Journal article

Competition, Markups, and the Gains from International Trade †

C Edmond, V Midrigan, DY Xu

American Economic Review | American Economic Association | Published : 2015

Abstract

We study the procompetitive gains from international trade in a quantitative model with endogenously variable markups. We find that trade can significantly reduce markup distortions if two conditions are satisfied: (i) there is extensive misallocation, and (ii) opening to trade exposes hitherto dominant producers to greater competitive pressure. We measure the extent to which these two conditions are satisfied in Taiwanese producer-level data. Versions of our model consistent with the Taiwanese data predict that opening up to trade strongly increases competition and reduces markup distortions by up to one-half, thus significantly reducing productivity losses due to misallocation.

University of Melbourne Researchers

Grants

Awarded by National Science Foundation


Awarded by Australian Research Council


Funding Acknowledgements

Edmond: Department of Economics, University of Melbourne, 111 Barry Street, Carlton, VIC 3010, Australia (e-mail: cedmond@unimelb.edu.au); Midrigan: Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012, and NBER (e-mail: virgiliu.midrigan@nyu.edu); Xu: Department of Economics, Duke University, 419 Chapel Drive, Box 90097, Durham, NC 27708, and NBER (e-mail: daniel.xu@duke.edu). We thank four anonymous referees for valuable comments and suggestions. We have also benefited from discussions with Fernando Alvarez, Costas Arkolakis, Andrew Atkeson, Ariel Burstein, Vasco Carvalho, Andrew Cassey, Arnaud Costinot, Jan De Loecker, Dave Donaldson, Ana Cecilia Fieler, Oleg Itskhoki, Phil McCalman, Markus Poschke, Andres Rodriguez-Clare, Barbara Spencer, Ivan Werning, and from numerous conference and seminar participants. We also thank Andres Blanco, Sonia Gilbukh, Jiwoon Kim, and Fernando Leibovici for their excellent research assistance. We thank the National Science Foundation for financial support under grant SES-1156168. Edmond also thanks the Australian Research Council for financial support under grant DP-150101857. Midrigan also thanks the Alfred P. Sloan foundation for financial support. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. Midrigan is a consultant at the Federal Reserve Bank of Minneapolis.