| Since Ricardo proclaimed free trade an enhancer of welfare, economists have constructed a perfectly competitive theory of markets in which the voluntary exchange of goods and services must be an activity that improves the welfare of every nation. In the last twenty years, economists have revolutionized the field by firmly establishing the possibility of modeling imperfectly competitive international markets. However, the issue of how gains from trade are divided when some markets are imperfectly competitive has been largely ignored. On first blush, it may seem countries gain from trade even if some markets are imperfectly competitive. After all, without trade restrictions, the distortions due to imperfect competition should be minimized everywhere. Then, the elimination of trade barriers should increase welfare in every country. However, in a general equilibrium model of 2 countries and 2 sectors, this volume shows this statement must be made with caution.; To see why, recall a property of imperfectly competitive international markets: producers may make positive profits. Then, welfare changes resulting from trade must account for changes in producer surplus. In this case, imperfect competition can cancel the consumer gains from trade, because rent shifting allows an exporting firm to extract producer surplus from sales in foreign countries to the detriment of foreign producers and hence countries. In specific, though lower trade barriers make consumers in every country better off and increase world total welfare, enough rent may be extracted through importing to make social surplus in a country fall.; Like classical trade models, identical countries will not trade, As a result, we consider two variants of the model, In the first, countries have identical technologies and trade because of different preferences. Here, one country always loses from trade. In the second, countries have identical preferences and trade occurs because of different technologies. Here, the less efficient country may or may not lose from trade depending on how different the technologies are. In specific, if the efficiency difference is sufficiently small, the less efficient country loses from trade. On the other hand, if the efficiency difference is sufficiently large, it gains from trade, despite rent shifting. |
