Quantitative Estimates o f Trade Liberalisation— Methods and Results

THE economic benefits o f trade l iberal isat ion are conven t i ona l l y d i v i d e d i n t o t w o parts : static gains and d y n a m i c gains. Static gains refer t o the advantages o f increased specialisation ar is ing f r o m easier access to in te rna t iona l markets . T h e y l ie at the core o f the classical t h e o r y o f compara t ive advantage. I t was static gains Rica rdo had i n m i n d i n his famed and much-deba ted assertion tha t in te rna t iona l trade increases " the mass o f commodi t i e s and the sum' o f en joyments" . O t h e r benefits, h o w e v e r , m a y accrue". First , freer trade m a y lead to m o r e exp lo i t a t i on o f economies o f scale. Secondly, i t m a y create m o r e c o m p e t i t i v e condi t ions i n na t iona l markets thereby increasing p r o d u c t i v e efficiency. F ina l ly , faster economic g r o w t h m a y ensue o n account o f enhanced l o n g r u n inves tment oppor tun i t i e s . For example , i t is a rgued that industries p r o d u c i n g n e w technical ly-sophist icated products w i l l develop o n l y i n the c o n t e x t ' o f ex t r eme ly large in tegra ted markets . These last three types o f gain const i tute the d y n a m i c gains f r o m in te rna t iona l trade. I t is one t h i n g t o assert that freer trade increases the gains f r o m trade, b u t an en t i re ly different p r o b l e m t o p r o v i d e quant i ta t ive estimates o f their magn i tude . C lea r ly mos t o f these extra gains are realised i n the f o r m o f an increased v o l u m e o f exports and i m p o r t s f o l l o w i n g the r e m o v a l o r r educ t i on i n p ro tec t ion . . Ceteris paribus, the greater the increase i n the v o l u m e o f t rade, the greater the increase i n the gains f r o m t r ade . ' I n eva lua t ing the consequences o f trade l iberal isat ion, therefore, a t t en t ion na tu ra l l y focuses.on its effect o n trade f lows . Th i s p r o b l e m has received the a t t en t ion o f n i a h y economists d u r i n g the past decade—efforts, f o r example , have been made to r e v i e w the trade effects o f reg iona l free trade g roup ings such as E F T A and the E E C , and t o quan t i fy the increase i n trade w h i c h w o u l d accompany a d i sman t l i ng o f developed countr ies ' t a r i f f barriers against the exports o f the less developed areas. Exercises o f this t ype are b e c o m i n g increasingly fami l i a r and p l a y a v i t a l r o l e i n in te rna t iona l t a r i f f negot ia t ions . O u r a i m i n this art icle is t w o f o l d . First , w e describe and evaluate the me thods