The Dynamics of Trade and Competition

National Bank of Belgium Working Paper No. 91

60 Pages Posted: 9 Oct 2010

See all articles by Natalie Chen

Natalie Chen

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Jean M. Imbs

Paris School of Economics (PSE); NYU Abu Dhabi; Centre for Economic Policy Research (CEPR)

Andrew Scott

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 12, 2006

Abstract

We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization.

Keywords: Competition, Globalization, Markups, Openness, Prices, Productivity, Trade

JEL Classification: E31, F12, F15, L16

Suggested Citation

Chen, Natalie and Imbs, Jean M. and Imbs, Jean M. and Scott, Andrew, The Dynamics of Trade and Competition (October 12, 2006). National Bank of Belgium Working Paper No. 91, Available at SSRN: https://ssrn.com/abstract=1688971 or http://dx.doi.org/10.2139/ssrn.1688971

Natalie Chen (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8419 (Phone)
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Centre for Economic Policy Research (CEPR)

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United Kingdom

Jean M. Imbs

Paris School of Economics (PSE) ( email )

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Paris, 75014 75014
France

NYU Abu Dhabi ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Andrew Scott

London Business School - Department of Economics ( email )

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+44 20 7706 6780 (Phone)
+44 20 7402 7875 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

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