B06: Trade policy and market structure

The liberalization of product markets and the reductions in international trade costs have changed the conditions under which economic transactions take place — both within and across countries — and, thus, have changed firms’ performance, workers’ labor market outcomes and policy-makers’ incentives to regulate markets.

First, building on the results of the first funding period, we investigate theoretically and empirically the design and the impact of trade policy in the context of firm heterogeneity. The ongoing US-China trade war, Brexit, and a general strive for unilaterlism have put into question the traditional model of multilateral cooperation. The recent wave of unilateralism is also threatening the production methods of multinational companies which rely on global value chains (GVCs). These GVCs magnify the distortions of trade policy because tariffs are charged on the gross value of trade which crosses international borders several times during the production process. A major aim of our research in the second funding period will be to better understand the role of trade policy in the presence of GVCs.

One important reason for the increased resistance to free trade is the effect of globalization on income distribution. The second goal of our research is thus to gain a better understanding of the interaction effects between trade, labor market outcomes, and inequality. A challenge in identifying the impact of trade on these outcomes is that its effect is often indirect. For example, trade may induce increased inequality via organizational and technical change, or changes in the supply of human capital. These indirect effects of trade on labor markets and inequality have so far not been sufficiently explored.

Third, the project aims to improve our understanding of how market conditions affect firms’ organizational structure in general equilibrium. Market conditions may impact both on firms’ integration decisions and their internal organization. Market conditions, in turn, depend on trade policy and other types of regulation. This implies that we need to better understand how regulation, industrial policies, and trade policies affect firms’ organizational decisions, because these have important consequences for firm performance and welfare.