How do multi-product exporters react to a change in trade costs?. EFIGE Working paper

Recent literature has pointed to the major contribution of multi-product firms in international trade activity. This observation has motivated a lively theoretical research on the effects of trade liberalization (Bernard, Redding and Schott (2009), Eckel and Neary (2008)). Key to the results obtained in this literature is the presence of a product specific ability or value of consumer taste, on the top of the now usual firm specific productivity. Accordingly, within firm adjustments play a key role when trade cost vary. Using French individual firms ’ exports at the product level, we decompose trade margins by identifying the product, market and firm extensive margins, on the top of the firm level intensive margin. Using such decomposition, we show that the classical effect of distance on trade margins is very much the result of composition effects. We use then euro adoption as a natural experiment to test the effects of a decrease in trade costs on multi-product firms. Using a panel of some 100,000 exporters, 6,000 products and 50 destinations, we find that the effect of this decrease in trade costs has channeled mainly through the number of products exported by firm, while the effect on export decision may be negative. Only most productive firms benefited from an increase in the number of products exported. Firms with a lower productivity react through the value of exports by product category. The absence of a positive effect of greater integration on export market participation may suggest that this integration- through euro adoption- has been accompanied with a rise in competition, stressing the need for trade models with multi-product firms exporting to several markets