This paper examines the efficacy of second-best trade restrictions at correcting sectoral misallocation due to scale economies or profit-generating markups. To this end, we characterize optimal trade and industrial policies in an important class of quantitative trade models with scale effects and profits, estimating the structural parameters that govern policy outcomes. Our estimates reveal that standalone trade policy measures are remarkably ineffective at correcting misallocation, even when designed optimally. Unilateral adoption of corrective industrial policies is also ineffective due to immiserizing growth effects. But industrial policies coordinated internationally via a deep agreement are more transformative than any unilateral policy alternative.

The tariff-for-revenue argument has been invoked repeatedly in recent years to justify protectionism. It is motivated by the belief that a country with market power can use trade taxes to raise revenue from foreign consumers and producers. This paper develops a new sufficient statistics methodology to evaluate this claim for a wide range of countries. I show that (a) even large countries have limited market power. (b) So, before retaliation by trading partners, the average country can beneficially replace only 16% of its domestic tax revenues with trade taxes. (c) After retaliation, however, 50% of the collected trade tax revenues disappear, governments are forced to increase domestic taxes to counter their shrinking tax base, and real GDP drops across-the-board by an average of 7%. On the flip side, these findings indicate (d) the gains from multilateral trade agreements are also 30% larger once we account for the fiscal cost of trade wars.

Tariff wars have reemerged as a serious threat to the global economy. Yet measuring the prospective cost of a global tariff war remains computationally prohibitive, unless we restrict attention to a small set of countries and industries. This paper develops a new methodology that measures the cost of a global tariff war in one simple step as a function of observable shares, industry-level trade elasticities, and markup wedges. Applying this methodology to data on 44 countries and 56 industries, I find that (i) the prospective cost of a global tariff war has more-than-doubled over the past fifteen years, with small downstream economies being the most vulnerable. (ii) Meanwhile, due to the rise of global markup distortions, the potential gains from cooperative tariff policies have also elevated to unprecedented levels.

This paper uncovers a new type of quality specialization that occurs along the physical weight margin. To this end, I document that (i) there is great heterogeneity in the unit weight of traded goods even within narrowly-defined product categories; (ii) heavier varieties of the same product are more costly to produce; (iii) heavier varieties exhibit (on average) a higher product appeal or quality; and (v) the cost of transportation increases more rapidly with unit weight than the cost of production. These observations indicate that suppliers face a basic quality-cost trade-off when choosing their output unit weight. As a result of this trade-off, high-wage economies specialize in heavier varieties of a given good, while geographically distant economies specialize in lighter varieties (i.e., weight-based quality specialization). Micro-level trade data support these predictions and suggest that weight-based quality specialization can explain a significant portion of the cross-national variation in export prices and export quality. Moreover, accounting for the heterogeneity in export unit weights yields support for the iceberg trade cost assumption, which has proven to be elusive in the past.

International quality specialization (IQS) and pricing-to-market (PTM) are two of the most studied phenomena in international trade. I present new evidence that PTM and IQS are significantly more pronounced in discrete industries that involve indivisible consumption goods. In light of this observation, I develop a generalized model of international trade that accommodates both discrete and continuous industries. Using this general framework, I argue that IQS and PTM in discrete industries are magnified by (i) affordability constraints, and (ii) cross-country differences in the price of non-traded services. These predictions find strong support from micro-level trade data. Furthermore, I show that the unique forces underlying discrete trade shed fresh light on the gains from trade and the “big-push” effects of globalization.

Export price levels exhibit tremendous cross-national and spatial variation, even within narrowly-defined industries. Standard theories attribute this variation to within-industry quality specialization. This paper argues that a significant portion of the export price variation is driven by rich and remote economies specializing in high-market power, high-returns-to-scale segments of industries. I also argue that this particular pattern of specialization (i) accounts for 30% of the overall gains from trade, and (ii) explains more than 37% of the observed cross-national income inequality.