Can Comparative Advantage Explain the Growth of US Trade?

We present a dynamic comparative advantage model in which moderate reductions in
trade costs can generate sizable increases in trade volumes over time. A fall in trade
costs has two e.ects on the volume of trade. First, for given factor endowments, it
raises the degree of specialization of countries, leading to a larger volume of trade
in the short run. Second, it raises the factor price of each country's abundant
production factor, leading to diverging paths of relative factor endowments across
countries and a rising degree of specialization. A simulation exercise shows that
a fall in trade costs over time produces a non-linear increase in the trade share of
output as in the data. Even when elasticities of substitution are not particularly
high, moderate reductions in trade costs lead to large trade volumes over time.