International Finance Discussion Papers (IFDP)
Technology, Geography, and Trade over Time: The Dynamic Effects of Changing Trade Policy
I study the dynamic effects of changes in trade policy in a multi-country model with firms that make durable and destination-specific investments in exporting capacity. Using Mexican exporter-level data, I show that incumbent exporters to minor trade partners account for a smaller share of bilateral exports than do incumbent exporters to major trade partners, indicating a systematic difference in the persistence of the export decision across destinations. The model is calibrated to capture the positive relationship between exporting persistence and export volume, and predicts that trade liberalizations with minor export destinations deliver higher bilateral export growth than liberalizations with major export destinations. Panel analysis on bilateral exports after free trade agreements is consistent with these predictions, confirming that the model is a useful tool for explaining export behavior. Furthermore, I find that heterogeneity in export churning across destinations is a key driver of aggregate dynamics and welfare gains from changes in trade policy.
Keywords: trade policy, heterogeneous firms, export participation
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