What gains and distributional implications result from trade liberalization?

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