The Impact Of Market Distortion On The Gains From Trade

Since the reform and opening up of China,although the sustained high growth of the economy,however,because of the incomplete of China's progressive reform,and the continued existence of local protectionism and policy barriers,resulting in that product and factor can not cross regional,cross sectoral flow freely.The various policy distortions exist in the economy rendering resource misallocation within manufacturing sector,between manufacturing and service sectors and between different regions,and finally resulting in overall productivity loss and decreased consumer welfare.However,the distortion of policy is not the only source of misallocation.Market distortions can also lead to resource misallocation.In this paper,the policy distortion is temporarily put aside,focusing on the discussion of market distortions and resource misallocation.The industrial organization theorists have made deep researches on how market distortions impact resource misallocation and then the welfare of consumers,but are confined to the closed economy framework.In addition,the welfare effect of trade is an evergreen topic in international trade theory.Many international trade theorists have done a lot of research on the existence,the extent and the decomposing of the welfare gains from trade.So,on the one hand,the study of industrial organization theorists is confined to the closed economic framework.On the other hand,the international trade theorists ignore the fact that market distortions exist in the study of the welfare gains from trade.Therefore,there are two main shortcomings in the existing research.First,the lack of how market distortions affect the misallocation of resources and then the welfare gains from trade;second,the lack of how trade liberalization impact the degree of market distortions(i.e.the efficiency gains from trade).This paper attempts to study market distortions,misallocation of resources and gains from trade(welfare gains from trade and efficiency gains from trade)in a unified framework,so as to achieve the integration of industrial organization theory and international trade theory.Based on the theory of industrial organization and the theory of international trade,this paper studies how market distortions impact gains from trade via resource misallocation.Try to answer the following questions:(1)Whether the market allocates resources effectively in the absence of any policy intervention?(2)What is the source of market distortions if the market does not allocate resources effectively?(3)If there is a market distortion in a closed economy,how does trade liberalization impact the welfare gains from trade via resource misallocation?(5)How to decompose the welfare gains from trade with market distortion exists in advance?(5)If there is a market distortion in a closed economy,how does trade liberalization impact the degree of market distortions?In this paper,we study by methods of documents,theoretical modeling and numerical simulation.With the help of these three methods,we get the following conclusions.Firstly,in the closed economy condition,demand structure determines the existence and the direction of market distortion;under the condition of opening up,regardless of firm homogeneity or firm heterogeneity,were find that the demand structure determines the change of degree of market distortions and also the change of consumer welfare.Therefore,the demand structure is very important.However,the different countries and the income of consumers may have different demand structure,which is an empirical problem needed to get the answer from the data.Secondly,there is a widespread domestic market distortion,that is,even if there is no government biased policy intervention,there will be no efficient allocation of resources,because the market itself is not complete.Specifically,in the closed conditions,the number of successful entry into the market is too big,the marginal cost is too large,resulting in a lot of inefficient firms survive which should be exit.In addition,the output of high productivity firm is too small,and the output of the low productivity firm is too large.Therefore,the combination of the cutoff marginal cost distortion,the entry distortion and the output distortion leads to the lower welfare under market equilibrium.Thirdly,no matter what kind of Trade Liberalization(market expansion or decline in trade costs),will lead to an increase in consumer welfare,which is consistent with the results obtained in most of the literature.At the same time,it is found that the efficiency of resource allocation has not been alleviated by the liberalization of trade.This is because,while the welfare of consumers in the market is rising,the social optimum welfare is also rising,and the two are the same.Fourthly,with the decline in the shape parameters of the Pareto distribution,that is,the increase in the average productivity of enterprises,as well as the increase in productivity dispersion among firms,consumer welfare will increase,but the degree of market distortion also intensified.Fifthly,no matter China's market size grows 2 times,3 times or 4 times(such as the elimination of domestic market segmentation,or China trades freely with trading partners through the FTA),or the trade cost decreased gradually between China and the countries with relatively higher(or lower,or similar)technical level.The contribution rate of welfare gains of selection effect is very high,about 105%,and the contribution rate of