Empirica

pp 1–36 | Cite as

Trade liberalization gains under different trade theories: a case study for Ukraine

Original Paper
  • 99 Downloads

Abstract

We analyze the deep and comprehensive free trade area (DCFTA) between Ukraine and the EU using a multi-regional general-equilibrium simulation model. Three alternative trade structures are implemented: (a) a standard specification of perfect competition based on the Armington assumption of regionally differentiated goods; (b) monopolistic competition among symmetric manufacturing firms; and (c) a competitive selection model of heterogeneous manufacturing firms. Across these structures the DCFTA indicates relatively large gains for Ukraine of more than 3 percent. We show, however, that the gains for Ukraine are lower when we consider monopolistic competition in manufacturing. This is attributed to a movement of resources into Ukraine’s traditional export sectors to the EU, which produce under constant returns. While there is little danger of deindustrialization dominating the overall welfare gains, we do observe substantially lower gains when we consider monopolistic competition. To our knowledge, this is the first empirical confirmation of the theoretic predication that the relative gains from trade in monopolistic competition models might be lower than under perfect competition in the context of a numeric simulation of economic integration. Under the popular heterogeneous-firms monopolistic competition theory we find significant firm selection effects indicating welfare impacts for Ukraine that are less than under the Armington structure but above those found under symmetric firms and monopolistic competition. These results are important considerations for Ukraine’s overall development strategy.

