THE LIKELIHOOD OF TRADE PATTERN CHANGES ∗

This paper discusses the reasonableness of assumptions used in theoretical trade models, noting that it is common in theoretical literature to make the assumption that in a multi-country, multi-good world, the direction of trade (import and export by commodity) is predetermined and fixed for each good for each country. Comparative static exercises with such models, such as the analysis of alternative regional trade agreements (customs unions, for instance) are typically assumed to leave the direction of trade in each good unchanged for each country. Here, we both provide computational evidence as to the reasonableness of this assumption and an indication as to how the reasonableness of assumptions used elsewhere may be gauged. We consider a simple three-country, threegood, pure-exchange model with CES preferences. We compute free trade competitive equilibria, three-country non-cooperative Nash equilibria, and customs union equilibria for randomized parameterizations, and find that trade pattern changes between free trade and customs union equilibria in around 35% of the cases. In three-country Nash and customs unions comparisons the trade pattern changes roughly 40% of the time. We evaluate alternative cases, including with different numbers of randomizations in the parameter space. Results remain robust, reinforcing our conclusion that the assumption of unchanged trade pattern changes, common in theoretical analysis, does not have firm numerical support in this case. We are grateful to the Centre for the Study of Globalisation and Regionalisation at the University of Warwick and the Henry B. Tippie College of Business at the University of Iowa for support; and to Scott Page, carsten Kowalczyk, Carlo Perroni, Ben Zissimos, Ben Lockwood, and Ted To for discussions. An earlier version of this paper was presented at a seminar at Warwick in March 2000.