Goods-market frictions and international trade

Abstract

We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched product varieties that reduce welfare, attenuate welfare responses, increase the responsiveness of trade to iceberg costs, and operate mainly through the extensive margin. Quantitative results based on U.S. and Chinese data suggest that reducing international search costs to their domestic levels raises U.S. and Chinese welfare by 5.6% and 4%, respectively. A model with search frictions attenuates ex-ante welfare responses by 85% and changes the trade elasticity from −3.2 to −5.5 relative to a model without search frictions. The trade elasticity with respect to search costs is −0.7 and search frictions make the intensive and extensive margins of trade with respect to variable costs about equally important. Our framework provides a baseline for analyzing the aggregate implications of search frictions in models of trade.