Fixed Transport Costs And International Trade

The authors develop a simple two country model of international trade that assumes that there is a fixed cost of doing international trade. They show that this leads to multiple equilibria that can be Pareto-ranked. They examine the stability properties of these equilibria. Then, they examine the stability properties of these equilibria and show that the high trade equilibrium and autarky are stable while the medium volume of trade equilibrium is unstable. They argue that some countries could be in an autarky trap since in the neighborhood of autarky, because of the fixed transportation cost, they would have no incentive to engage in international trade.