Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} andMelitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis reveals that if this condition is satisfied then all countries gain from trade, even when the scale elasticity varies across industries. The presence of scale economies tends to lower the gains from trade except if the country specializes in industries with relatively high scale elasticities. On the other hand, scale economies amplify the gains from trade liberalization except if it leads to reallocation towards industries with relatively low scale elasticities.

We propose a model to study the role of industry-level external economies of scale in open economies. If the elasticity governing the strength of external economies is below the inverse of the trade elasticity in each industry, then specialization under frictionless trade is consistent with comparative advantage, the model is tractable even with trade frictions, and all countries gain from trade. External economies lower gains from trade except if the country specializes in industries with high scale economies, and they amplify the gains from further trade liberalization except if it leads to specialization in industries with low scale economies. (JEL D24, F11, F12, F13)

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Recently in this Journal Grossman and Rossi-Hansberg (2010) proposed a novel way to think about the implications of international trade in the presence of national external economies at the industry level. Instead of perfect competition and two industries, GRH assume Bertrand competition and a continuum of industries. GRH conclude that the equilibrium is unique if transport costs are low, that there is no trade for high transport costs, and that there is no equilibrium in pure strategies when transport costs are intermediate. In this note we reexamine the equilibrium analysis under di¤erent transport costs for a single industry (partial equilibrium) version of GRH's model. We con…rm many of GRH's results, but also …nd that there are circumstances under which there are multiple equilibria, including equilibria in which trade patterns run counter to "natural" comparative advantage, and also …nd that there is a pro…table deviation to the mixed-strategy equilibrium postulated by GRH for intermediate trading costs. We propose an alternative set of strategies for this case and establish that they constitute an equilibrium. JEL code: F10Total word count: 2,807We thank Kalyan Chatterjee, Gene Grossman, Vijay Krishna, Konstantin Kucheryavyy, Esteban RossiHansberg, Adam Slawski, and an anonymous referee for helpful comments. A special thanks also to James Graham-Eagle and Donald Richards for invaluable insights.

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