The Impact of Trade Openness on Relative Equipment Prices: Lessons from Latin America

Trade can affect relative equipment prices because equipment production is concentrated among a small group of developed countries and many developing nations rely heavily on equipment imports. We construct a new dataset of relative equipment prices for thirteen Latin American countries from 1970 to 2011 in order to help identify which trade channels affect these prices. We show that both the composition of trade and countries' trade partners matter. Overall, increasing trade intensity in equipment with major equipment-producing countries is associated with the largest relative price reductions, but there is significant heterogeneity across countries in their responsiveness to changes in trade intensity and trade restrictions.