Essays in international trade
Keywords: Economics.

This thesis consists of three essays in international trade. The first chapter explores the consequences of firm-level resource misallocation on the gains from trade liberalization. While the standard trade models explain observed firm heterogeneity with variance in firms' innate productivity, discriminatory policies and political connections may also affect the firm size and generate resource misallocation across firms. In this chapter, I show that the productivity heterogeneity alone cannot adequately explain the observed firm-level patterns in Chinese manufacturing sector. I document that larger firms exhibit lower average revenue productivity, revenue productivity variance is high conditional on firm size, and larger exporters exhibit lower export intensity. Introducing firm-level misallocation can help reconcile these facts and doing so matters for estimating the gains from trade. The misallocation model predicts the size of gains from trade that is 45\% lower than the standard model predicts when both models are calibrated with the same Chinese manufacturing data. The result suggests that accounting for firm level heterogeneity in the dimensions other than productivity is important when estimating the gains from trade. The second chapter, a joint work with Antoine Berthou (Banque de France), Kalina Manova (University College London), and Charlotte Sandoz (IMF), examines the impact of international trade on aggregate welfare and productivity. We show theoretically and numerically that bilateral and unilateral export liberalizations increase aggregate welfare and productivity, while unilateral import liberalization can either raise or reduce them. However, all three trade reforms have ambiguous effects in the presence of resource misallocation across heterogeneous firms. Using unique new data on 14 European countries and 20 manufacturing industries during 1998-2011, we empirically establish that exogenous shocks to both export demand and import competition generate large aggregate productivity gains. We develop a precise mapping between theory and empirics, and provide evidence for the adjustment mechanisms. First, both trade aspects increase average firm productivity, but export expansion also reallocates activity towards more productive firms, while import penetration acts in reverse. Second, both export and import exposure raise the productivity threshold for survival, but the latter is not a summary statistic for aggregate productivity. Finally, efficient institutions, factor and product markets amplify the productivity gains from import competition, but dampen those from export expansion. We conclude that the effects of globalization operate through firm selection and reallocation in the presence of resource misallocation. The third chapter studies the role of production chain on the patterns of international trade. Theory suggests that if producing a final product requires a sequence of production stages, and a mistake occurring at any stage destroys the product, then countries with higher productivity has comparative advantage in later stages of production chain, where the cost of mistake is higher. Despite this prediction, I combine international trade data with country and sector level data to show that more developed countries specialize in earlier stages, once other sources of comparative advantage have been considered. This result suggests that quality control is potentially an important factor in country's specialization along production chains -- when mistakes are imperfectly observed, countries with better ability to observe mistakes would specialize in more upstream sectors.