Staff Report 492

Using the New Products Margin to Predict the Industry-Level Impact of Trade Reform

Timothy J. Kehoe | Consultant
Kim J. Ruhl | University of Wisconsin and National Bureau of Economic Research
Jack Rossbach | Georgetown University Qatar

Published January 24, 2014

This paper develops a methodology for predicting the impact of trade liberalization on exports by industry (3-digit ISIC) based on the pre-liberalization distribution of exports by product (5-digit SITC). Using the results of Kehoe and Ruhl (2013) that much of the growth in trade after trade liberalization is in products that are traded very little or not at all, we predict that industries with a higher share of exports generated by least traded products will experience more growth. Using our methodology, we develop predictions for industry-level changes in trade for the United States and Korea following the U.S.-Korea Free Trade Agreement (KORUS). As a test for our methodology, we show that it performs significantly better than the applied general equilibrium models originally used for the policy evaluation of the North American Free Trade Agreement (NAFTA).

Published In: Journal of International Economics (Vol. 96, No. 2, July 2015, pp. 289-297)

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