Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades

We show in a multi-sector, heterogeneous-firm trade model that the effect of tariffs on entry, especially in the presence of production linkages, can reverse the traditional positive optimal tariff argument.We then use a new tariff dataset, and apply it to a 189-country, 15-sector version of our model, to quantify the trade, entry, and welfare effects of trade liberalization over the period 1990-2010.We find that the impact on firm entry was larger in Advanced relative to Emerging and Developing countries; that slightly more than three-quarters of the total gains from trade are a consequence of the reductions in MFN tariffs (the Uruguay Round), with two-thirds of the remainder due to preferential trade agreements and one third due to the hypothetical movement to free trade; and that free trade would bring gains for some Emerging and Developing countries, in particular.Ten economies in our sample -including China, Hong Kong, India, Israel, Vietnam, and five more remote countries -would have benefited from going beyond free trade to subsidizing their imports in 1990, since their optimal tariffs are negative.