Blocking the Giants: Theory and Evidence from the Great Firewall

Trade policy increasingly targets individual firms and products rather than entire sectors or countries. This paper develops a framework for evaluating granular trade policies in highly differentiated markets. Using an event-study design, I first show that product-pair elasticities of substitution are systematically related to the similarity between product descriptions. Motivated by this evidence, I develop a general-equilibrium trade model with oligopolistic competition. Products are heterogeneous in their attribute mix and quality, and substitution strength varies continuously with product similarity. I apply the theory to the mobile app sector and evaluate China's Great Firewall Project (GFW). Removing the GFW raises Chinese consumers' utility from app-based leisure but reallocates profits away from Chinese companies (e.g., Tencent) toward foreign companies (e.g., Meta). In the benchmark calibration, this profit shift more than offsets the direct consumer gain: removing the GFW lowers Chinese welfare by 0.146%, while raising welfare by 0.311% in the United States and 0.080% in the rest of the world.