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date: 24 January 2020

Abstract and Keywords

The revolution in firm-level approaches to trade has significant implications for how political economists approach trade-policy preferences and the demand for policy outcomes. Rather than focusing on factor mobility to explain political cleavages, firm-based political economy models emphasize the role of firm-level heterogeneity in predicting trade’s winners and losers. Trade is a rare activity among producers across all industries; its costliness limits participation to highly productive firms, although not all engage in trade. Thus, while competition from traded goods and services harms relatively unproductive firms, their highly productive counterparts gain from it. Consequently, the latter are much more likely to favor trade liberalization than are the former. As these high-productivity producers are also the most likely to engage in political activities, a clear mechanism exists for linking preferences to policy. These dynamics explain the variations in trade-policy outcomes that cannot be described through reliance on classical models.

Keywords: trade-policy preferences, firm-level heterogeneity, productivity

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