Pro-Competitive Effects and Harmful Trade Liberalization in Multi-Country World

Abstract

We study a multi-country trade model with two types of countries (big and small ones). The model generalizes the case of two countries analyzed in [3] and wonder whether there could be harm from trade. Monopolistic competition, iceberg type trade costs and variable elasticity of substitution (VES) are among the model assumptions. The effects of trade liberalization on price, production and welfare are analyzed, in cases of free trade and autarky.

Painful Birth of Trade Under Classical Monopolistic Competition

“…In this paper, the effect stems from strategic behavior and market power in oligopoly, differing from our mechanism of losses, which involves distortion among differentiated varieties within monopolistic competition (a more realistic market structure). In modern literature based on monopolistic competition models, only [Chen and Zeng, 2014] finds similar harm in a two-factor trade model with footloose capital, but does not provide a clear explanation. We suppose that the effect in [Chen and Zeng, 2014] stems from labor/capital substitution and international capital migration.…”

“…In modern literature based on monopolistic competition models, only [Chen and Zeng, 2014] finds similar harm in a two-factor trade model with footloose capital, but does not provide a clear explanation. We suppose that the effect in [Chen and Zeng, 2014] stems from labor/capital substitution and international capital migration. Therefore, our "harm from trade" based on distortion appears to be a phenomenon novel to New Trade.…”

“…To rely on the proofs and explanations in our working papers [Bykadorov et al, 2015c], [Bykadorov et al, 2015a], the exposition of the present model follows almost the same notations; all variables for Gullivers (respectively, Lilliputians) are displayed in capital (resp., lowercase) characters, such notation economizes on the use of subscripts. The only production factor is labor, supplied inelastically by L identical consumers/workers in each Gulliver country (resp., l in Lilliputian), and we assume…”

“…Moreover, under VES, free trade may show welfare loss in comparison with autarky. [Bykadorov et al, 2015b] show such harmful trade under general-form preferences and non-linear costs. Necessary and sufficient condition for welfare diminishing free trade equilibrium is "misaligned revenue and utility," originating from [Dhingra and Morrow, 2012 ].…”

“…Our model is a version of Krugman's general one-sector monopolistic competition ( [Krugman, 1979]), with unspecified additive utilities, and without outside good. Homogeneous firms use one production factor (labor), having uniform fixed and marginal costs, and consumers are also identical (similar model is studied in [Zhelobodko et al, 2012], [Mrázová and Neary, 2014], [Bykadorov et al, 2015a] but for symmetric countries). For analytical tractability, in the difficult case of asymmetric countries, our model includes only two types of economies: G -countries with great populations, and Lcountries, which can be little or equal to G .…”