Small Islands, Big Trade: Import Elasticities and Welfare Gains from Trade | Kevishen Valeyatheepillay

Small Island Developing States (SIDS) have higher trade openness compared to other developing countries and major economic blocs while also being more vulnerable to economic shocks. Nevertheless, the impact of this higher openness on the economies of SIDS merits further consideration. Using import tariffs as a proxy for variable costs and a structural gravity equation, this paper finds that SIDS have, on average, smaller trade elasticities – and hence higher welfare gains from trade – compared to other countries. I find that the trade elasticity for SIDS can be as much as half as that of non-SIDS and is significant. This difference arises not because SIDS import higher shares of low- elasticity products, but rather that the product-specific elasticities for SIDS on average are smaller than for non-SIDS.

Read the article here