Fixed Export Costs Research Articles

Trade, Labor Reallocation Across Firms and Wage Inequality

This paper develops a framework for studying the effects of higher trade openness on the wage distribution that emphasizes within-industry labor reallocation across firms, strong skill-productivity complementarities in production and heterogenous fixed export costs across firms. Assuming no entry in the industry, an autarkic economy that opens to trade experiences a pervasive rise in wage inequality; a trade liberalization in a trading economy increases inequality at the lower end of the distribution, but may reduce it elsewhere. Assuming free entry, opening to trade could result in pervasively higher inequality or wage polarization. The analysis highlights the importance of new exporters (extensive margin) in shaping the aggregate relative demand for skills, a channel controlled by the distribution of fixed export costs in the model.

On export duration puzzles

AbstractWe investigate two puzzles in the export duration literature. The first puzzle has to do with the frequent entries and exits of firms in export markets, which are at odds with the large fixed export costs in such markets. We introduce convex production technologies in a trade model to show how variable marginal costs create direct linkages between export markets. As fixed export costs vary across destinations, more productive firms need not necessarily export to more destinations. Cost convexity implies that the probability of supplying a given export market is adversely affected by positive export shocks in other markets. This is supported by our empirical analysis of bilateral flows for over 200 agri‐food products to 176 destinations originating from six large exporting countries. The second puzzle has to do with the paradoxical effect of tariffs reported in empirical export duration studies. When endogeneity is addressed, tariffs increase the probability of an export failure.

Quality and gravity in international trade

This paper introduces endogenous quality innovations in a multi-country model with heterogeneous firms. We show that quality investments lead to an additional margin of adjustment in the gravity equation. In industries with a high scope for quality differentiation, the elasticity of bilateral exports with respect to fixed costs is lower due to adjustments at the extensive margin, whereas the elasticity with respect to variable costs remains unaffected. We find robust and consistent evidence for the effect of quality differentiation on the gravity equation, using aggregate trade data and Brazilian firm-level data. We apply our model and evaluate the impact of trade policies that reduce fixed export costs. Our results highlight that trade and welfare effects are substantially lower and become much more dispersed across industries than predicted by heterogeneous firm models without quality differentiation.

Firms’ exports, volatility and skills: Evidence from France

This paper studies the effects of globalization on the employment growth volatility by investigating the relationship between firms’ export intensity and labor demand volatility across skills. Based on detailed firm-level administrative French data for the period 1996–2007, we show that firms with intense export activity exhibit lower volatility of labor demand for skilled, compared to unskilled workers. Both the theoretical and empirical analysis point to the importance of skill-intensive fixed export costs in explaining this effect. Our identification strategy is based on an instrumental variable approach to provide evidence of causal effects. Our findings show that a higher level of export intensity increases the employment growth volatility for unskilled relative to skilled workers.

The Internet and SME Participation in Exports

This paper analyzes the effect of the development of the Internet on the share of small and medium-sized enterprises (SMEs) in total exports. We extend the Helpman, Melitz and Yeaple (2004) model to include the opportunity for firms to pay lower fixed export costs by exporting indirectly via well-established e-commerce platforms. SMEs self-select into the indirect exporting mode. In response to the development of the Internet, fixed costs of indirect exporting fall at a higher rate than fixed costs of direct exporting. Consequently, SMEs tend to account for a larger share in total exports as the Internet develops. Using two samples from the Exporter Dynamics Database, we find supporting evidence that the development of the Internet in the exporting country has a significant and negative effect on the share of exports by the top 5% or 25% of exporters, implying a larger share of SMEs. Moreover, we find that improved submarine cable infrastructure in the exporting country also leads to a lower share of exports by large exporters. These are in contrast to the estimated positive effect of telephone development in the exporting country, which may not disproportionately benefit indirect exporting via e-commerce platforms over direct exporting. Finally, we find an imperfect substitution relationship between e-commerce platforms and traditional intermediaries.

Can the Japanese agri-food producers survive under freer trade? A general equilibrium analysis with farm heterogeneity and product differentiation

The roles of firm heterogeneity and product differentiation in the manufacturing industries have attracted research attention on the “new new trade theory.” The agricultural sectors also produce new goods using product differentiation through breeding, branding, and other activities. In reaction to globalization, the Japanese Government has sought to revitalize its agri-food sectors by promoting exports of differentiated products. This computable general equilibrium study examines the relevance of this policy, focusing on five agri-food sectors other than grains. We simulate Japan’s three trade deals and a policy intervention that cuts fixed export costs to promote exports. We show that only a few agri-food sectors can increase exports and maintain domestic output under freer trade, and that export promotion would markedly increase entrants into export markets and increase exports of the vegetables and fruit, and processed food product sectors. In these trade deals, tariff and nontariff barriers have different impacts on trade, output, and farm/firm entry.

