Working Paper: CEPR ID: DP8161
Authors: Toshihiro Okubo; Pierre M. Picard; Jacques-François Thisse
Abstract: We study how the level of trade costs and the intensity of competition can explain the existence of two-way, one-way or no trade within the same industry. As trade costs decrease from very high to very low values, the economy moves from autarky to a regime of two-way trade, through a regime of one-way trade from the larger to the smaller country. Trade is less likely when the economy gets more competitive. Finally once capital is mobile across countries, the market delivers an outcome in which capital is too much concentrated in the large country.
Keywords: capital mobility; country asymmetry; trade regime
JEL Codes: F12; H22; H87; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | economy transitions from autarky to twoway trade (F00) |
| trade costs (F19) | economy transitions through oneway trade (F19) |
| competition intensity (L13) | likelihood of trade (F19) |
| larger country attracts more capital (F21) | concentration effect diminishes trade opportunities for smaller country (F12) |
| capital is mobile (F20) | capital tends to concentrate in larger country (P19) |
| high competition (L13) | capital may flow in opposite direction (F21) |