What gains & distributional implications result from trade liberalization?_IMF OECD WB Sept 2020

What gains and distributional implications result from trade liberalization?

Maria Bas1

Caroline Paunov2

University of Paris 11 and OECD2

25th September 2020

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Motivation

Trade liberalization is a core component of economic reforms implemented by developing countries over the past two decades; Aggregate gains on productivity have been widely documented, also production upgrading (inputs from abroad) What about distributional impacts across firms, consumers and workers?

Little evidence on those distributional gains within a single framework → Heterogeneous effects of input-trade liberalization on firms’ production choices depending on firm efficiency and market power.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

The mechanisms at play Based on an extension of the model of heterogeneous firms and endogenous markups a la Melitz and Ottaviano (2008): (1) Input-trade liberalization allows firms to access new varieties and higher quality inputs increasing firms’ variable profits; (2) With fixed costs in product innovation, firms expand their product scope.

(3) Since output quality is an increasing function of imported input quality and inputs varieties, input-tariff cuts allow firms to upgrade their output quality.

(4) Skilled labor is needed to produce new products of higher-quality, increasing their demand for skilled labor and their returns.

(5) Assuming a quasi linear-demand function,input-tariff cuts allow more productive firms to upgrade output quality and increase their markups.

(6) Heterogeneous effects: most productive firms charging higher markups benefit the most from input-tariff cuts.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Contribution

A comprehensive assessment of the distributional impacts of trade liberalization in Ecuador across firms, consumers and workers.

Input and output quality: direct measures of input and output quality based on demand function estimations at the firm-product level (following KSW,2013); Efficiency gains vs. Markups direct measures of changes in firm efficiency based on “real” productivity (TFP-Q), production costs and markups; Heterogeneous effects of trade liberalization on firms’ production choices (product scope and quality upgrading) depending on firms’ efficiency (TFPQ) and their market power.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Related literature Input-tariff cuts enhance firm performance: Firm productivity (Amiti and Konings, 2007 (AER); Topalova and Khandelwal, 2010 (REStat)), Product scope (Goldberg et al., 2010,(QJE)), Export performance (Bas, 2012 (JDE), and Bas and Strauss-Kahn, 2015 (JIE), Manova and Yu (2017), Wages (Amiti and Davis, 2012 (RES), Amiti and Cameron, 2012, (JIE); Chen et al., 2017,(JIE)), Prices, Markups and Marginal Costs, (De Loecker et al.,2016 (Econometrica)) Trade liberalization and technology / quality upgrading (demand channel) Verhoogen, 2008 (QJE); Bustos, 2011 (AER); Aw et al., 2011 (AER); Lileeva and Trefler, 2010 (QJE); Contribution → We bring new evidence of the distributional effects of trade liberalization What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Trade Liberalization in Ecuador

Unilateral trade liberalization episode in Ecuador: 1996- 2007 Trade policy of Ecuador in the 70s and 80s: import protection regime

In 1996 Ecuador enters WTO and trade policy is driven by the adoption of the MFN tariffs Heterogeneous tariff cuts across sectors Significant growth of imports, doubling between 1994 and 2004 We test for the exogeneity of input and output tariff changes

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Empirical Motivation

-.25

Change in input tariff 1996-2007 -.2 -.15 -.1 -.05

0

Input tariff cuts in Ecuador over the period 1996-2007

.05

.1

.15 .2 Input tariff 1996

.25

.3

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Empirical Motivation

Distribution of imported input quality and variety in 1997 and 2007

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Empirical Motivation Distribution of product scope and quality by import status in 1997 and 2007

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Empirical Motivation Distribution of skilled intensity by import status in 1997 and 2007

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

What We Do Identification strategy: the unilateral trade liberalization episode in Ecuador: 1996-2007 (when the country enters WTO); Difference-in-difference: causal link exploiting exogenous changes in input tariff cuts on firms’ production choices (product scope and output quality): (i) disentangling the channels: input quality upgrading vs. new varieties; (ii) looking at differences across firms with different TFP-Q and markups; Exogeneity of tariffs industry-level input tariff variations over the period unrelated to initial firm / industry characteristics.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Data Firm-product level Data 1

Firm level data comes from the INE and reports information on total employment, production and non-production workers, total sales, inputs and materials of firms ;

2

Firm-product level data for final goods and inputs: detailed information at 11 digit codes on value and quantity of products produced by firms and inputs used (by origin: domestic or foreign).

