Structural Estimation of Variety Gains from Trade Integration in Asia

The present paper studies variety gains from regional integration in Asia. Applying a heterogenous firm model we simulate trade liberalisation in Asia in three integration scenarios: CIFTA, ASEAN+3, and ASEAN+6. The paper makes three contributions to the literature. First, in addition to classical gains of specialisation, we also account for gains arising from an increased number of different varieties. Second, we explicitly study differences in gains of trade between variable and fixed trade cost reduction. Third, using a unique set of firm-level panel data we estimate the underlying trade model's structural parameters econometrically. We find that the gains from trade integration are substantial. Reducing trade barriers by 15 percent induces trade growth up to 60 percent, which due to the extensive margin of trade, is larger than in trade models with representative firms. Similarly, due to gains from variety growth, the gains from trade integration in Asia are up to 17 percent higher than classical trade models would predict.

KANCS D'Artis; 

2010-02-11

INFER

JRC56152