Disentangling trade reform impacts on firm market and production decisions

Maria Bas and Caroline Paunov

European Economic Review, 2021, vol. 135, issue C

Abstract: This paper disentangles the impacts of trade liberalization on firm market and production decisions. Using firm-product data for Ecuador, we exploit exogenous tariff changes at entry to the World Trade Organization and find positive effects of trade liberalization on revenue total factor productivity (TFP-R). Input-trade liberalization improves firm efficiency, measured by quantity total factor productivity (TFP-Q) and leads firms to raise their markups and to introduce new products following an increase in imported input quality. Output-trade liberalization also improves firm efficiency and raises marginal costs as firms increase input quality and improve the quality of their core products. Firms’ markups and product scope decrease. Chinese imports also contributed positively to productivity while the exchange rate's volatility prior to dollarization had reverse effects. We find positive welfare effects as consumers were offered better and cheaper products. Trade liberalization also benefited the more productive firms introduce new or better products while less productive firms were more likely to exit.

Keywords: Gains from trade, Input and output tariff reductions, Revenue and physical quantity total factor productivity (TFP-R, TFP-Q); Markups; Output and input prices; Firm-product-level data; Ecuador (search for similar items in EconPapers)
JEL-codes: D22 F16 L6 O12 O30 O54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Disentangling trade reform impacts on firm market and production decisions (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:135:y:2021:i:c:s0014292121000799

DOI: 10.1016/j.euroecorev.2021.103726

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