Not all trade restrictions are created equally

Matthew T. Cole (1)

1 UCD School of Economics, Newman Building (Room G215)

There has been great focus in the recent trade theory literature on the introduction of firm heterogeneity into trade models. This introduction has highlighted the importance of the entry/exit decision of firms in response to changes in trade barriers. However, it is typical in many of these models to use iceberg transport costs as a general form of trade barriers that can be interchangeable with ad valorem tariffs. I show that this is not always an appropriate conclusion. Specifically, I illustrate that profit for an exporter is more elastic in response to tariffs than iceberg transport costs, which affects the entry/exit decision of firms. This has implications for welfare analysis and empirical specifications.

Mots clés: Intra-industry trade; Trade policy; Firm heterogeneity; Monopolistic competition; F10; F12; F13

Domaines: Économie et finance quantitative [q-fin]

Matthew T. Cole. Not all trade restrictions are created equally. Review of World Economics, 2011, 147 (3), pp.411-427. ⟨10.1007/s10290-011-0090-1⟩. ⟨hal-00665003⟩