With costs of starting to export that are substantially larger than the costs of continuing to export, the model matches both the size distribution of exporters and annual transition in and out of exporting of US manufacturers. The tariff equivalent of these fixed costs is 30 percentage points. The calibrated model is used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade of 1.03 percent of steady state consumption. Along the transition, economic activity overshoots its steady state so that steady state changes in consumption understate the welfare gain to trade reform. Models that abstract from exporter dynamics generate smaller gains to trade and very different aggregate transition dynamics.
Establishment Heterogeneity, Exporter Dynamics, and the Effects of Trade Liberalization
WP 11-19/R - The authors study the effects of tariffs in a dynamic variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneous establishments and fixed costs of exporting.