The inquiry into the relationship between countries’ trade policy and their subsequent economic growth has two branches. The first seeks to relate cross-country differences in openness to cross-country variation in GDP growth. The second focuses on the microeconomic link between firm exporting and firm productivity. This paper uses several new firm-level models of international trade to explore a third channel, the evolution of industry productivity resulting from a reallocation of activity across firms in response to changes in trade costs.
An increase in aggregate industry productivity as a result of falling trade costs is a key feature of three heterogeneous-firm, general equilibrium trade models recently introduced by Bernard et al. (2000), Melitz (2002), and Yeaple (2002). These models emphasize productivity differences across firms operating in an imperfectly competitive industry consisting of horizontally differentiated varieties. In all three models, the existence of trade costs induces only the most productive firms to self-select into exporting. As trade costs fall, industry productivity rises due a reallocation of activity across firms: lower trade costs cause low productivity non-exporting firms to exit and high productivity non-exporters to increase their sales through exports, thereby increasing their weight in aggregate industry productivity. An important feature of these models is that the increase in aggregate productivity is not a result of faster firm productivity growth from exporting.
This paper provides the first empirical examination of the relationship among industry trade costs, firm reallocation, and industry productivity in the U.S.. A key contribution of our analysis is the connection of plant-level U.S. manufacturing data to industry-level measures of trade cost changes. We define trade costs as the sum of ad valorem tariff and transport costs, and construct them using U.S. product-level trade data. Trade costs are found to vary substantially across both industries and time.
We report two main results. First, we find that aggregate industry productivity rises as trade costs fall. Second, we find support for two of the four firm-level implications, and weak evidence for a third, that are integral to industry reallocation in the heterogeneous-firm models. The probability of plant death is higher in industries experiencing declining trade costs, as is the probability of successfully entering the export market. In addition, existing exporters’ exports grow as industry trade costs decline. These results highlight the heterogeneity of firm outcomes within industries, calling attention to the fact that there are both winners and losers within industries as a result of trade liberalization.
The relationship between falling trade costs and faster productivity growth is not uniform across industries. We find that within-industry reallocation in response to changes in trade costs is strongest for industries where the U.S. has high levels of imports from, and exports to, other high income countries. These industries are more likely to encompass trading in horizontally differentiated varieties, and therefore provide a closer fit with theory.
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Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics
