Public Economics and Policy Seminar - Lorenzo Trimarchi (University of Namur)

Recent decades have witnessed a growing concern among academics and policymakers regarding rising market power and declining competition. This paper examines how trade liberalization has influenced the evolution of markups and market concentration in the small open economy of Belgium. Using detailed balance sheet and trade data covering the universe of Belgian manufacturing firms from 1996 to 2015, we exploit two major trade shocks: China's WTO accession in 2001 and Eastern Europe's integration into the EU and WTO. Employing an instrumental variable strategy based on Dauth et al. (2014), we document that the East European shock significantly increased aggregate markups, total factor productivity (TFP), and market concentration, while the China shock had a more nuanced impact, increasing TFP but reducing market concentration. These effects are primarily driven by within-firm adjustments rather than reallocation across firms, suggesting a shift towards a “winner-take-most” market structure. Our findings highlight the potential anticompetitive effects of trade liberalization, underscoring the need to balance trade integration with competition policy.