Gains from Domestic versus International Trade: Evidence from the U.S.
One sentence summary: Domestic trade contributes about 94 percent to overall welfare gains from trade, whereas the contribution of international trade is only about 6 percent.
The corresponding paper by Hakan Yilmazkuday has been accepted for publication at The Journal of International Trade & Economic Development.
Abstract
Using varieties of a rich model that considers sectoral heterogeneity and input-output linkages, this paper shows that the overall welfare gains of a region within a country can be decomposed into domestic versus international welfare gains from trade. Empirical results based on sector- and state-level data from the U.S. suggest that about 94 percent of the overall welfare gains of a state is due to domestic trade with other states. The ocean states gain from international trade about two times the Great Lake states and about three times the landlocked states.
Non-technical Summary
Domestic trade of a typical state in the U.S. is about five times its international trade, where about three quarters of this domestic trade is achieved with other states. It is implied that a typical state is about 20 percent open to international trade, while it is about 60 percent open to domestic trade. Since welfare gains from trade are known to be directly connected to such openness measures for a vast variety of models, the greater part of the welfare gains are implied to be through domestic trade. Nevertheless, since domestic trade data are not available for the majority of the countries, the existing literature has mostly focused on international welfare gains from trade that represent only a small portion of overall welfare gains.
Within this picture, this paper introduces a rich model considering sectoral heterogeneity as well as input-output linkages, where the unit of investigation is set as regions representing U.S. states. As standard in the literature, the corresponding welfare gains from trade are shown to be a function of expenditure shares and model parameters, where changes in expenditure shares are used to capture the changes in welfare in case of a hypothetical change in trade costs. The corresponding literature has focused on the hypothetical case of an autarky in the context of international trade. This paper follows this literature by having the same definition of international autarky while calculating the international welfare gains from trade.
The main contribution of this paper is achieved by considering an additional/alternative hypothetical case of autarky, namely domestic autarky, which is useful to calculate the domestic welfare gains from trade. In particular, domestic autarky is defined as the case in which a region still imports products internationally, but the domestic trade with other regions of the same country is shut down in this hypothetical case. It is shown that the overall percentage welfare gains from trade is the summation of domestic and international welfare gains from trade.
Based on the significant difference between international and domestic openness measures of states in the U.S., the corresponding welfare analysis shows that about 94 percent of the overall percentage welfare gains of a state are due to domestic trade with other states, on average across alternative model specifications, with a range between 85 percent and 99 percent across states.
The results have also shown that the ocean states gain from international trade about two times the Great Lake states and about three times the landlocked states. Since this result is partly due to the international openness of these states and partly due to considering a multi-sector framework, it is implied that the ocean states gain more from international trade not only because they overall trade more internationally but also certain sectors in these states are dependent more on international trade (e.g., "Chemical products" or "Transportation equipment"). This result is also reflected as the landlocked states gaining more from domestic trade compared to the coastal states, consistent with earlier studies in the literature suggesting that landlocked regions trade less than coastal regions due to facing higher trade costs.
