The pro-competitive effects of trade agreements

Crowley, Meredith A., Han, Lu and Prayer, Thomas (2024) The pro-competitive effects of trade agreements. Journal of International Economics, 150. ISSN 0022-1996

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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 pro-competitive 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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-i...
Additional Information:	© 2024 The Author(s)
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HF Commerce
JEL classification:	F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade F - International Economics > F1 - Trade > F15 - Economic Integration
Date Deposited:	25 Jun 2024 18:03
Last Modified:	25 Jun 2024 18:12
URI:	http://eprints.lse.ac.uk/id/eprint/123982

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