with Chris Boehm and Andrei Levchenko

We propose a novel approach to estimate the trade elasticity at various horizons. When large countries change Most Favored Nation (MFN) tariffs, small trading partners that are not in a preferential trade agreement experience plausibly exogenous tariff changes. The differential growth rates of imports from these countries relative to a control group -- countries not subject to the MFN tariff scheme -- can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2017, and estimate the trade elasticity at short and long horizons using the local projections method (Jorda,2005). Our main finding is that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about -0.7, and the long-run elasticity is around -1.5 to -2. The welfare-relevant long-run trade elasticity is about -0.6. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial market penetration costs to accessing new customers.

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