A Comprehensive Empirical Analysis of Trade Policy with Monopolistic Competition in a Small Country

To access, with industry-level data, an ampler set of trade-policy effects under imperfect competition, which are: the competition, the scale and allocative effects. In theoretical terms, we rely on comparative advantages, underpinning the general-equilibrium analysis, and on spatial monopolistic competition, underpinning the industrial organization analysis. The empirical strategy is based on a reduced equation regression model restricted to the period under protection. Accordingly, the identification of each of those trade-policy effects is drawn from within-period counterfactuals, which entail not only simulation with distinct variables but also with distinct statistical tools. In the case of two fixed-cost variables, comparison is limited to the US economy, under the assumption that this technology would not substantially change across those developed countries. To identify the following effects from protectionism within the regression model: 1. a reduction in the singular comparative contribution of the scale (size) of the Brazilian firms; 2. an increase in the singular negative impact of price distortion, stemming from higher market power, or rather from lower competition; 3. a smaller contribution from comparative (marginal) cost. Each of these effects are expressed by a coefficient value under trade protection as compared to that of the simulated free-trade economy.