The Search for Partners and the Path-Dependency of Trade

This paper investigates the implications of matching and searching in inter rm trade. From a schematic model, whereby rms nd long-term trading partners by successive matches, we derive some important propositions. Trade between matched rms generates an expected economic pro t, depending on match quality, while trade between searching rms may be conducted at a short-term loss, being a form of capital accumulation. Contract periods and the availability of nance will a ect the growth of trade. Following trade liberalisation, countries with a large initial number of well-matched rms will show relatively low price elasticities of demand for imports and exports. Apparent home bias in current trade patterns may well re ect past, rather than present trade costs and protection. More importantly, today's policy decisions become tomorrow's history, implying that inappropriate phasing and sequencing decisions for trade deals can potentially have adverse consequences long into the future, if not inde nitely. Match-searching theory strengthens the argument that global welfare is likely to be enhanced by multilateral, rather than by stepwise bilateral liberalisation, and that when deals are spaced too far apart, there is an increased risk that some countries will seek to block further liberalisation.