Abstract:

Many countries try to bring down trade costs by striking free trade agreements, forming currency unions or joining the WTO. But when trade costs fall, how much does trade increase? Natalie Chen and Dennis Novy explain that the impact depends on how intensively countries trade. Falling trade costs boost trade between countries with initially 'thin' trading relationships where the scope for growth is largest. But they have a much weaker impact for country pairs that are already trading heavily.