Get access

TRADE LIBERALIZATION AND THE EXTENSIVE MARGIN

Authors


  • Winner of the 2008 Cairncross Prize: Best Paper by a Young Economist, presented at the Scottish Economic Society Conference.

ABSTRACT

Trade barriers can lead to the disappearance of products and impose huge costs. Allowing for the realistic possibility that imported products are substituted by domestic varieties this paper finds that the cost of protection that allows for disappearance of products, the ‘Romer cost,’ is higher below a tariff threshold. This threshold depends on the substitutability of domestic for foreign products. This is important for developing countries where inferior technology leads to poor substitutability and traditional calculations underestimate the cost. Analysis of new varieties trade after the Indian liberalization supports the findings in the context of a developing country.

Ancillary