The elusive procompetitive effects of trade

We study the gains from trade liberalization in models with monopolistic compe-tition, firm-level heterogeneity, and variable markups. For a large class of demand functions used in the international macro and trade literature, we derive a parsimo-nious generalization of the welfare formula in Arkolakis, Costinot, and Rodríguez-Clare (2012). We then use micro-level trade data to quantify the implications of this new formula. Our main finding is that gains from trade liberalization predicted by models with variable markups are slightly lower than those predicted by models with constant markups. In this sense, pro-competitive effects of trade are elusive. We thank numerous colleagues, discussants, and seminar participants for helpful comments. Federico Esposito, Cory Smith, and Anthony Tokman provided superb research assistance.