Trade Costs, Firms and Productivity∗ (Published in Journal of Monetary Economics, July 2006)

This paper examines the response of U.S. manufacturing industries and plants to changes in trade costs using a unique new dataset on industry-level tariff and transporta-tion rates. Our results lend support to recent heterogeneous-firm models of international trade that predict a reallocation of economic activity towards high-productivity firms as trade costs fall. We find that industries experiencing relatively large declines in trade costs exhibit relatively strong productivity growth. We also find that low productivity plants in industries with falling trade costs are more likely to die; that relatively high productivity non-exporters are more likely to start exporting in response to falling trade costs; and that existing exporters increase their shipments abroad as trade costs fall. Fi-nally, we provide evidence of productivity growth within firms in response to decreases in industry-level trade costs