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INTRODUCTION

In 1980 US two-way merchandise trade was $467 billion. By 2006 US two-way trade had grown
more than five-fold in nominal terms, to reach $2,942 billion.1 During this period of rapid growth,
the international economy continued its hurried pace of globalization that began after the Second
World War. The international economy became increasingly interdependent, as transportation and
communication costs declined, multinational enterprises flourished, and trade barriers receded through
multilateral, preferential, and unilateral initiatives.

Against this background, it seems worthwhile to evaluate the sources of past growth in US
merchandise trade in order to make informed guesses about the future course of trade growth. In this
paper we attempt to do just that: using various data sources, a simple partial equilibrium analysis, and
a more complex computable general equilibrium (CGE) model. These tools are deployed to determine
what share of US trade growth over the last 25 years is attributable to policy liberalization, what share
is attributable to the decline in transportation costs, and as a residual, income growth and unidentified
technology—a basket category dominated by market forces, especially the remarkable expansion of
multinational enterprises (MNEs).

In the next section we present our simple partial equilibrium analysis. We use estimates of the
price elasticities of trade combined with the declines in tariff rates, nontariff barriers (NTBs), and
transportation costs to make ballpark estimates of the role of each force in US trade growth. In the third
section we present the CGE analysis carried out at our request by Professor John Gilbert of Utah State
University. We run several scenarios off the baseline model (i.e., current circumstances) to determine
what US trade would look like in the event of a reversion to the policies or the transportation costs that
prevailed in the 1980s. We then compare the results of the two analyses to determine the role of various
forces that promote trade growth. We conclude with implications from our results.

PARTIAL EQUILIBRIUM ANALYSIS

Using various data sources that stretch back to the Tokyo Round of multilateral trade negotiations
(1973—79), conducted under the auspices of the General Agreement on Tariffs and Trade (GATT), we
analyze six hypothetical scenarios that allow us to evaluate the impact of major policy liberalizations and
the reduction in transportation costs since 1980. The data sources and methods are explained in detail in
appendix A. The methodology for each scenario is straightforward: We determine a “past” and a “present
set of tariff rates and then using price elasticity estimates we determine the impact on current US trade
of moving from the “present” rate back to the “past” rate. For this analysis we calculate weighted average

1. US exports in 1980 totaled $217 billion and imports were $250 billion. US exports in 2006 were $1,028 billion and
imports were $1,913 billion (UN Comtrade Database via WITS 2008).



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