Tariffs and Free Trade Agreements
Paper Session
Saturday, Jan. 3, 2026 8:00 AM - 10:00 AM (EST)
- Chair: Roc Armenter, Federal Reserve Bank of Philadelphia
Interdependence, Sectoral Linkages, and the Costs and Benefits of Negotiating Free-Trade Agreements
Abstract
The last decades have seen a substantial increase in the number of free trade agreements (FTAs). The vast majority of these agreements, however, have been signed between richer economies with only limited participation by developing countries. This paper studies the reasons for and consequences of this trend and develops a model to quantify the costs and benefits of FTAs in the presence of intermediate goods, input-output linkages, sectoral heterogeneity, and interdependence across FTAs, when countries endogenously negotiate FTAs with each other. In light of challenges regarding the dimensionality of the problem, we adapt the approach developed by Jia (2008) to the present setting and quantify the importance of falling negotiating costs, welfare gains, cross-country heterogeneity, and cross-FTA complementarities in the recent rise in the number of new FTAs. Our estimates imply that heterogeneity in the potential gains and costs from FTAs is the main reason why FTAs are primarily negotiated between rich economies and that these FTAs may increase rather than decrease the probability of developing countries participating in FTAs in the future.The Cost of Dissolving the WTO: The Role of Global Value Chains
Abstract
As trade agreements face renewed pressure, we show that the rise of global value chains has multiplied the value of trade agreements to unprecedented levels. We cast our argument using a non-parametric neoclassical trade model that accommodates global input-output networks and nests a wide class of quantitative trade models as a special case. To guide our analysis, we derive analytic formulas for optimal non-cooperative trade taxes in this general framework. These formulas predict the extent of trade restriction if global trade agreements were to dissolve. Mapping these formulas to data, we quantify the value of trade agreements for various countries. We find that the disintegration of existing trade agreements will erase 30% of the overall gains from trade, which amounts to a $2.8 trillion loss in global GDP. Around 46% of this value is driven by the agreements’ facilitation of global value chains.Two-sided Search in International Markets
Abstract
We develop a dynamic model of international business-to-business transactions featuring two-sided endogenous search, bargaining, and matching. Estimating the model to match key cross-sectional and dynamic patterns in U.S. apparel import data, we find a relative abundance of potential suppliers, and a decline in search costs as firms accumulate more business connections. These forces shape the division of profits between suppliers and buyers and drive their distinct life cycles in international markets. We quantitatively investigate the IT revolution, the 2005 phaseout of the Agreement on Textiles and Clothing, and Trump’s 2018 tariffs on Chinese apparel. Increasing the access of foreign exporters to the U.S. market can congest matching, dampening or even reversing the gains consumers enjoy from access to extra varieties. On the other hand, lower search costs can significantly improve consumer welfare, intensifying competition among both retailers and their upstream suppliers.Discussant(s)
Svetlana Demidova
,
McMaster University
Ariel Weinberger
,
George Washington University
Matthew Grant
,
Dartmouth College
Lukasz Drozd
,
Federal Reserve Bank of Philadelphia
JEL Classifications
- F1 - Trade
- D6 - Welfare Economics