An Inconvenient Truth: Welfare Losses From Asymmetric Reductions in Transportation Costs

Abstract

Recent empirical studies find that the magnitudes of reductions in bilateral shipping costs are asymmetric within country pairs. Motivated by these findings, I study the welfare effects of asymmetric reductions in transportation costs in Helpman and Itskhoki's [(2010). Labour market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137] model of international trade with heterogeneous firms and frictional labor markets. I show that sufficiently asymmetric reductions in bilateral transportation costs result in welfare losses in the importing country, while a uniform reduction in the bilateral transportation costs of both imports and exports always benefits both countries. This paper raises a cautionary note that the phrase ‘welfare gains from trade liberalization’ implicitly assumes an ‘approximately equal’ reduction in transportation costs.