UC San Diego

This dissertation lies on the intersection between international trade and macroeconomics. It brings together time and space. Its chapters embed growth or adjustment over time, emphasized in macroeconomics, into trade models, which focus on the distribution of economic activity over space.

Chapter 1 shows that a plausibly exogenous increase in market access increases the probability of product innovation in the context of the European Union enlargement. Then, it rationalizes this finding through a new quantitative framework that integrates the forces of specialization and market size and nests the Eaton-Kortum trade model and the Romer growth model as special cases. In this framework, the product innovation growth rate increases with higher market access. The key result is an analytical expression to decompose gains from trade into dynamic and static components. A quantitative version of the model suggests that the EU enlargement increased its long-run yearly growth rate by 0.10pp; and dynamic gains account for as much as 90% of total gains from trade.

Chapter 2 focuses on the potential effects of global and persistent geopolitical conflicts on trade, technological innovation, and economic growth. In conventional trade models, the welfare costs of such conflicts are modest. Using a dynamic trade model, it shows that welfare losses of a decoupling of the global economy can be drastic, as large as 12% in 20 years for some regions, with more significant losses in lower-income countries. Two mechanisms are essential to capture these effects: technological diffusion and input-output linkages, both of which magnify welfare losses.

Chapter 3 proposes a new theory explaining why trade flows adjust slowly after a shock. The model features staggered sourcing decisions, nests the Eaton-Kortum model as the limiting long-run case, and provides a quantitative framework that accounts for the time-varying trade elasticity. In doing so, it microfounds the gap between empirical estimates of the trade elasticity in the short and long run. Simulations in the context of the US-China trade war suggest that the short-run welfare impact can be smaller than the long-run level for the United States but larger for China despite the same low short-run trade elasticity, while third countries such as Mexico and Vietnam may experience welfare losses in the short run but welfare gains in the long term.