A simple method to ex-ante quantify the unobservable effects of trade liberalization and trade protection

• Published in: Journal of Comparative Economics Vol. 51; no. 4; pp. 1200 - 1213
• Main Authors: Larch, Mario, Tan, Shawn W., Yotov, Yoto V.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.12.2023
• Subjects: CEFTA; Structural gravity; Trade policy; Unobserved trade costs; EU; CEFTA; Trade policy; F10; Unobserved trade costs; Structural gravity; F14; F13; F1
• ISSN: 0147-5967; 1095-7227
• DOI: 10.1016/j.jce.2023.06.006

We propose a simple and flexible econometric approach to quantify ex-ante the impact of comprehensive trade liberalization or protection with the structural gravity model. Specifically, we argue that the difference between the estimates of border indicator variables for affected and non-affected countries can be used to measure unobservable changes in bilateral trade costs in response to hypothetical policy changes. To demonstrate the effectiveness of our methods, we focus on the integration between the countries from the Central European Free Trade Agreement (CEFTA) and the European Union (EU); an important policy application that has not been studied before due to a lack of data. We overcome this challenge by utilizing a new dataset on trade and production that covers all EU countries and all CEFTA members (except for Kosovo). The partial equilibrium estimates that we obtain confirm the validity of our methods, while the corresponding general equilibrium effects point to significant and heterogeneous potential gains for the CEFTA countries from joining the EU. The proposed methods are readily applicable to other applications, e.g., Brexit or joining the World Trade Organization (WTO), and can also be extended to ex-post analysis. •Propose a new approach to quantify comprehensive trade liberalization or protection.•Quantify an agreement between CEFTA and the EU (also for services without tariffs).•Borders between CEFTA and EU countries are large, larger than between EU countries.•Large heterogeneity of border estimates across sectors and by direction of flows.•An agreement with the EU would lead to large welfare gains for the CEFTA countries.