Does input trade liberalization boost downstream firms' exports? Theory and firm-level evidence

Outline

• Abstract
• Jel Classification
• Keywords
• 1. Introduction
• 2. Theory
• 2.1. Technology
• 2.2. Preferences, Demand and Prices
• 2.3. Export Revenues and Intermediate Product Prices: Some Properties
• 2.4. Impact of Input Tariffs on Export Decisions
• 2.5. Discussion
• 3. Empirical Model and Estimation Strategy
• 4. Data and Variables
• 4.1. Firm Data
• 4.2. Tariffs
• 4.2.1. Input Identification
• 4.2.2. Input Tariff at the European Border
• 4.2.3. Alternative Measures of Input Tariffs
• 4.3. Selection Variable
• 4.4. Descriptive Statistics
• 5. Results
• 5.1. Input Tariffs, Export Status and Exports
• 5.2. Robustness Checks
• 5.3. the Magnitude of the Input Tariff's Effects on Export Sales
• 6. Conclusion
• Appendix A. the Impact of T on Ri
• References

Conclusions

We have studied the impact of input tariffs on export status and export performance. Using a theoretical model with heterogeneous firms, we show that changes in input tariffs do not have a clear impact on the export level or export decisions of food processing firms. The sign of the effect depends on the fixed export costs and labor productivities of firms. When fixed export costs are low enough, falling input tariffs decreases the probability of entering foreign markets and leads to the reallocation of exports from low-productivity firms to high productivity firms. The export sales of high productivity firms increase, whereas export sales of low productivity firms decrease.

When fixed export costs are sufficiently high, lower input tariffs increase both the probability of exporting and the export sales of all firms. Nevertheless, the most productive firms gain more than the least productive firms. This model can be applied to all processing industries that use a fixed proportion of intermediate goods to produce a differentiated output. We then compared the predictions of the theoretical model to firm-level data on the food sector in France. Our empirical findings do not invalidate the conclusions of our theoretical model. Even if the liberalization of agricultural trade increases total export sales of food firms, its effects vary between firms. More precisely, lower tariffs in the agricultural sector favored the exit of French food firms from foreign markets and increased the export sales of more productive firms at the expense of less productive firms. These exporting firms losing out from lower input tariffs represent a low share of export sales but hire a non-negligible share of workers due to their low labor productivity. In our approach, we consider the total mass of firms to be given (only the share of exporting firms is endogenous). It would be interesting to explore the impact of input trade on domestic market structure. For example, our approach could be extended to analyze the impact of input trade liberalization on the entry and exit decisions of domestic firms both theoretically and empirically.

Finally, it should be mentioned that falling input tariffs can also allow firms to import additional input varieties (Goldberg et al., 2010) or may cause innovation and new varieties of domestically produced inputs. Our theoretical approach focuses on the price effect, whereas Goldberg et al. (2010) highlight the role played by the variety effect. Unfortunately, our data do not enable us to disentangle the two effects. Note that the recent literature on the effect of input tariffs uses data in developing countries. It is not surprising that the variety effect is strong in the developing countries because the growth of new imported varieties (products that had not been imported prior to the trade reforms) is substantial (see, for example, Goldberg et al., 2010). In more developed countries, the price effect should be larger. The importance of the variety effect relative to the price effect of input trade liberalization merits more attention. Exploring the relationship between the number of new products and input tariffs is beyond the scope of our analysis. This is an area for future research. Our contribution to the literature is to show that only more productive firms gain from input trade liberalization.