Trade diversion is reversed in the long run

Research output: Contribution to journalArticle

Abstract

We explore the role of economic growth as a cause of reverse trade diversion in an asymmetric three-country Melitz model. A regional trade agreement between countries 1 and 2 decreases country 3's growth rate and the revenue shares of varieties country 3 exports to countries 1 and 2 in the short run, but increases them in the long run, compared with the old balanced growth path. This is because faster short-run growth in countries 1 and 2 than country 3 starts to increase the members' market entry costs more than the nonmember, thereby making the latter relatively more competitive.

Original languageEnglish
JournalReview of Economic Dynamics
DOIs
Publication statusAccepted/In press - 2020

Keywords

  • Endogenous growth
  • Melitz model
  • Regional trade agreement
  • Reverse trade diversion
  • Transitional dynamics

ASJC Scopus subject areas

  • Economics and Econometrics

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