Efficiency gaps, love of variety and international trade

We develop a general equilibrium monopolistic competition model of trade wi th technical heterogeneity among firms and countries. With free entry, tech nical asymmetries between firms result in the endogenous determination of t he equilibrium average efficiency of the industry. We show that trade reduc es (increases) the minimum efficiency required to survive in the more (less ) efficient country. This has important welfare implications: (1) Contrary to the constant elasticity of substitution homogeneous-firms model, trade a ffects welfare even when there is no love of variety. (2) There are circums tances in which trade liberalization leads to a loss of consumer welfare.