Using the Gravity Model to Estimate the Costs of Protection

T he United States, along with almost every other country in the world, maintains significant restrictions on the movement of goods across international borders. Although the recent Uruguay round of the General Agreement on Tariffs and Trade (GATT) resulted in a general lowering of tariffs and a broadening of goods and countries covered by the agreement, free trade remains elusive. Strong growth in the United States in recent years has kept protectionist pressures at bay, but recent calls for restrictions on steel and other imports suggest that protectionism in the United States has been dormant but is not dead. When a country restricts imports, foreign producers are disadvantaged relative to their domestic competitors, and the volume of trade is reduced. This prevents both importing and exporting countries from realizing all of the gains from international trade, as resources will be diverted from industries where there are comparative advantages. The objective of this paper is to provide new estimates of the effects of protectionism on the volume of U.S. trade, and to obtain rough estimates of the resulting welfare effects. Table 1 summarizes the variety of trade barriers imposed by the United States and its trading partners in the rest Howard Wall is a senior economist with the Federal Reserve Bank of St. Louis. Eran Segev provided research assistance.