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Working paper

Painful Birth of Trade Under Classical Monopolistic Competition

Bykadorov I., Ellero A., Funari S., Kokovin S. G., Molchanov P. S.
In the standard Krugman (1979) non-CES trade model, several asymmetric countries typically lose from increasing trade costs. However, all countries transiently benefit from such increase at the moment of closing trade, under almost-prohibitive trade costs (i.e., near autarky, which is possible only under non-CES preferences). In other words, during trade liberalization the first step from autarky to trade is necessarily harmful. Our explanation rests on market distortion and business destruction effects.