Procompetitive Losses from Trade

We argue that the procompetitive e¤ect of international trade may bring about signif-icant welfare costs that have not been recognized. We formulate a stylized general equilib-rium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence that trade might be responsible for it and provide some quanti\u85cations of the induced welfare cost. Our results suggest that, to avoid some unpleasant e¤ects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors