Impacts of TTIP on Processed Food Trade under Monopolistic Competition and Firm Heterogeneity

Abstract

Food processing firms vary in size, exhibit productivity differences, engage in monopolistic competition, and produce highly differentiated products. As the TTIP negotiation is gaining momentum and trade in processed food is becoming more important, it is worth analyzing the impact of this potential trade liberalization on the US and EU processed food markets. This study develops a three-region (United Staates, European Union, and ROW) monopolistic competition trade model with heterogeneous firms to analyze the effects of US-EU bilateral tariff elimination and non-tariff barrier harmonization on prices, domestic production, consumption, bi-lateral trade, cutoff productivity levels, and aggregate productivity in the processed food sector. The empirical results show that this trade liberalization expands cross hauling, with US exports to the European Union increasing b 113.58% and EU exports to the United States rising by 96.19%. This increased cross hauling displaces exports from ROW to the United States and European Union by 47.26% and 16.10%, respectively. US and EU processed food production increases by 4.89% and 3.91%, respectively. Consequently, aggregate utility expands in all three regions.