Industry composition, trade barriers, and their welfare implications: Evidence from Peru's trade liberalization

To what extent do differences in competition across industries affect the gains from trade? This paper develops a trade model with differences in productivity and competition across industries. The model provides sufficient statistics to quantify competition in every industry and welfare. The model highlights three main mechanisms that determine welfare of a country when tariffs decrease: efficiency gains from reallocation of production, changes in industry profits, and changes in relative prices. I bring the theory to the data using datasets of the universe of Peruvian exporters and agreed tariffs over preferential trade agreements of the last 10 years. The decreases in tariffs in Peru have not been uniform across industries: whereas the tariffs of most Peruvian industries have been reduced to zero, a few industries are protected from foreign competition. The calibration shows that reductions in tariffs have a limited impact on welfare if they target non-protected industries.