Non-technical summary

Research Question

What are the potential welfare gains from efficient international trade? The question of economic efficiency is probably one of the most important and long-standing questions in economics. We complement existing work and contribute to the broader literature on economic efficiency by focusing on ‘trade specialists’, defined here as firms specializing in international trading, and by quantifying the gains from their ability to conduct efficient international trade.

Contribution

We make four contributions to the existing literature. First, we develop a theoretical model, which distinguishes between the trading abilities of ‘trade specialists’ vs. ‘common traders’. Second, we are the first to employ a unique firm-level dataset on the universe of German merchanting transactions, which enables us to identify the trade transactions that are conducted by ‘trade specialists’. Third, based on our theory, we specify an econometric model that decomposes the efficiency gains for trade specialists across three types of trade costs, including transportation costs, non-tariff trade barriers, and tariffs. Finally, we rely on the theoretical, general equilibrium model to translate our partial equilibrium estimates into welfare effects.

Results

We find strong evidence for lower trade costs, and hence, efficiency gains from trading, for trade specialists. Specifically, we find that trade specialists are less sensitive to transportation costs, especially so for long-distance trade. Utilizing the theoretical general equilibrium model, we translate our trade cost estimates of the gains for trade specialists into welfare effects. Lowering trade costs in all countries to the level of trade costs for trade specialists, we find that all countries gain in terms of welfare with an average increase in real GDP per capita of 80 %. Hence, the potential welfare gains from efficient international trade are large.