, Krugman illustrated that natural (regional) free trade agreements (FTAs) are likely to be welfare-enhancing if intercontinental transport costs are prohibitively high, but are likely to be welfare-reducing if such costs are zero. In 1995, Frankel, Stein and Wei extended the analysis to consider positive but nonprohibitive transport costs. This paper extends these models to allow for countries of different economic size. Large countries will tend to have higher relative wages, influencing the relative gains and losses from natural FTAs. For even modest differences in size, intracontinental FTAs are welfare-enhancing for larger countries, regardless of strong preferences for diversity or low intercontinental transport costs. Copyright 1997 by Blackwell Publishing Ltd