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The dynamics of trade and competition

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Author Info
Natalie Chen (Warwick, ECARES, CEPR)
Jean Imbs (HEC Lausanne, Swiss Finance Institute, CEPR)
Andrew Scott (London Business School, CEPR)

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Abstract

We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization.

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Publisher Info
Paper provided by National Bank of Belgium in its series Research series with number 200610-3.

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Length: 60 pages
Date of creation: Oct 2006
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Handle: RePEc:nbb:reswpp:200610-3

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Related research
Keywords: Competition; Globalization; Markups; Openness; Prices; Productivity; Trade;

Other versions of this item:

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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  7. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2006. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," NBER Working Papers 12031, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I. [Downloadable!] (restricted)
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  33. repec:rus:hseeco:122439 is not listed on IDEAS
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