Competition, Markups, and the Gains from International Trade

Abstract

We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation, i.e., large inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.

Why trade matters after all

“…Caliendo and Parro (2015), Hsieh and Ossa (2012), Ossa (2014), and others work with multi-industry versions of standard trade models but also do not point out that cross-industry heterogeneity in the trade elasticities has the potential to greatly magnify the gains from trade. Closest in spirit is perhaps the contribution by Edmond et al (2012) which measures the gains from trade originating from procompetitive effects in an oligopolistic trade model. A key finding is that such pro-competitive effects are large if there is a lot of crossindustry variation in markups which is the case if there is a lot of cross-industry variation in the elasticities of substitution.…”

The internationalisation of monetary policy

“…Others argue, however, that globalisation allows for further diversification and insurance opportunities such that the impact of foreign shocks in fact diminishes. As a result, it is easier to achieve domestic targets and the need for coordination falls (Edmond et al, 2012;Hoxha et al, 2013). In general, it is difficult to predict which of these effects will dominate.…”

The welfare consequences of import tariffs: A quantitative perspective

“…17 As the expenditure share λij is defined as λij ≡ P 1−σ ij /P 1−σ j , the gravity equation inherits important characteristics of the import price index. 18 See Appendix D for full details on the derivation.…”

“…The gains from trade are computed using equation (18) with ε τ = 5, δη = 0 in column (5) for the perfect competition models and Krugman, and δη = 0.65 in column (6) for the Melitz model.…”

“…Icebergs and tariffs: Gains from trade that stem from a reduction in iceberg trade costs and/or tariffs consistent with the observed share of tariff revenue in GPD. Gains from trade are computed using equation (18) with ετ = 5. δη = 0 in column (5) and 0.65 in column (6). Tariff act as cost shifters if they are imposed before mark-ups and as demand shifters if they are imposed after mark-ups.…”