Keywords

DCFTA Ukraine EU Armington New trade theory Krugman Melitz 

JEL Classification

F12 C68 O12 O14 

References

  1. Akyz Y (2003) Developing countries and world trade: performance and prospects. Zed, LondonGoogle Scholar
  2. Arkolakis C, Costinot A, Rodríguez-Clare A (2012) New trade models, same old gains? Am Econ Rev 102(1):94–130CrossRefGoogle Scholar
  3. Armington P (1969) A theory of demand for products distuinguished by place of production. Int Monet Fund Staff Pap 16(1):159–176CrossRefGoogle Scholar
  4. Aw BY, Chen X, Roberts MJ (2001) Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing. J Dev Econ 66(2001):51–86CrossRefGoogle Scholar
  5. Baldwin RE, Forslid R (2010) Trade liberalization with heterogeneous firms. Rev Dev Econ 14(2):161–176CrossRefGoogle Scholar
  6. Balistreri EJ, Rutherford TF (2013) Computing general equilibrium theories of monopolistic competition and heterogeneous firms. In: Dixon PB, Jorgenson DW (eds) Handbook of computable general equilibrium modeling, vol. 1, Part B, chapter 23. Elsevier, Amsterdam, pp 1513–1570Google Scholar
  7. Balistreri EJ, Hillberry RH, Rutherford TF (2010) Trade and welfare: Does industrial organization matter? Econ Lett 109(2):85–87CrossRefGoogle Scholar
  8. Balistreri EJ, Hillberry RH, Rutherford TF (2011) Structural estimation and solution of international trade models with heterogeneous firms. J Int Econ 83(2):95–108CrossRefGoogle Scholar
  9. Bartelsman EJ, Doms M (2000) Understanding productivity: lessons from longitudinal microdata. J Econ Lit 38(3):569–594CrossRefGoogle Scholar
  10. Bernard AB, Eaton J, Jensen JB, Kortum S (2003) Plants and productivity in international trade. Am EcoN Rev 93(4):1268–1290CrossRefGoogle Scholar
  11. Corcos G, Del Gatto M, Mion G, Ottaviano GIP (2011) Productivity and firm selection: quantifying the ‘new’ gains from trade. Econ J 122(561):754–798Google Scholar
  12. Costinot A, Rodríguez-Clare A (2014) Trade theory with numbers: quantifying the consequences of globalization. In: Helpman E, Rogoff K, Gopinath G (eds) Handbook of international economics, vol. 4, chapter 4. Elsevier, Amsterdam, pp 197–261Google Scholar
  13. Dixon PB, Jerie M, Rimmer MT (2014) Modern trade theory for CGE modelling: the Armington, Krugman and Melitz models. Centre of Policy Studies, Victoria UniversityGoogle Scholar
  14. Ecorys, and CASE-Ukraine (2007) Global analysis report for the EU-Ukraine TSIA. Global Analysis Report, Ref: TRADE06/D01Google Scholar
  15. Emerson M, Edwards TH, Gazizulin I, Luecke M, Mueller-Jentsch D, Nanviska V, Pyatnytskiy V, Schneider A, Schweickert R, Shevtsov O, Shumylo O (2006) The prospect of deep free trade between the European Union and Ukraine. In: Report, Centre for European Policy Studies (CEPS), Institut fuer Weltwirtschaft (IFW), International Centre for Policy Studies (ICPS)Google Scholar
  16. European Commission (2015) The trade part of the EU–Ukraine Association Agreement becomes operational on 1 January 2016. Directorate-General for Trade, Press releaseGoogle Scholar
  17. European Council (2014a) European Union’s support to Ukraine. MEMOGoogle Scholar
  18. European Council (2014b) European Union’s support to Ukraine—Update. MEMOGoogle Scholar
  19. European Council (2014c) Remarks by President Barroso at the signing of the Association Agreements with Georgia, the Republic of Moldova and Ukraine. SPEECHGoogle Scholar
  20. European Council (2014d) ‘Statement by President of the European Council Herman Van Rompuy at the occasion of the signing ceremony of the political provisions of the Association Agreement between the European Union and Ukraine’. EUCOGoogle Scholar
  21. European Council (2014e) The EU’s Association Agreements with Georgia, the Republic of Moldova and Ukraine. MEMOGoogle Scholar
  22. Feenstra RC (2010) Measuring the gains from trade under monopolistic competition. Can J Econ 43(1):1–28CrossRefGoogle Scholar
  23. Francois J, Manchin M (2009) Economic impact of a potential free trade agreement (FTA) between the European Union and the Commonwealth of the Independent States. CASE Network Reports 84, Center for Social and Economic ResearchGoogle Scholar
  24. Frey M, Olekseyuk Z (2014) A general equilibrium evaluation of the fiscal costs of trade liberalization in Ukraine. Empirica 41(3):505–540CrossRefGoogle Scholar
  25. Hummels DL (2007) Transportation costs and international trade in the second era of globalization. J Econ Perspect 21(3):131–154CrossRefGoogle Scholar
  26. Hummels DL, Schaur G (2013) Time as a trade barrier. Am Econ Rev 103(7):2935–2959CrossRefGoogle Scholar
  27. Hummels DL, Minor P, Reisman M, Endean E (2007) Calculating tariff equivalents for time in trade. Nathan Associates Inc. for the United States Agency for International Development (USAID), ArlingtonGoogle Scholar
  28. Jensen J, Svensson P, Pavel F, Handrich L, Movchan V, Betily O (2005) Analysis of economic impacts of Ukraine’s accession to the WTO: overall impact assessment. Kyiv, Munich, CopenhagenGoogle Scholar
  29. Kee HL, Nicita A, Olarreaga M (2009) Estimating trade restrictiveness indices. Econ J 119(534):172–199Google Scholar
  30. Kehoe TJ (2005) An evaluation of the performance of applied general equilibrium models of the impact of NAFTA. In: Kehoe TJ, Srinivasan T, Whalley J (eds) Frontiers in applied general equilibrium modeling: essays in honor of herbert scarf. Cambridge University Press, Cambridge, pp 341–377CrossRefGoogle Scholar
  31. Kosse I (2002) Using a CGE model to evaluate import tariff reductions in UkraineGoogle Scholar
  32. Krugman P (1980) Scale economies, product differentiation, and the pattern of trade. Am Econ Rev 70(5):950–959Google Scholar
  33. Maliszewska M, Orlova I, Taran S (2009) Deep integration with the EU and its likely impact on selected ENP countries and Russia. CASE Network Reports 88, Center for Social and Economic ResearchGoogle Scholar
  34. Markusen JR, Rutherford TF, Tarr DG (2005) Trade and direct investment in producer services and the domestic market for expertise. Can J Econ 38(3):758–777CrossRefGoogle Scholar
  35. Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71(6):1695–1725CrossRefGoogle Scholar
  36. Melitz MJ, Redding SJ (2015) New trade models, new welfare implications. Am Econ Rev 105(3):1105–1146CrossRefGoogle Scholar
  37. Minor P (2013) Time as a barrier to trade: a GTAP database of ad valorem trade time costs. ImpactECON. http://mygtap.org/resources/
  38. Movchan V, Giucci R (2011) Quantitative assessment of Ukraine’s regional integration options: DCFTA with European Union vs. Customs Union with Russia, Belarus and Kazakhstan. Policy Paper Series PP/05/2011, German Advisory Group, Institute for Economic Research and Policy Consulting, Berlin, KyivGoogle Scholar
  39. Olekseyuk Z (2016) Modeling of FDI in business services: additional effects in case of Ukraine’s European integration. J Trade Econ Dev 7(25):1010–1043CrossRefGoogle Scholar
  40. Pavel F, Burakovsky I, Selitska N, Movchan V (2004) Economic impact of Ukraine’s WTO accession: first results from a computable general equilibrium model. IER Working Paper 30, Institute for Economic Research and Policy ConsultingGoogle Scholar
  41. Rutherford TF (1999) Applied general equilibrium modeling with MPSGE as a GAMS subsystem: an overview of the modeling framework and syntax. Comput Econ 14(1):1–16CrossRefGoogle Scholar
  42. Rutherford TF, Tarr DG (2002) Trade liberalization, product variety and growth in a small open economy: a quantitative assessment. J Int Econ 56(2):247–272CrossRefGoogle Scholar
  43. Rutherford TF, Tarr DG (2008) Poverty effects of Russia’s WTO accession: modeling ’real households’ with endogenous productivity effects. J Int Econ 75(1):131–150CrossRefGoogle Scholar
  44. Trefler D (2004) The long and short of the Canada–U.S. free trade agreement. Am Econ Rev 94(4):870–895CrossRefGoogle Scholar
  45. von Cramon-Taubadel S, Hess S, Brmmer B (2010) A preliminary analysis of the impact of a Ukraine–EU free trade agreement on agriculture. The World Bank Policy Research Working Paper 5264Google Scholar
  46. WTO, Unctad, and ITC (2007) World tariff profiles 2006. WTO, SwitzerlandGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of World Economy and Development FinancingDeutsches Institut für Entwicklungspolitik/German Development Institute (DIE)BonnGermany
  2. 2.Colorado School of MinesGoldenUSA

Personalised recommendations