welfare gains of pro-competitive effect is low,about 5%,a seemingly paradoxical result is that the contribution rate of welfare gains of selection effect is negative,it is about-10%.That is,the welfare gains of variety hinder the growth of welfare.The economic explanation is that the "crowding out effect" of welfare gains of selection effect on the welfare gains of selection effect leads to finally the negative contribution rate.The policy implications are as follows:Firstly,we should continue to promote trade liberalization even if market distortion exists in domestic market.Under the premise of the existence of market distortions,there has been a controversy on whether trade liberalization can improve welfare.This paper finds that the conclusion of this problem depends on the hypothesis of demand structure.Chinese consumers' demand structure satisfies Behrens type utility function.According to the conclusion of the fifth chapter,under the hypothesis of this demand structure,trade liberalization,including the expansion of market size and the decrease of trade cost,can not reduce the market distortion,but it can increase the welfare of consumers.Therefore,we should continue to promote trade liberalization.Secondly,industrial policy and trade policy should be coordinated.This is because the implementation of simple trade openness policy can increase the welfare of consumers,but did not reduce the market distortions,if policymakers first take appropriate industrial policy in the domestic market,reduce or even eliminate pre-existing market distortions,welfare rise will increase a lot with trade openness.Of course,what is the "appropriate" industrial policy?This article does not give an answer.Thirdly,with the increase in the average productivity of Chinese firms(through the decline of the shape parameters of the Pareto distribution),the importance of industrial policy has gradually increased.This is because the increase in the average productivity of firms,although bring in the rise in consumer welfare,also led to market distortions.In addition to the introduction and conclusion,The rest of this paper is organized as follows:Chapter one is the literature review,combing the three categories of literature.The first is the literature about the market distortion,the second category is the relevant literatures on the welfare gains from trade and the third is the relevant literature about the efficiency gains from trade.Finally,in the last part of this chapter,the author reviews the three major categories of literature and finds the innovation points of this paper.Chapter two presents a distorted history of international trade theory.The distortion theory of international trade is an important achievement in the development of postwar international trade theory,which is further divided into "distortion,trade and welfare"theory and "optimal policy intervention" theory.The distortion theory of international trade mainly focus on the impact of trade liberalization on social welfare,and there is no research on the impact of trade liberalization on distortions existed in advance,which forms one of the research contents of this paper.Chapter three and Chapter four are both the pure theoretical research part.These two chapters study two problems respectively in the framework of firm homogeneity and firm heterogeneity.The first one is to study the social efficiency problems in the industrial organization theory under the condition of open economy,that is to say,the research of the influence of trade liberalization on the degree of market distortion with different demand structure assumptions;the second is to study the impact of trade openness on social welfare under the assumption of the market distortions in the closed economy.By setting up a bridge between the theory of industrial organization and the theory of international trade,we have made a contribution to the study of basic theory.In chapter five,we study the impact of China's trade liberalization on the degree of domestic market distortions.First,this paper constructs a general equilibrium model of monopolistic competition,which includes firm heterogeneity and the sub-convex demand structure.We find that trade liberalization can not mitigate domestic market distortion.This is obviously different from Behrens(2012)under the framework of firm homogeneity.Accordingly,there are different policy implications.This conclusion shows that the simple trade liberalization policy can not slow down the existing distortions and a proper industrial policy is also necessary.Then,we go from theory to reality.Based on the Chinese industrial enterprise micro data,we discuss the TFP dispersion and the correlation between TFP and markups and find the significant heterogeneity in productivity China between enterprises,and the positive correlation between TFP and markups.According to the relationship between TFP and markups,we find that the demand structure of the consumer is of sub-convex type.In chapter six,we first calculate the welfare gains from trade of China.Then separate it into three parts,that is,gains from variety,gains from selection effect and gains from pro-competitive effect respectively.This is the first paper that separates the total welfare gains into three parts.We also calculate their respective contribution rate.The last is the conclusion and policy implications.The conclusions of this paper are summarized and the policy implications are put forward.Finally,this paper introduces the directions in further research.