Export, FDI and the welfare gains from trade liberalization

This paper extends Melitz and Redding (2015) to analyze the welfare gains from trade liberalization by adding foreign direct investment(FDI). Our model predicts that with FDI activities, welfare gains from trade liberalization will be strictly lower than those in a model without FDI, but only takes exports into account. In addition, the calibrated model indicates that with FDI activities, aggregate welfare reaches its maximum when the fixed export costs are positive rather than 0. Furthermore, we decompose the welfare gains induced by trade liberalization from continuing exporters, and switchers. The results show that in any case, with or without FDI, continuing exporters contribute a larger share to welfare gains than status switching firms.

Natural disasters and trade: the mitigating impact of port substitution

Abstract We study the effect of natural disasters on port-level exports. We model the interaction between firms and ports to study how strongly exports from one port are affected by changes in the cost of exporting at neighboring ports. We extend the standard trade model with heterogeneous firms to a multiple port structure where exporting is subject to port specific local transportation costs, port specific fixed export costs and international bilateral trade costs. We show that gravity distortion due to firm heterogeneity is conditional on the comparative advantage at the port level and resulting substitution of exports across ports. We present evidence of the substitution effect using the 2011 Great East Japan Earthquake, indicating that at least 40% of exports was substituted to other ports following the disaster. The substitution effect is the strongest in technology intensive product categories, which suggests an interaction between supply chains and domestic trade costs.

Why Don’t MENA Countries Trade More? The Curse of Deficient Institutions

This paper explores the relation between institutions and trade in the Middle East and North Africa (MENA) region. Although most of the countries suffer from a clear deficit of “good” institutions, the MENA region was neglected in the literature on institutions and trade. This literature offers a broad consensus that poor institutions hamper trade, and that trade liberalization engenders institutional reforms. Taking into account the inverse relation between institutions and trade, we use a gravity model that explains bilateral trade for disaggregated goods and service sectors for 21 MENA countries over the period 1995-2014. Our results show that, in the presence of excessive zero trade observations, the institutional gap between MENA countries and their trading partners are considered as fixed export costs that help explain the zero probability of trade for some MENA countries. Indeed, we find that the institutional gap between trading partners has a significant negative effect on trade, and not the level of the exporter and importer’s institutional quality. Our results are robust after we control for the endogeneity problem between institutions and trade. Also, alternative aspects of institutions have different effects on trade in goods and trade in services.

Do environment regulations matter for EU-MENA trade?

ABSTRACTThis study examines the impact of environmental regulations stringency on agricultural trade between European Union (EU) and Middle East and North Africa (MENA countries). Using a gravity model and applying the zero-inflated Poisson (ZIP) model, we estimate the impact of environmental regulations stringency on bilateral agricultural exports between 28 EU and 20 MENA countries during the period 2001–2014. The results have showed that environmental regulations do matter for agricultural trade between both regions because in the presence of excessive zero trade observations, they act as significant fixed export costs that affect the probability of trade. More stringent environmental regulations stimulate innovative efforts in cost-saving green technologies, which increase productivity and positively affect agricultural exports. The results have favoured the revisionist Porter hypothesis (PH), according to which environmental regulations may stimulate innovative efforts, which mitigate the negative effects of higher fixed abatement costs and enhance trade competitiveness.

Market Efficiency, Heterogeneous Trade Costs and Export‐Only Firms

AbstractThis paper provides a two‐country general equilibrium model under monopolistic competition, in which we incorporate heterogeneous fixed export costs, a non‐zero export tax rebate rate and efficiency asymmetry to explain the existence of export‐only firms. We focus on the impact of efficiency differences on social welfare and the evolution of export‐only activities from autarky to trade. We show that exposure to trade brings a country of larger size and with higher efficiency more welfare gains, including higher industry productivity and greater variety of products. We also find that firms that face lower fixed export costs enjoy greater export tax rebates and firms that are located in more efficient countries have a greater chance of becoming export‐only firms. Further internationalization promotes the prosperity of export‐only activities.

Explaining the size differences of exporter premia: theory and evidence

Two decades of research have established pronounced exporter productivity premia (EPP) and exporter size premia (ESP). Yet, we do not know why such exporter premia differ so widely in magnitude across countries or sectors? We take this question to the theory and to the data. We derive the sectoral EPP and ESP in a standard heterogeneous firms trade model and apply the insights from the model to guide our empirical investigation of detailed Danish firm-level data. We show that a significant share of the observed variation in EPP and ESP across sectors can be accounted for by sector differences in the underlying variation in productivity dispersion, variable trade costs, the ratio of fixed export costs to fixed costs of production, and the elasticity of demand.

Fixed Export Costs and Trade Patterns: The Case of China

AbstractCurrent research on heterogeneous firms does not include firms' choices on trade patterns. This is an important issue in developing countries. The growth in the number of low‐productivity processing firms in developing countries needs further study to show how these firms survive and prosper. In this study, we adopt the idea in Castro, Li, Maskus and Xie that fixed trade costs should be a co‐determinant of a firm's export decisions and it is a substitute for productivity. We use firm‐level data for China, for the period 2000–2006, to show that fixed export costs play a key role in firms' trade pattern decisions. More specifically, firms with low productivity and low fixed trade costs have a significantly higher probability to choose the processing trade pattern. Although the processing trade is often criticised for its low productivity and value added, it has natural advantages in its savings on fixed export costs. Therefore, the exporting firm is able to survive, prosper and contribute to growth in developing regions.

