Three essays on trade costs and firm exports

This thesis consists of three separate and self-contained individual studies on trade costs and firm exports. According to the new “new trade theory” where trading firms are heterogeneous, only a few firms can export, while others cannot. The main tenet of the new “new trade theory” is that differences in export participation among firms can be explained by a combination of (1) fixed (sunk) costs of exporting and (2) heterogeneity in the firm characteristics (in terms of size or costs). The goal of the study is to analyze the behavior of firms in international trade while putting “firm heterogeneity” - at the forefront. The first chapter evaluates how the “distance” and “time of travel” affect individual exports, especially if these effects differ across firm sizes and modes of transport. The empirical methodology follows a Bayesian sample-selection model and presents empirical evidence of distance and time of travel effects on individual export flows from 14 Latin American and the Caribbean (LAC) countries. These effects are estimated separately for different firm sizes and modes. The posterior mean estimates predict the effects of “distance” and “time of travel” on export to be negative; however, these effects are likely higher for small and medium firms than for large firms. Comparing these effects across modes suggests that exporting by maritime and land is likely to have higher effects than exporting by air. The second chapter is devoted to examining whether gains from economic integration agreements (EIAs) vary across firm sizes. EIAs reduce trade costs and how firms react to the falling trade costs is related to firm size. Costs of Rules of Origin (ROO) is one example where trade policy instruments like EIAs and firm size interact strongly because firms need to prove the ROO in getting the benefits of the EIAs. Larger, more efficient firms typically meet the ROO requirements and are treated preferentially, while less efficient, smaller firms are usually unable to prove the ROO and are excluded from preferential access. The empirical analysis makes use of a unique and unbalanced panel dataset with 1520 country pairs, firm sizes, and EIAs from 2007 to 2017. Firstly, it decomposes the aggregate export flows across firm sizes, i.e., micro, small, medium, and large. Secondly, it deconstructs the export margins across firm sizes. A structural gravity model is augmented with three-way (exporter-time, importer-time, and country-pair) fixed effects, and the effect of EIAs is estimated for different firm sizes by Average Treatment Effects (ATE). The results show that there are differences in the effects of EIAs on extensive and intensive margins, and the differences differ by firm size. On the one hand, large and medium firms gain from the EIAs primarily through the intensive margin. Small and micro firms, on the other hand, gain from the EIAs exclusively through the extensive margin. Margins of trade can be of three types, (1) country, (2) firm, (3) goods. Although firm-level export is a central issue in the new “new trade theory,” empirical studies on the impact of trade agreements on the number of exporting firms are scarce due to severe data constraints. Therefore, most existing literature focuses on the effect of EIAs on goods margins of trade. This chapter contributes to the literature by examining the effect of EIAs on export margins, i.e., both extensive (firms) and intensive margins (average exports per firm). It uses the same panel data used in the second chapter, employs gravity specifications with three-way fixed effects, and shows that EIAs primarily increase the average exports per firm but have a smaller impact on the number of exporting firms. It further examines whether different “types” of EIAs have different effects on these margins and uncovers that the higher the degrees of integration agreements, the stronger the impact on average exports per firm.