TradeDiversion.net
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Trade Diversion
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- Why is it important to model the role of traders explicitly? We do so not simply to inject a dose of realism into the analysis but because the size of the import industry matters for the amount of trade that takes place and the consequent level of social welfare. And the size of the import industry, in turn, is affected by the costs and risks involved in importing. This is where our model differs from the standard partial equilibrium analysis of trade policy under perfect competition: by explicitly introducing entry costs and an element of uncertainty for all potential traders - factors that are crucial in determining the entry decisions of traders and ultimately, the outcome of trade policies - we show that neglecting the role of traders can lead one astray in evaluating the effects of various trade restrictions. Thus, the fundamental contribution of this paper lies in its implications for trade policy, which differ quite substantially from the norm.
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