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In a small open economy with heterogeneous firms, in which tariffs determine the mass of active firms, the gains from trade liberalization depend positively on the level of firm vertical heterogeneity (quality heterogeneity) and negatively on transportation costs. The benefits from temporary protection depend on the quality gap: for a given mass of backward firms, the relative gains from protection increase with their quality and decrease with the quality of advanced firms; for given production quality levels, the relative advantage of protection increases with the mass of backward firms.
Keywords: trade policy; learning externalities; infant industry
Published Online: 2010-7-7
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