Unequal Gains: Profit Shifting, Trade Liberalization, and Welfare in Asymmetric Economies

ABSTRACT Does trade liberalization enhance the welfare impact of profit shifting on asymmetric non‐haven countries? We examine the interaction between trade liberalization and corporate profit shifting within a three‐country framework featuring heterogeneous firms and monopolistic competition. Our model incorporates two non‐haven countries and a tax haven where firms can shift profits. The non‐havens are asymmetric in their concentration of multinational enterprise (MNE) headquarters, with a developed country typically hosting a larger share of MNEs. Our research shows that developing countries can suffer welfare losses from the presence of tax havens, while highly developed economies can benefit. Furthermore, we demonstrate that the interplay between trade liberalization and profit shifting yields non‐monotonic welfare outcomes that are contingent upon a country's MNE concentration.