PROFIT SHIFTING AND TRADE AGREEMENTS IN IMPERFECTLY COMPETITIVE MARKETS*

Abstract

Do new rationales for trade agreements arise once imperfectly competitive markets are allowed? We consider several trade models that feature imperfectly competitive markets and argue that the basic rationale for a trade agreement is, in fact, the same rationale that arises in perfectly competitive markets. In all of the models that we consider, and whether or not governments have political–economic objectives, the only rationale for a trade agreement is to remedy the inefficient terms‐of‐trade‐driven restrictions in trade volume. We also show that the principles of reciprocity and nondiscrimination continue to be efficiency enhancing in these settings.

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