How Markups Distort Trade Reciprocity

Reciprocity in WTO negotiations is usually recorded as an exchange of tariff concessions. Country A lowers its tariff on steel, while Country B lowers its tariff on automobiles. This accounting treats tariffs as the main wedge governing market access. Firms with market power impose another wedge, the markup, which transfers surplus across borders much as a tariff does.

Ding, Lashkaripour, and Lugovskyy (2026) formalize this equivalence. They compute the tariff-equivalent of markup-driven surplus transfers and estimate an average shadow tariff of 17.6 percent for high-income countries. This figure measures the additional surplus these countries extract from trading partners through market power, beyond the effect of their statutory tariffs. The mechanism runs through within-industry specialization. Rich economies concentrate in product segments with low substitution elasticities and high markups, so their exports extract more rent per unit sold.

Tariff concessions can therefore appear reciprocal while leaving another markup wedge, perhaps a larger one, untouched. A country whose exporters charge high markups extracts surplus that appears in no tariff schedule. A country whose firms face stronger competition and charge lower markups grants more market access than its tariff rates alone suggest. Reciprocity computed only from tariff data is incomplete, and the error systematically favors countries with greater market power.

This conclusion does not by itself make a case for regulating markups through trade agreements. Competition policy and trade policy raise different institutional questions. It does imply that welfare accounting based only on tariffs is incomplete. An assessment of whether an agreement is balanced must account for all wedges between price and marginal cost, including those that governments do not directly control.