Impacts of the transatlantic trade and investment partnership on processed food trade under monopolistic competition and firm heterogeneity

Food processing firms vary in size, exhibit productivity differences, produce highly differentiated products, and engage in monopolistic competition. As the Transatlantic Trade and Investment Partnership 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 U.S. and E.U. processed food markets. This study develops a three-region (United States, European Union, and Rest of the World) monopolistic competition trade model with heterogeneous firms to analyze the effects of U.S.-E.U. bilateral tariff elimination and nontariff barrier harmonization on prices, domestic production, bilateral trade, productivity, measure of operating firms, and welfare in the processed food sector. The results show that this trade liberalization expands cross-hauling, with U.S. exports to the European Union increasing by about 95% and E.U. exports to the United States rising by about 87%. This increase in cross-hauling displaces exports from the Rest of the World to the United States and the European Union by approximately 3% and 8%, respectively. U.S. and E.U. total processed food production increases by about 4% and 0.4%, respectively. Because of lower prices and more consumption, net welfare expands in all three regions.