DP8161 No trade, one-way or two-way trade?

Author(s):	Toshihiro Okubo, Pierre M Picard, Jacques-François Thisse
Publication Date:	December 2010
Keyword(s):	capital mobility, country asymmetry, trade regime
JEL(s):	F12, H22, H87, R12
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8161

We study how the level of trade costs and the intensity of competition can explain the existence of two-way, one-way or no trade within the same industry. As trade costs decrease from very high to very low values, the economy moves from autarky to a regime of two-way trade, through a regime of one-way trade from the larger to the smaller country. Trade is less likely when the economy gets more competitive. Finally once capital is mobile across countries, the market delivers an outcome in which capital is too much concentrated in the large country.