International trade in a model with heterogeneous trade costs, parallel imports and non-homothetic preferences∗

I incorporate heterogeneous trade costs into the model of Foellmi, Hepenstrick, and Zweimüller (2013) to analyze another reason for export zeros, additional to arbitrage constraints resulting from per capita income differences. In my model, high trade costs may be responsible for export zeros. The level of tariffs and transportation costs are crucial for patterns of international trade. I find that trade between a rich and a poor country is only happening, when trade costs lie within a certain range i.e. high enough to prevent losses due to arbitrage but sufficiently low to still let exporting be profitable. Furthermore, the model suggests that with a sufficiently large per capita income gap between trading partners, some poor-country firms find it optimal to exclusively export their products to the rich county but not to offer them at home. These new features allow to explain a large share of the empirically observed regional exclusions. I illustrate with a numerical example that, while rich countries always benefit from a trade liberalization, poor countries may benefit or lose. This is due to the effect that trade costs have on the arbitrage constraint. My model also helps to explain the very low trade relations between poor countries. Some intuitive examples help to illustrate the predictions of the model. JEL classification: F10, F12, F19