The growth of world trade: tariffs, transport costs, and income similarity

Abstract In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327–377] stated that the answer to the fundamental question “Why has world trade grown?” remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [Helpman, E., 1987. Imperfect competition and international trade: Evidence from fourteen industrial countries. Journal of the Japanese and International Economies 1 (1) 62–81] and Hummels and Levinsohn (1995) [Hummels, D., Levinsohn, J., 1995. Monopolistic competition and international trade: Reconsidering the evidence. Quarterly Journal of Economics 110 (3) 799–836] is increased similarity of countries’ incomes. The purpose of this study is to disentangle from one another (and from income growth) the relative effects of transport-cost reductions, tariff liberalization, and income convergence on the growth of world trade among several OECD countries between the late 1950s and the late 1980s. In the context of the model, the empirical results suggest that income growth explains about 67%, tariff-rate reductions about 25%, transport-cost declines about 8%, and income convergence virtually none of the average world trade growth of our post World War II sample.