Markups, Production Relocation, and the Gains from Trade

100 Pages Posted: 14 Dec 2020 Last revised: 9 Nov 2023

See all articles by Hamid Firooz

Hamid Firooz

Department of Economics, University of Rochester

Gunnar Heins

University of Florida - Department of Economics

Date Written: November 25, 2020

Abstract

This paper develops a multi-sector, multi-country model of international trade and profit shifting that embeds imperfect competition into Eaton and Kortum (2002)'s Ricardian trade model and allows markup distributions for both imports and exports to vary across sectors and countries. We first show theoretically how the gains from trade liberalization depend on the markup distribution for imported relative to exported goods. To bring the model to the data, we estimate both trade elasticities and a rich set of country-and industryspecific import demand elasticities for over 36,000 distinct sector-country pairs. We find that crosscountry heterogeneities in export markups relative to import markups are a first-order determinant of the gains from trade and especially the welfare losses from tariffs. By flexibly taking heterogeneity in markups into account, these losses are up to three times larger for net exporters of high-markup products. We apply our model to the recent U.S.-China trade war and show that U.S. welfare losses from the tariff war are more than twice as high once markups and profit shifting are taken into account, whereas China benefited slightly overall.

Keywords: JEL Codes: F12, F14 Profit shifting, production relocation, imperfect competition, markup, trade war, gains from trade

JEL Classification: F12, F14

Suggested Citation

Firooz, Hamid and Heins, Gunnar, Markups, Production Relocation, and the Gains from Trade (November 25, 2020). Available at SSRN: https://ssrn.com/abstract=3740634 or http://dx.doi.org/10.2139/ssrn.3740634

Hamid Firooz (Contact Author)

Department of Economics, University of Rochester ( email )

Department of Economics
227 Harkness Hall
Rochester, NY 14627
United States

HOME PAGE: http://https://sites.google.com/view/hamidfirooz/home

Gunnar Heins

University of Florida - Department of Economics ( email )

Department of Economics
224 Matherly Hall
Gainesville, FL 32606
United States

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