3

Firm-level data linked with firm-product level data quantity and value of imported inputs and final goods to compute input and output quality based on KSW methodology, number of new imported varieties and final goods products, markups (unit values over marginal costs) and TFP-Q using firm-level output prices deflators.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Step1: Input tariff cuts, input quality and variety

Tariffsk,t−1

Initial firm size trend Firm-product fixed effects Industry-year fixed effect Observations R-squared

Imported input quality (1)

Domestic input quality (2)

Imported quantity (3)

Domestic quantity (4)

New imported variety dummy (5)

New domestic variety dummy (6)

-0.882** (0.419)

0.682 (0.435)

-2.065* (1.234)

1.725* (0.888)

-0.106** (0.054)

0.242*** (0.079)

yes yes yes 15273 0.43

yes yes yes 46167 0.48

yes yes yes 16142 0.79

yes yes yes 46171 0.80

yes yes yes 61709 0.32

yes yes yes 61709 0.41

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Step 2: Input tariff cuts, product scope and output quality lnYijt = γI Inputτj,t-1 + γO Outputτj,t-1 + γs Sizei,t0 × ιt + ¾i + ιt + ist 1

lnYijt the number of products firm i produces or output quality across all the products a firm i produces,

2

Sizei,t0 Ă— Îąt : initial firm size trend,

3

Âľi firm fixed effects

4

Îąt : year fixed effects

5

IV estimations in a 5-year difference equation to disentangle the channels: Changes in input quality upgrading and new imported varieties are instrumented by 5 year changes in input tariffs and initial input tariffs in 1996 interacted with initial levels of firms’ imported input variety and input quality indicator (following Trefler, 2004).

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Step 2: Input tariff cuts, product scope and output quality

(1) Input tariffj,t−1 Output tariffj,t−1

-0.246** (0.125) 0.477*** (0.077)

Import quality upgrading

firm-level (3) -1.152** (0.553) 0.443 (0.287)

Product quality firm-product level Growth rates t and t-5 (4) (5) -0.671** (0.310) -0.571** (0.271)

-0.194 (0.120) 0.544* (0.321)

New imported varieties

Initial firm size trend Firm fixed effects Year fixed effects Firm-product fixed effects Observations R squared P value of Hansen Test

Product scope Growth rates t and t-5 (2)

yes yes yes 12343 0.84

yes 5593 0.51

1.244* (0.662) -2.131 (1.430) yes yes yes 12343 0.55

yes yes yes 56031 0.39

yes 5588 0.45

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Step 2: Input tariff cuts, skill upgrading and markups

Skill intensity

Skill premium firm-level

Input tariff(j,t-1) Output tariff(j,t-1)

Initial firm size trend Firm fixed effects Year fixed effects Firm-product fixed effects Observations R squared

Cost adjusted for quality firm-product level (3)

Markups

(1)

(2)

-0.077* (0.045) -0.019 (0.025)

-0.502*** (0.166) 0.067 (0.089)

1.140*** (0.438) 0,373 (0.374)

-1.113** (0.496) 0.088 (0.426)

(4)

yes yes yes

yes yes yes

yes

yes

12343 0.77

12332 0.71

yes yes 46464 0.58

yes yes 46464 0.79

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Step 3: Heterogeneous effects

Product scope firm-level (2)

(1) Input tariffj,t−1 x High TFP

-0.402** (0.163)

Input tariffj,t−1 x High TFP x High Markups Input tariffj,t−1 x High TFP x Low Markups Input tariffj,t−1 x Low TFP Output tariffj,t−1 x High TFP

-0.064 (0.171) 0.629*** (0.101)

Output tariffj,t−1 x High TFP x High Markups Output tariffj,t−1 x High TFP x Low Markups Output tariffj,t−1 x Low TFP

Initial firm size trend Firm-product fixed effects Year fixed effects Firm fixed effects R squared

0.288** (0.116)

Product quality Market share firm-product level (4) (5) (6)

(3)

-1.012*** (0.392) -0.638*** (0.217) -0.100 (0.225) -0.060 (0.171)

-0.021 (0.137) 0.732 (0.143) 0.290** (0.116)

yes

yes

yes yes 0.84

yes yes 0.84

-0.256 (0.424) -0.475 (0.364)

-0.128*** (0.026) -1.228*** (0.412) -0.121 (0.563) -0.204 (0.467)

-0.019 (0.028) 0.036 (0.024)

-0.157*** (0.027) -0.009 (0.037) -0.204 (0.467)

-0.669* (0.348)

-0.146 (0.377) -1.141** (0.488) -0.346 (0.284)

0.015 (0.023)

0.019 (0.025) 0.041 (0.032) -0.346 (0.284)

yes yes yes

yes yes yes

yes yes yes

yes yes yes

0.39

0.58

0.58

0.39

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Robustness tests Alternative explanations: (1) Foreign demand shocks (export-channel) (2) The role of the financial crisis in Ecuador (1999-2000).

Alternative measures: (1) TFP-Q based on a residual of a production function estimation of multi-product firms based on De Loecker et al, (2016) methodology; (2) Markups as the deviation between the elasticity of output to input and the input share based on De Loecker et al, (2016) methodology.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Conclusion Distributional impacts of input-trade liberalization in Ecuador (1) Firms: positive impacts of input-tariff cuts on firms’ ability to upgrade production processes (improve product variety and quality and to be more skill-intensive) ; (2) Workers: more skill intensive workers benefit the most from input tariff liberalization; (3) Consumers: benefit from access to more varieties and higher output quality, but (4) firms also increase markups leading to incomplete pass through of benefits to consumers; (5) Heterogeneous effects across firms: Input-trade liberalization benefits are concentrated on initially more productive firms with higher markups (6) → Challenge: Input-tariff cuts boost the market shares of firms with higher markups prior to the reforms.

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov

Conclusion

Thanks for your attention....

What gains and distributional implications result from trade liberalization?

Maria Bas, Caroline Paunov