Trade, Resource Reallocation and Industry Heterogeneity

Recent trade models with heterogeneous firms (Bernard et al., 2003 and Melitz, 2003) show how lower trade costs can spur aggregate productivity by forcing lower productivity firms out of the market, cutting off the lower tail of the productivity distribution. In this paper we find significant heterogeneity regarding this impact across different industries. In particular, we find that the exit of inefficient plants due to stronger import competition is very prominent in light industries, that is, in industries in which only a limited amount of capital is needed and where most plants are of small-scale. In contrast, we find no significant effects of import competition on the exit of plants in heavy industries. The result has important policy implications regarding the role of trade reform in boosting aggregate productivity, particularly in industries with high levels of distortions.Trade costs, productivity, resource reallocation