Data and Code for: Profits, Scale Economies, and the Gains from Trade and Industrial Policy

This paper examines the efficacy of second-best trade restrictions at correcting misallocation in the domestic economy. To this end, we derive sufficient statistics formulas for first-best and second- best optimal policies in an important class of quantitative trade models where misallocation stems from scale economies or profit- generating markups. We then estimate the essential parameters of the model and apply our optimal policy formulas to quantify the ex-ante gains from trade and industrial policy among major countries. Our estimates reveal (i) that standalone trade policy measures are remarkably ineffective at correcting misallocation; (ii) unilateral adoption of corrective industrial policies is also ineffective as it leads to immiserizing growth; but (iii) industrial policies coordinated internationally via deep agreements are more transformative than any unilateral policy alternative.