Trade Liberalization and Regional Inequality: Do Transportation Costs Impose a Spatial Poverty Trap?

TLDR: In this article, a cost-competitiveness approach based on relative changes in the sectoral and regional cost and demand structures is adopted to isolate the likely spatial effects of further tariff reductions in Brazil.

Abstract: In this paper, we focus on the regional (intra-national) impacts of barriers to trade, in the form of tariffs, in a national economy. More specifically, we are concerned with the spatial impediments for the internal transmission of the potential benefits of trade liberalization, in the form of high transportation costs that the more remote regions face. A cost-competitiveness approach, based on relative changes in the sectoral and regional cost and demand structures, is adopted to isolate the likely spatial effects of further tariff reductions in Brazil. It tackles the three basis for the analytical framework proposed in the literature: comparative advantage is grasped through the use of differential regional production technologies; geographical advantage is verified through the explicit modeling of the transportation services and the costs of moving products based on origin-destination pairs, as well as increasing returns associated to agglomeration economies; and cumulative causation appears through the operation of internal and external multipliers and interregional spillover effects in comparative-static experiments. The strategy adopted in this research utilizes an interregional (bottom-up) computable general equilibrium (ICGE) model integrated to a geo-coded transportation model to evaluate shifts in the economic center of gravity and regional specialization in the Brazilian economy due to further liberal tariff policies. Counter-factual experiments focusing on the role of transportation costs within specific import-export corridors are also carried out.