Bad Trade: The Loss of Domestic Varieties

78 Pages Posted: 23 Mar 2020 Last revised: 6 Jun 2023

See all articles by John Morgan

John Morgan

University of California, Berkeley

Justin Tumlinson

University of Exeter Business School

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute)

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

Morgan, John and Tumlinson, Justin and Várdy, Felix, Bad Trade: The Loss of Domestic Varieties (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3529246 or http://dx.doi.org/10.2139/ssrn.3529246

John Morgan

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Justin Tumlinson (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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