Bad Trade: The Loss of Domestic Varieties
78 Pages Posted: 23 Mar 2020 Last revised: 6 Jun 2023
Date Written: January 31, 2020
Abstract
In the context of New Trade Theory with finite choke prices, we show that a country is better off in autarky than in free and costless trade, if its trading partner's marginal cost sufficiently exceeds its own. The initiation of trade hurts both countries. This also holds on a sector-by-sector basis, irrespective of the overall distance to autarky. `Bad Trade' arises even when monopoly distortions have been eliminated through entry fees or subsidies. We derive the lowest import tariffs that guarantee that countries gain from trade. Our results are robust to heterogenous productivity and fixed costs of exporting. Hence, outside of CES utility, which has infinite choke prices, they apply broadly to the monopolistic-competition-based models of New Trade and `New' New Trade Theory.
Keywords: Gains from Trade, Trade Costs, Tariffs, New Trade Theory, Monopolistic Competition, Love of Variety, Scale Gains, Choke Prices
JEL Classification: F12, F13
Suggested Citation: Suggested Citation