Public quality standards and the food industry’s structure in a global economy

We study the impact of public quality standards on industry structure in a context of international trade. We consider vertical differentiation in an international trade model based on monopolistic competition in which firms differ in terms of their productivity and must incur two fixed export costs when exporting to any given destination: a generic one (i.e., setting up a distribution system) and a destination-specific one to meet the quality standard prevailing in the importing country. Variable costs are also increasing in quality. The absolute mass of firms in any given country is decreasing in the domestic standard, but the relative mass (market share) of foreign firms is increasing in the domestic standard. Increasing public quality standards benefit highly productive foreign firms which gain from the quality-induced exit of less productive domestic and foreign firms. The increase in industry productivity following stricter public standards does not result from induced innovation as in the Porter hypothesis but from the exit of less productive firms.

Fixed Export Costs and Export Behavior

This article provides a direct assessment of how fixed export costs (FECs) and productivity jointly determine firm-level export behavior. Using Chilean data, we construct indices of FECs for each industry-region-year triplet and match them to domestic firms. Our empirical results show that firms facing higher estimated FECs are less likely to export, while those with higher productivity export more. These outcomes are the foundation of the widely-used sorting mechanism in trade models with firm heterogeneity. We also find that the substitution between FECs and productivity in determining export decisions is weaker for firms with higher productivity. Finally, among firms that export, both larger FECs and greater within-triplet productivity dispersion are associated with a greater export volume of the average exporter.

Participation in export and Chinese firms’ capacity utilization

This paper first sets up a firm heterogeneity trade model and shows that given capital stock and productivity, export firms will have higher rates of capacity utilization. In addition, given capital stock and fixed export costs, firms with higher productivity are more likely to export. I then use the 2012 Chinese enterprise survey from the World Bank to empirically investigate the impact of participation in export on Chinese firms’ capacity utilization rate. The results show that on average, export firms have capacity utilization rate 1.55–2.01 percent higher than non-export firms, which amounts to 14.6–18.9 percent of the standard deviation of capacity utilization rate in the sample. I also find that firms with a larger part of shares owned by the government have lower capacity utilization. Stronger market competition leads to over-investment and therefore lower capacity utilization rate. Faced with more rigorous labor market regulation, firms will substitute capital for the use of labor, resulting in higher capacity utilization rate.

American Beauty: Trade Flows and Export Costs of US Movies

Copyright industries face global fixed export costs, in terms of cultural and geographic distance together with formal trade barriers. Adjustment to these costs may occur along both the intensive and the extensive margin. We investigate this issue using a microeconomic approach that considers a hedonic model of revenues for US movie exports to evaluate: aggregation bias; simultaneity in the observation of imported movies and their revenues; and reliable estimations for country clusters. We find that product heterogeneity is a key element for both intensive and extensive margin adjustments at the country level.

What Determines Small Champions’ Export Performance? Evidence from Korea Firm-Level Data

Small- and medium-sized enterprises (SMEs) often have different export behavior than bigger firms, in spite of their high productivity. To understand the behavior of these small champions, we develop a theoretical framework that analyzes the factors that affect firm export performance, from the decision to start exporting (the extensive export margin) and how much they will export (the intensive export margin). When we use Korean firm-level data to test our model, we find that productivity plays an important role in the firm export entry decision, and fixed export costs are important determinants of fractions of export intensity. We use our empirical results to explore the policy implications of policy interventions focused on SME export.

Internet Technology and the Extensive Margin of Trade: Evidence from eBay in Emerging Economies

AbstractOnline platforms such as eBay offer technologies that make it easier for firms to export. This paper dissects a new firm‐level dataset that covers sales made through eBay by sellers based in 21 emerging economies to provide a new lens through which to look at the effect of trade costs on the extensive margin of trade. Comparing eBay sellers with “offline” firm‐level data from the World Bank's Exporter Dynamics Database allows us to test whether the observed trade patterns on eBay fit with the trade‐liberalization predictions of heterogeneous‐firm models. We find that eBay firms export to more destinations, suggesting low destination‐specific fixed costs on eBay. We then show that the distribution of export destinations across eBay sellers is well approximated by a balls‐and‐bins model of frictionless trade, suggesting eBay indeed lowers fixed export costs. Finally, we compare the gravity of eBay with that of offline trade and find geographic distance, languages, and trade agreements to matter less for online trade.

Virtual proximity and audiovisual services trade

Audiovisual services such as music and movies in digital formats have gained substantial importance over the last decade. This paper analyses audiovisual services in a gravity model framework. In particular, we explore the role of virtual proximity – a new proxy for cultural proximity based on bilateral hyperlinks and bilateral website visits between countries – and find that ‘virtually-proximate’ countries trade significantly larger amounts of audiovisual services. Our results show that virtual proximity also has a larger impact on trade in audiovisual services than on total services trade. Moreover, in line with Hanson and Xiang (2011), our analysis indicates that in the audiovisual services sector, global fixed export costs dominate bilateral fixed export costs for most countries in our sample.