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We build a dynamic model of …rm-level adjustment to trade liberalization that jointly incorporates the main salient features highlighted by recent empirical micro-level studies of …rms and trade. Our model captures the joint entry, exit, export, and innovation decisions (subject to sunk costs) of heterogeneous …rms as they adjust to trade liberalization. We characterize this industrial evolution over its entire transition path to a new steady state with lower trade costs- starting from the time that trade liberalization is …rst announced (but not necessarily yet implemented). We rely on numerical methods to solve for these equilibrium paths. In order to more accurately capture the dynamics of …rm adjustments to trade, we model the sunk nature of market entry costs for both the domestic and export market- as well as the per-unit and additional …xed costs of exporting incurred in every period. Firm-level productivity evolves stochastically, and innovation involves a trade-o ¤ between its cost and a return in terms of a “better”distribution of future productivity draws. Although the empirical micro-level studies of …rms and export status initially emphasized the selection e¤ects of more productive …rms into export markets, several recent studies have

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Abstract This paper reviews the new approach to international trade based on firm heterogeneity in differentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these empirical patterns reveals new mechanisms through which the aggregate economy is affected by trade liberalization, including endogenous increases in average industry and firm productivity. J.E.L. CLASSIFICATION: F10, F12, F14

We use Italian firm-level data to investigate the impact of trade openness on the distribution of firms across marginal cost levels. In so doing, we implement a procedure that allows us to control not only for the standard transmission bias identified in firm-level TFP regressions but also for the omitted price bias due to imperfect competition. We find that more open industries are characterized by a smaller dispersion of costs across active firms. Moreover, in those industries the average cost is also smaller.

A number of economic theories suggest that barriers to competition lead to higher levels of inefficiency among incumbents in an industry. In this paper, we use a detailed plant-level dataset to study the the impact on productivity of two reforms aimed at increasing product market competition in India – liberalization of foreign direct investment (FDI) and reduction in tariff rates – initiated in 1991. First, we examine the effect of the liberalization policies on mean plant-level productivity in the liberalized industries. While we find no significant effects in the short-run (1992-93), in the longer term (1993-94), we find increases in productivity level in the FDI and tariff liberalized relative to non-liberalized industries. We check the robustness of these results to: (a) using alternative measures of productivity; (b) using alternative definitions of the liberalization variable; and (c) inclusion of controls to address bias from non-random selection of liberalized industries. The tariff liberalization effect is generally robust; the FDI liberalization effect is lower (from 23 % to about 15%) when controlling for non-random selection. Next, we examine aggregate productivity growth in liberalized industries; we find a 16 % (15.6%) increase following FDI (tariff) liberalization. This increase appears to be largely driven by improvement in intra-plant productivity growth, with a small role for re-allocation.

This paper investigates the sources and size of trade barriers at the industry level. We derive a micro-founded measure of industry-specific bilateral trade integration that has an in-built control for time-varying multilateral resistance. This trade integration measure is consistent with a broad range of recent trade models including the Anderson and van Wincoop (2003) framework, the Ricardian model by Eaton and Kortum (2002) and heterogeneous firms models. We use it to explore trade barriers for manufacturing industries in European Union countries between 1999 and 2003. We find a large degree of trade cost heterogeneity across industries. The most important trade barriers are transportation costs and policy factors such as Technical Barriers to Trade. Trade integration is generally lower for countries that opted out of the Euro or did not abolish border controls in accordance with the Schengen Agreement. Reductions in trade barriers explain about one-half of the growth in trade over the period 1999-2003 and are therefore a major driving force of the EU Single Market. JEL Classification: F10, F15

We derive a micro-founded measure of bilateral trade integration that is consistent with a broad range of leading gravity models. This measure accounts for cross-industry heterogeneity by incorporating substitution elasticities estimated at the industry level. We then use it to provide a theory-based ranking of trade integration across manufacturing industries in European Union countries. In addition, we explore the determinants of trade integration, finding that substantial Technical Barriers to Trade in certain industries as well as high transportation costs associated with heavy-weight goods are the most notable trade barriers.

Abstract: This paper describes the effects of a temporary increase in tariffs on the performance and behavior of U.S. manufacturing establishments (plants). Using antidumping duties as an example of temporary protection, I compare the responses of protected manufacturers to those predicted by new models of trade with heterogeneous firms. I find that apparent increases in revenue-based productivity associated with temporary protection are primarily due to increases in prices and mark-ups. In fact, antidumping duties lower physical productivity among the set of protected plants reporting output data in units of quantity. Moreover, antidumping duties allow for the continued operation of low-productivity plants that likely would have otherwise ceased production. As a result, temporary protection slows the process of output rationalization, with less productive plants producing a greater share of total output, leading to a reduction in aggregate productivity growth. Importantly, plants that are denied protection by the government are no more likely to exit than protected plants. Rather, they adjust by dropping the unprotected product and producing other, potentially higher-productivity products.

We develop a theory of multiproduct firms to analyze the effects of globalization on the distributions of firm size, scope, and productivity. Our model explains two puzzles. First, it explains the well-known size-discount puzzle: large firms have lower values of Tobin’s Q than small firms. Second, it explains the globalization-skewness puzzle documented in the empirical part of our paper: a multilateral reduction in trade costs leads to a flattening of the size distribution of firms. In our model, globalization not only affects the distribution of observed productivities but also productivity at the firm level.