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Welfare-Reducing Trade Liberalization

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Recent literature on the workhorse model of intra-industry trade has explored heterogeneous cost structures at the firm level. These approaches have proven to add realism and predictive power. This paper shows, however, that this added realism also implies that there may exist a positive bilateral tariff that maximizes national and world welfare. Applying one of the simplest specifications possible, namely a symmetric two-country intra-industry trade model with fixed export costs that are heterogeneous across firms, we find that the reciprocal reduction of small tariffs reduces welfare.
Original languageEnglish
Place of publicationNottingham
PublisherUniversity of Nottingham, Leverhulme Centre for Research on Globalisation and Economics Policy
Number of pages21
Publication statusPublished - 2005

    Research areas

  • Intra-industry trade, monopolistic competition, heterogeneous firms, welfare, protectionism, Intra-industry trade, heterogeneous firms, welfare, protectionism

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ID: 32343949