Welfare Effects of Trade Liberalisation and Protectionist Measures

Tasks

The study examines the extent to which trade liberalization relative to technical progress is causally responsible for the growth of trade, the welfare effects resulting from the globalization process as a whole, and the macroeconomic effects arising from the introduction of trade barriers. We aim to assess the effects of different integration steps of trade liberalization on sectoral trade flows and to causally differentiate them from other drivers of growth in trade (autonomous growth of economies, technologically induced changes in trade costs). We also quantify the welfare effects of trade liberalization. In doing so, we focus not only on a specific foreign trade policy measure, but on the entiretyof efforts to facilitate international trade. The quantification also includes trade policy measures in which Germany is not directly involved but which have an indirect effect on Germany as a “third country” including also all other processes that influence the openness of a country. We examine the changes in real income and in real consumption that would result from a hypothetical transition from the observed situation in 2014 to a state of autarky or compared to the situation in 1990. In a counterfactual analysis of trade policy, we additionally ask which changes in welfare would result if certain integration steps had never been concluded or if Germany had not been part in the conclusion of certain agreements.

Methods

Analysis of the effects of trade policy and associated integration steps of trade liberalization on sectoral openness. Using a gravity model, we examine the effects of various existing globalization steps and their integration efforts. To quantify the welfare effects of trade liberalisation in a general equilibrium model, we employ several models that fall into the class of new quantitative trade theory (NQTT) models. We use a version without intermediate inputs and a model in which producing sectors use inputs from other sectors. We distinguish between models with perfect competition, monopolistic competition (Krugman, 1980), and heterogeneous firms (Melitz, 2003).

Data sources

World Input Output Database, Destatis, WTO, World Bank, EU Commission.

Results

Since 1990, Germany has become much more open due to the fall of the iron curtain, the accession of 16 new members to the EU, the rise of China and its accession to the WTO in 2001, the introduction of the Euro in 1999, the creation of the Schengen zone and due to various free trade agreements the EU has conducted with third countries.

The econometric ex-post evaluation shows that the different trade policy measures have led to a significant increase in Germany's trade in goods and services. The EU's Eastern enlargement has pushed Germany's goods trade with the new EU member states by 60.3% and service trade by 54%; the introduction of the Euro had a positive effect on the trade in goods of 11.3%, but not on trade in services; free trade agreements have increased Germany's total bilateral trade in goods by 14.7% and trade in services by 25.7%. China's accession to the WTO increased Germany's exports of goods to China by 122.3% and exports by 148.2%, while trade in services grew by 80.4% and 89.1%, respectively.

Using a new quantitative trade model to compare the observed status quo of 2014 with a hypothetical state of autarky, we find that German real income per capita is 22% higher than under autarky, and real per capita consumption is 13% higher. Over time, Germany's real per capita income has increased from 13% in 1990 to 22% in 2014. An important reason for this increase is Germany’s participation in the international division of labor. If all the liberalization steps were reversed, German welfare would decline by about 5.3%; of these, EU integration accounts for the lion's share (about 4.6 percentage points); China's accession to the WTO is responsible for 0.8 percentage points. Looking at EU integration, the accessions of the 16 new member states since 1990 contributed the most; but the creation of the Eurozone and the Schengen area has also had positive effects. Taking them back would reduce German welfare by 0.4% and 0.9%, respectively. According to our calculations, at least a quarter of the trade benefits generated since 1990 are due to specific trade policy measures; the remainder is attributable to technological and infrastructural reductions in international trade costs.

Publication