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 input cost pass-through to export prices. Pass-through is incomplete and heterogeneous in percentage terms, but approximately linear and homogeneous 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 that shift marginal costs proportionally can reduce misallocation and raise world welfare, provided that exporters follow linear pricing in levels. The framework offers a disciplined way to incorporate empirically relevant currency unit pricing into quantitative trade and policy analysis.

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