Trade liberalisation with mobile capital and firm heterogeneity

This paper develops a general equilibrium model that captures the delocation of firms, imbalance of trade in goods and firm selection into export markets. We show that, in the presence of capital being mobile across countries and firms being heterogeneous in productivity, the spatial inequalities in wages and firm allocations are differently affected by trade liberalisation. We explore the welfare effects of trade through two channels: changes in the share of expenditure on domestic goods and factor price adjustments to the spatial reallocation of capital. Selection into export markets magnifies the impact of mobile capital on the welfare gains from trade.