Royale with Cheese: Globalization, Tourism, and the Variety of Goods

The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an increase in the number of varieties available to consumers. Though the number of varieties in a given country rises, many models predict that global variety decreases as imported varieties drive out local varieties. This is potentially worrisome when consumers care about non-exported foreign varieties as a result of tourism (especially when foreign varieties are highly desired). Since lowering trade costs induces additional firms to export and drives out some non-exported varieties, these modifications result in welfare losses not accounted for in the existing literature. Nevertheless, improvements in non-tourism consumption outweigh any such losses.