On Estimating The Welfare Gains from Trade Liberalization

Estimating general equilibrium price feed- backs is notoriously difficult. This has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a CES monopolistic competition example, we show that this difficulty has been greatly exaggerated. The paper achieves three goals. First, we provide dynam- ically consistent, general equilibrium estimates of elasticit- ies of substitution. Second, with the help of these elast- icities we estimate a compensating variation measure of both the static and dynamic gains from trade liberalization. Uniquely, these estimates are accompanied by standard er- rors. We estimate that the compensating variation asso- ciated with worldwide tariff elimination is between 2.0% (s.e. = 0.05%) and 5.2% (s.e. = 0.61%) of world income, depending on the weight given to dynamic mechanisms. Third, and in contrast to calibration methods, we employ a barrage of specification tests to examine the extent to which the model does violence to the data.