Royale with cheese : the effect of globalization on the variety of goods

The key result of the so-called “New Trade Theory” is that countries gain from
falling trade costs by an increase in the number of varieties available to consumers.
Though the number of varieties in a given country rises, it is also true that global variety
decreases from increased competition wherein imported varieties drive out some
local varieties. This second result is a major issue for anti-trade activists who criticize
the move towards free trade as promoting “homogenization” or “Americanization” of
varieties across countries. We present a model of endogenous entry with heterogeneous
firms which models this concern in two ways: a portion of a consumer’s income is
spent overseas (i.e. tourism) and an existence value (a common tool in environmental
economics where simply knowing that a species exists provides utility). Since lowering
trade costs induces additional varieties to export and drives out some non-exported
varieties, these modifications result in welfare losses not accounted for in the existing
literature. Nevertheless, it is only through the existence value that welfare can fall
as a result of declining trade barriers. Thus, for these criticisms of globalization to
dominate, it must be that this loss in the existence value outweighs the direct benefits
from consumption.