THE COST OF TRADE DISRUPTIONS AT DIFFERENT STAGES OF DEVELOPMENT

• Published date: 01 August 2024
• Author: Juan Carlos Conesa,Matthew J. Delventhal,Pau S. Pujolas,Gajendran Raveendranathan
• Date: 01 August 2024
• DOI: http://doi.org/10.1111/iere.12690

INTERNATIONALECONOMIC REVIEW

Vol. 65, No. 3, August 2024 DOI: 10.1111/iere.12690

THE COST OF TRADE DISRUPTIONS AT DIFFERENT STAGES OF

DEVELOPMENT∗

By Juan Carlos Conesa, Matthew J. Delventhal, Pau S. Pujolas,

and Gajendran Raveendranathan

Stony Brook University, U.S.A.; CoreLogic, U.S.A.; McMaster University, Canada

We study trade disruptions at different stages of development in a two-country, three-sector model of Spain

and United Kingdom from 1850 to 2000. The impact of trade disruptions depends on trade openness and

the productivity gap between countries. A trade collapse today (more openness, less gap) comparable to the

Inter-War Trade Collapse (IWTC) decreases the capital stock threefold (12% instead of 4%) and lifetime con-

sumption fourfold (1.58% instead of 0.37%). Capital accumulation amplif‌ies the cost of trade disruptions. The

IWTC promoted Spanish industrialization, while the opposite would be true today.

1. introduction

After the period of increased globalization and trade known as the Second Wave of

Globalization (Baldwin and Martin, 1999), there are indications that we are now experiencing

a new era of signif‌icant trade disruptions. This article examines how the potential conse-

quences of such disruptions differ depending on the countries’ development stage. Specif‌ically,

countries that are still in the process of catching up to the technological frontier have a dif-

ferent composition of output and trade from those with higher levels of development. Given

these differences, it is reasonable to anticipate that the effects of trade disruptions will vary.

There have been signif‌icant trade disruptions throughout history occurring after periods of

expanding trade. One such episode was the Inter-War Trade Collapse (IWTC) that marked

the end of the First Wave of Globalization from the mid-19th century to 1913. This event

was followed by the Second Wave of Globalization, which we have experienced since the end

of World War II. Spain’s trade with countries in the technological frontier (which in this ar-

ticle is represented by the United Kingdom) provides an illustrative example of the evolu-

tion of trade and growth during those historical episodes.1The United Kingdom is regarded

as the technological frontier, whereas Spain initially lagged far behind in productivity. How-

ever, through an intense process of structural transformation, Spain caught up to the frontier.

At the time of the IWTC, Spain’s GDP per capita was well below that of the United

∗Manuscript received November 2021; revised December 2023.

We thank anonymous referees, Jaime Alonso, Wyatt Brooks, Kevin Donovan, Manu García-Santana, Alok Johri,

Joe Kaboski, Tim Kehoe, Zach Mahone, Joaquín Naval, Theo Papageorgiou, Fran Rodríguez-Tous, Joe Steinberg,

and seminar participants at numerous seminars and conferences. Special thanks to Kyle Fendorf and Julia Schul-

man for exceptional research assistance. Pujolas thanks SSHRC for Insight Grants 435-2018-0274 and 435-2021-0006,

as well as for the Partnership to Study Productivity, Firms and Incomes. Please address correspondence to: Gajen-

dran Raveendranathan, McMaster University, 1280 Main Street West Hamilton Ontario L8S 4M4 Canada. E-mail:

raveeg1@mcmaster.ca.

1The United Kingdom is a convenient stand-in for the more advanced Spanish trading partners to which it is catch-

ing up over time. The use of the United Kingdom is threefold: it was a major global player during the f‌irst half of the

time period we study, its economy has consistently been close to the technological frontier, and, despite the United

Kingdom’s diminishing importance for Spain, Spain’s trade with the United Kingdom looks like Spain’s trade with

the rest of the world, as we show in Appendix A.

