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The Pro-competitive Effects of Trade Agreements

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  • Crowley, Meredith A.
  • Han, Lu
  • ,

Abstract

How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle-income countries, we document that tariff reductions under trade agreements have strong procompetitive effects -- they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm’s optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tariff-induced reallocation of market share among firms and across countries.

Suggested Citation

  • Crowley, Meredith A. & Han, Lu & ,, 2022. "The Pro-competitive Effects of Trade Agreements," CEPR Discussion Papers 17463, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17463
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    References listed on IDEAS

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    Cited by:

    1. Matteo Neri-Lainé & Gianluca Orefice & Michele Ruta, 2023. "Deep Trade Agreements and Heterogeneous Firms Exports," CESifo Working Paper Series 10436, CESifo.

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    More about this item

    Keywords

    Trade agreements; Variable markups; Markup elasticity; Trade elasticity; Competition policy; Firm level data;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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