What gains and distributional implications result from trade liberalization?
Maria Bas & Caroline Paunov
This paper investigates the distributional impacts of trade
liberalization across firms, consumers and workers. Using
firm-product-level census data for Ecuador, we exploit exogenous tariff
changes at entry to the World Trade Organization. We show that with
input tariff cuts firms access higher quality and new input varieties.
Consequently, firms increase their product scope and quality, while
their production’s skill-intensity increases and costs decrease. “Real”
productivity (TFPQ) increases only in the medium run, following
adjustments to produce more and higher quality products. Positive
immediate revenue productivity (TFPR) gains result because firms’
markups increase. Consumers still gain as quality-adjusted prices
decrease and varieties increase. Workers benefit differentially: skilled
workers’ wages rise compared to less skilled workers’ wages.
Input-tariff liberalization also has distributional impacts across
firms. Only more productive firms with high markups increase product
scope and quality and gain market shares. With output-trade
liberalization the least productive firms decrease their product scope.
Keywords: gains from trade, input and output tariff reductions, product scope, product quality, market share, quantity and revenue total factor productivity (TFPQ, TFPR), skill premium, markups, price, foreign inputs quality and variety, firm-product-level data, Ecuador
JEL Codes: F16, O30, D22, O12, O54, L6