Competition, markups, and the gains from international trade

We study the procompetitive gains from international trade in a quantitative model with endogenously variable markups. We find that trade can significantly reduce markup distortions if two conditions are satisfied: (i ) there is extensive misallocation, and (ii ) opening to trade exposes hitherto dominant producers to greater competitive pressure. We measure the extent to which these two conditions are satisfied in Taiwanese producer-level data. Versions of our model consistent with the Taiwanese data predict that opening up to trade strongly increases competition and reduces markup distortions by up to one-half, thus significantly reducing productivity losses due to misallocation.