Welfare effects of trade liberalization under the heterogeneous firm framework: a review of the literature

CHEN Yongbing1 ZHAO Yang1 WANG Ting1

(1.School of Business Administration, Zhongnan University of Economics and Law)

【Abstract】Benefits from trade liberalization is a core issue in international trade. Based on the heterogeneous firm framework, this article summarizes the existing theoretical and empirical literature, discusses three sources of benefits from trade(imported inputs, inter- and intra- company resource reallocation, and lowered price and cost markups), notes the shortcomings in existing literatures, and explores the direction of future research. It clarifies the sources of the welfare effect from trade liberalization and provides a micro-level basis for welfare-iproving trade policy.

【Keywords】 trade Liberalization; import variety; resource reallocation; cost markup;


【Funds】 This study is sported by National Nature Science Fund (71573278); National Nature Science Fund Youth Project (71203239) Huo Ying Dong Education Fund 14th Higher Education Institution Young Teacher Fund Elementary Research Project (141085) Zhongnan University of Economics and Law Postgraduate Innovation Education Project “Excellent Master’s Degree Dissertation Nurture” Project (2015YS1002)

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(Translated by YI Ran)


    [1]. 1) Chen Yongbing et al. (2014) offered a detailed review of trade profit under the oligopolistic competition framework. [^Back]

    [2]. 2) Profit erosion refers to the mechanism that the impact of new product manufacturing or export on the scale of existingdemanded product variety. Flexible manufacturing technology refers the case where a firm deviates from its core competitiveness brought by manufacturing a certain product and manufactures its “marginalized product,” which would lead to the excessive production cost as compared to the production cost of its “core product.” [^Back]

    [3]. 3) Four initial hypotheses are: D-S preference; each product only has one factor; linear cost function; complete or oligopolistic competition. [^Back]

    [4]. 4) Three macro level limitations are: trade is balanced; overall revenue is represented by fixed share of overall profit; satisfying CES import requirement system. [^Back]


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This Article


CN: 11-1692/F

Vol , No. 03, Pages 28-36

March 2016


Article Outline


  • Introduction
  • 1 Benefits from import inputs
  • 2 Benefits from resource re-allocation
  • 3 Price markup and reallocation efficiency
  • 4 Future orientation of research
  • Footnote