Abstract: Cost-based trade measures, including carbon border adjustments and countervailing duties, are increasingly used to reshape global trade. Their incidence and efficiency hinge on how exporters translate marginal cost changes into export prices. Using transaction-level data for Chinese exporters and exogenous movements in world input prices, this paper provides new evidence on own cost pass-through to export prices. Pass-through is incomplete, about 40 cents per dollar in levels, and heterogeneous in percentage terms; within markets, this heterogeneity is consistent with a single linear pricing rule in levels. Motivated by this evidence, we develop an open economy model with variable markups and constant level pass-through. Firms optimally choose prices that are linear in marginal costs, yielding a tractable link between cost exposure and pricing decisions. The resulting demand system features variable elasticities and endogenous markups while remaining analytically transparent. In this environment, a broad class of non-discriminatory trade policies can reduce misallocation and raise world welfare, provided that exporters follow linear pricing in levels. Applied to China's VAT export rebate, the model implies that most of the world's loss from the unrefunded tax falls on foreign buyers and that a per-unit subsidy recovers more of the efficiency loss than any single ad valorem rate. The framework offers a disciplined way to incorporate empirically relevant pricing in levels into quantitative trade and policy analysis.

For Information contact angela.baldassarre@unibocconi.it or giulia.zenoni@unibocconi.it