Competition, Markups, and the Gains from International Trade

Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu

NBER Working Paper No. 18041
Issued in May 2012
NBER Program(s):   EFG   IO   ITI   PR

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.

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An online appendix is available for this publication.

Acknowledgments

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