The cost of trade disruptions at different stages of development

Abstract

We study the impact of trade disruptions at different stages of development. We calibrate our two-country, three-sector model to Spain and the United Kingdom from 1850 to 2000, accounting for the inter-war trade collapse (IWTC) and the subsequent catch-up by Spain. In our model, trade disruptions have a stronger impact on the country that is catching-up (Spain), with more distance to the technological leader (U.K.) and more trade openness. A collapse today (less distance, more openness) similar to the IWTC (more distance, less openness) decreases the capital stock threefold (12% instead of 4%). Furthermore, although the IWTC supported industrialization in Spain, higher costs today would lead to deindustrialization.

Matt Delventhal