Ahmad LashkaripourDirect answer
How Markups Distort Trade Reciprocity
Market power functions as a shadow tariff, shifting surplus across borders and undermining reciprocity metrics that count only observed tariff rates.
Parent topic: Markups, Scale Economies, and Trade
Trade reciprocity, as practiced in WTO negotiations, is measured in tariff concessions. Country A lowers its tariff on steel; Country B lowers its tariff on automobiles. The implicit accounting assumes that tariffs are the principal wedge distorting market access. But firms with market power impose their own wedge, the markup, and this wedge transfers surplus across borders in much the same way a tariff does.
Ding, Lashkaripour, and Lugovskyy (2026) formalize the analogy. They compute the tariff-equivalent of markup-driven surplus transfers and find that high-income countries enjoy an average shadow tariff of 17.6 percent. This is not a metaphor: it is a quantitative statement about how much additional surplus these countries extract from trading partners through market power, over and above whatever their statutory tariffs impose. The mechanism runs through within-industry specialization. Rich economies concentrate in product segments where substitution elasticities are low and markups are high, so every unit they export carries a larger rent extraction.
The consequences for trade agreements are concrete. If two countries negotiate tariff reductions and declare the result reciprocal, they have equalized one wedge while ignoring another that may be larger. A country whose firms charge high markups on exports is extracting surplus that does not appear in any tariff schedule. A country whose firms face intense competition and charge low markups is, in effect, granting market access more generously than its tariff rates suggest. Reciprocity computed only from tariff data is incomplete, and the error is systematic: it favors countries with more market power.
This does not mean markups should be regulated through trade agreements; competition policy and trade policy raise different institutional questions. But it does mean that the welfare accounting of trade agreements is wrong if it ignores markups. Any assessment of whether a deal is balanced must consider the full set of wedges between price and marginal cost, not only the wedge that governments directly control.
Related papers
Markups as Shadow Tariffs: How Market Power Skews Trade Reciprocity
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Within-Industry Specialization and Global Market Power
This paper argues that rich and remote countries sort into high-market-power product segments. That pattern helps explain both export price differences and a large part of the gains from trade.
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Key questions
Why call a markup a shadow tariff?
A tariff inserts a wedge between the world price and the domestic price, creating deadweight loss at home and transferring surplus from foreign exporters to the domestic treasury. A markup does something analytically parallel: it inserts a wedge between marginal cost and the sale price, creating deadweight loss and transferring surplus to the firm's owners, who may be domestic or foreign. When the firm exports, part of the surplus extraction falls on foreign consumers, just as a tariff would. The term "shadow tariff" captures this welfare equivalence.