The Distributional Consequences of Preferential Trade Liberalization: Firm-Level Evidence

Abstract

While increasing trade and foreign direct investment, international trade agreements create winners and losers. Our paper examines the distributional consequences of preferential trade agreements (PTAs) at the firm level. We contend that PTAs expand trade among the largest and most productive multinationals by lowering preferential tariffs. We examine data covering the near universe of US foreign direct investment and disaggregated tariff data from PTAs signed by the United States. Our results indicate that US preferential tariffs increase sales to the United States from the most competitive subsidiaries of multinational corporations operating in partner countries. We also find increases in market concentration in partner countries following preferential liberalization with the United States. By demonstrating that the gains from preferential liberalization are unevenly distributed across firms, we shed new light on the firm-level, economic sources of political mobilization over international trade and investment policies.

Good for some, bad for others: US investors and non-trade issues in preferential trade agreements

“…Sector-level emission and factor endowment data allows the specification of a more precise theory. Baccini et al (2017) show that disaggregation matters for explaining trade and investment of multinationals. The authors argue that the distribution of trade liberalization benefits is unequal across companies and depends on firms' activities.…”

Trade at the margin: Estimating the economic implications of preferential trade agreements

“…However, while most of this research shows that PTAs tend to increase trade between member countries, these studies tend to evaluate the effect of PTAs on the country level. One recent exception is the study of Baccini et al (2017), which analyzes the effect of US PTAs on US multinationals. In line with the predictions of recent trade models, which are discussed in the following section, their results suggest that the gains from preferential trade are very unevenly distributed with more competitive firms gaining most.…”

“…However, while relying on firm level data, they aggregate their analysis on the country level to be able to estimate the effect of PTAs on countries' overall welfare. Finally, Baccini et al (2017) evaluate the effect of US PTAs on the sales of affiliates of US firms to the US market. They can show that the largest and most competitive firms can reap disproportionally high gains from these agreements supporting the idea of uneven benefits of PTAs.…”

“…However, few studies, with the exception of Baccini et al (2017) and Baggs and Brander (2006), analyze how PTAs affect trade flows at the firm level. Furthermore, the differentiation between the effect of trade liberalization for the intensive vs. the extensive margin of trade, which has been studied in the context of the WTO (Dutt et al 2013) and in the context of PTAs (Baier et al 2014), has, to the best of our knowledge, not been applied to firm level data.…”

“…However, analyzing the effects of trade agreements on the country level hides important sectoral respectively firm level heterogeneity. This implies that within the same country some sectors or firms might greatly benefit from trade liberalization while others might not (Baccini et al 2017;Subramanian and Wei 2007). The empirical observation that not all firms within the same industry gain equally from a change in trade barriers (Bernard et al 2003;Bernard and Jensen 1999;Eaton and Kortum 2002;Eaton et al 2004Eaton et al , 2011, e.g., a trade agreement, is reflected in models of new, new trade theory (Melitz 2003).…”