1133

© 2024 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the Economics

Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research

Association.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs Li-

cense, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-

commercial and no modif‌ications or adaptations are made.

1134 conesa et al.

Kingdom, and trade barriers were signif‌icant. Today, productivity and output composition in

Spain are similar to that of the United Kingdom, and trade integration is profound (or it was

before Brexit).

This article presents a quantitative model that assesses the impact of trade disruptions in

various developmental stages. To illustrate our point, we compare the effects of trade disrup-

tions during the period of IWTC, characterized by signif‌icant disparities in productivity and

limited trade integration, with a hypothetical disruption at the start of the 21st century. In ad-

dition, we complement our theoretical analysis with comprehensive trade data dating back to

1850, which enables us to track the evolution of bilateral trade patterns during episodes of in-

creased globalization.

Our article makes several contributions. First, we provide a detailed analysis of the com-

position of bilateral trade f‌lows between Spain and the United Kingdom, starting from 1850.

We achieve this by digitizing and categorizing information obtained from historical customs

data from the “General Ledger of the Foreign Trade of Spain with its Overseas Possessions

and Foreign Powers” for the years 1849–55 and “General Statistical Report of the Foreign

Trade of Spain with its Overseas Possessions and Foreign Powers” for the years 1856 and af-

ter. We manually assign each of these trade f‌lows to Standard International Trade Classif‌ica-

tion (SITC) Rev.1 categories, enabling us to observe changes in trade patterns associated with

structural transformation during a period of 150 years in Spain. We use these data to disci-

pline the analysis of our research question.

Second, we develop a dynamic general equilibrium two-country model of trade and struc-

tural transformation. In this model, households accumulate capital and have Stone–Geary

preferences over agriculture (modeled as a necessity), manufacturing, and services. Only in-

termediate goods are traded, with agriculture and services trade occurring “à la Arming-

ton” (Armington, 1969): one domestic and one foreign variety produced with constant re-

turns to scale. On the other hand, manufacturing trade occurs “à la Krugman” (Krugman,

1980): many differentiated varieties produced with increasing returns to scale. This modeling

choice is motivated by the patterns we document regarding increased trade in manufacturing

varieties.

We calibrate the model using key moments of the Spanish economy in 1850 and 2000,

and in addition we match the trend of exports to GDP in Spain, and GDP per working-age

population (WAP) in both Spain and the United Kingdom, from 1850 to 2000. Then, we vali-

date our calibrated model by examining nontargeted moments along the transition path. The

model accurately predicts the declining agricultural sector, moderate increase in the manufac-

turing sector, and secular increase in the services sector in Spain. It also captures the evolution

of the capital stock and investment; Spain transitioned from investing 5% of GDP to investing

25%. Furthermore, the model reasonably explains the observed behavior of relative prices

in Spain and the structural transformation in the United Kingdom from 1850 to 2000. On

the trade side, the model correctly predicts the changes in the number of varieties that Spain

imports and exports, as well as the shares of imports and exports that are accounted for by

agriculture and manufacturing. Furthermore, the model replicates Spain’s trade def‌icit in

manufacturing from 1850 until the latter part of the 20th century.

Our article’s third contribution is a comparison of the effects of a trade disruption similar

to the IWTC and a hypothetical trade collapse in the present day. We conduct two exercises to

make this comparison. First, we compare the benchmark economy experiencing the IWTC to

a counterfactual where the trade disruption did not occur. In the second exercise, we compare

the benchmark economy with a low trade cost after 2000 to a counterfactual where a trade

collapse similar to the IWTC occurs at the beginning of the 21st century. We make sure that

the relative change in iceberg trade costs is comparable in both counterfactuals. Our f‌indings

reveal that during the IWTC, Spanish capital stock fell by 4% at its lowest point, whereas it

would fall by up to three times as much today, at 12%. The decline in consumption follows

a similar pattern, with manufacturing experiencing the greatest fall. We f‌ind that the drop on

permanent consumption during the IWTC was 0.37% but it would be four times as high today,