Research

Countries trade more if they liberalized their trade relationship earlier. We derive a gravity equation featuring this path dependence due to sunk market-access costs that generate incumbency effects. We provide supporting evidence for the underlying mechanism and derive an augmented ACR formula (Arkolakis et al., 2012) for the gains from trade that accounts for incumbency effects. A quantification suggests our mechanism explains up to 25% of countries’ home shares, and the gains from trade are, on average, 10% larger when allowing for incumbency effects. The analysis further reveals novel distributional effects of trade, boosting real wages but reducing profits.

Estimating trade costs is key to understanding the welfare effects of trade liberalizations. Cost minimization implies that the triangle inequality (TI) of international trade costs must hold for any three countries to avoid cross-border arbitrage. We show that re-routing opportunities might arise when trade costs change because a shipment through an intermediary becomes cheaper. The TI captures such re-routing opportunities. However, standard approaches to calculating the gains from trade liberalizations ignore the TI. We outline an estimation routine that is model-consistent and respects the TI. Counterfactual exercises suggest that the welfare gains from re-routing after trade liberalizations can be substantial.

This paper explores the impact of changing trade barriers on the stability and formation of international trade relationships. It builds a general equilibrium model capturing that most countries have only a few active trading partners within disaggregated industries. In this framework, shocks impact trade flows not only at the intensive margin – as in standard gravity models – but also at the extensive margin; i.e., the set of trading partners responds endogenously to shocks. In turn, this allows for measuring a country pair's resilience to shocks and identifying alternatives to key trading partners. I develop a novel calibration strategy to fit data on industry-level bilateral trade flows and aggregate production. Counterfactual exercises suggest that accounting for the sparsity of trade flows magnifies welfare changes upon trade-cost shocks, particularly for lower-income countries, which usually have a small number of active trading partners. For instance, when simulating a 10% reduction in global trade barriers, incorporating extensive-margin variation increases the average welfare gain by 15% across the entire sample and by 30% for the bottom quartile of the income distribution.

International trade research relies heavily on data reported at the product level. Regular classification updates of the “Harmonized System” lead to intertemporal inconsistencies affecting up to 44% of world goods trade. Existing methods to standardize product vintages either drop numerous products over time or bulk updated codes into large synthetic categories. We largely overcome these issues by developing an algorithm that exploits the persistence of trade data to convert trade flows between vintages. Our conversion estimates are robust to year and sample choices. Provided a clear correspondence and persistent data, the algorithm can be applied to other classifications.