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Working paper

Elusive Pro-competitive Effects and Harm from Gradual Trade Liberalization

Препринты ИМ СО РАН. 295/2015. Институт математики им. С. Л. Соболева СО РАН , 2015. No. 295.
Bykadorov I., Pavel Molchanov, Sergey Kokovin.
We examine the Krugman's trade model with asymmetric countries, one sector, one production factor and unspecified utility/cost functions. (i) Welfare losses from opening free trade are very unlikely, but in costly trade, losses from small decrease in trade costs are guaranteed near autarky because of market distortion. (ii) The flatter demand curve is, the smaller are gains from trade, in spite of pro-competitive effects (our numerical estimates use AHARA utility). (iii) The bigger is the country, the bigger is its wage and price advantage (wage HME) and thereby welfare advantage over the smaller country. However, the small one benefits more from free trade.