International trade in intermediate goods only

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Motivation and contributions

The liberalization of trade in services and agricultural goods is a controversial topic, as shown by recent policy debates in the European Union and the World Trade Or-ganization. But the service and agricultural sectors are also speci…c, as they provide inputs to other sectors. Indeed, the agrifood sector relies on primary agricultural inputs and a wide range of manufacturing and services industries rely on service inputs (Arnold et al. 2011). In contrast to the large body of research on the impact of trade liberalization on …nal goods, little is known about the e¤ects of allowing greater foreign entry in input sectors.
The literature on input trade liberalization has no doubt about the positive e¤ect of input trade liberalization on downstream …rms, since better access to foreign inputs improves the performance of downstream …rms, via, for instance, a reduction in production costs, or complementarity between foreign and domestic inputs.
However, if we assume that …rms are heterogeneous and may react di¤erently to input trade liberalization, the e¤ect of liberalization on downstream industry may be much more complex. Indeed, if …rms belonging to the same sector react di¤erently, the structure of the market may be a¤ected by input trade liberalization, and this may have negative e¤ects in the downstream industry (in terms of the competitiveness of domestic …rms, the geographical distribution of activities and employment, etc.).
The aim of this thesis is to investigate how input trade liberalization could a¤ect 5 downstream …rms and the structure of downstream sectors, and to identify some characteristics of downstream industries that may a¤ect the consequences of input trade liberalization. If, depending on these characteristics, input trade liberalization has di¤erent e¤ects on downstream …rms and sectors, a better knowledge of these characteristics should allow trade policies to be designed for increased e¢ ciency and better control of the consequences of trade liberalization.
For instance, we show that even if input trade liberalization increases exports at sectoral level, if …xed export costs are low, the number of exporting …rms (the extensive margin of trade) decreases. However Chaney (2008) showed that promot-ing aggregated exports, by increasing the number of exporting …rms is more e¢ cient than increasing the average level of exports per …rm (the intensive margin). In other words, if policy makers wish to increase export performance in a given sector, they should focus on facilitating access to foreign markets rather than promoting exports by …rms that already serve foreign markets. In this way, the positive e¤ect of input trade liberalization on exports can be improved in sectors where …xed export costs are low by supporting weaker exporting …rms, otherwise they are likely to exit the export market due to input trade liberalization.
This thesis contributes to public debate on agriculture and services liberalization and aims to highlight public choices on input trade liberalization.
This thesis also contributes to the academic trade literature. Firstly, because the issue has not been widely addressed to date and secondly, because we develop an original theoretical framework and provide new results. Finally, an application based on the theoretical framework contributes to the empirical literature on the e¤ect of input trade liberalization.
First, this thesis investigates the impact of trade liberalization on the domestic market (export performance, production level, structure, etc.), rather than the e¤ect of trade liberalization on access to foreign markets. Consequently, we do not focus on the factors that govern international trade, but rather on the e¤ect of international trade, especially the e¤ect of international trade in inputs. As studies of the impact of trade on market structures are rare (as are studies of the impact of inputs on …rms ‘performances), the primary contribution of this thesis is the issue addressed: the impact of input trade liberalization on downstream sectors and downstream …rms.
Second, we develop our own theoretical framework. In this theoretical model, heterogeneous …rms are heterogeneously impacted by input trade liberalization or by changes in input prices, whereas previous models with heterogeneous …rms did not allow …rms to react di¤erently to these changes.
Although each chapter of this thesis deals with a speci…c issue, the theoretical models developed in each chapter are based on a common framework.
We start from a model à la Melitz (2003), where heterogeneous …rms produce a di¤erentiated good in monopolistic competition. Our main contribution is the introduction of an intermediate good sector, so that …rms use two production factors: labor and intermediate goods. Unlike other models with heterogeneous …rms and intermediate goods, we do not restrict our analysis to a Cobb-Douglas function of production. For simplicity’ sake, we assume that labor and intermediate goods are complementary, but we show that our results hold as long as the production function is not a Cobb-Douglas.
As in Melitz (2003) and others, …rms are heterogeneous with respect to labor use, so that more productive …rms are able to produce the same amount of …nal good using less labor than less productive …rms. In addition, for the sake of simplicity and without loss of generality, we assume that the use of intermediate goods is the same for all …rms producing the same good and that intermediate goods are homogeneous. Thus, there are no variety e¤ects due to imports of inputs, and all the mechanisms result from a price e¤ect. However, we show that the same results can be obtained assuming complementarity across di¤erentiated inputs.
Our assumptions on production costs follow those of Melitz (2003) and Helpman Melitz and Yeaple (2004). There are …xed costs to enter each market (even domestic markets), and …rms pay di¤erent …xed costs to export and to invest abroad, if they are allowed and able to do so. The existence of these …xed costs results in selection on each market, so that only some …rms are able to access each market.
This original framework produces original results.
We …nd that …rms react di¤erently to input trade liberalization, leading to the reallocation of market shares on each market, and forcing some …rms to exit these markets. Thus, even if input trade liberalization can result in a fall in production costs for all …rms, some …rms su¤er from this situation and are forced to exit either the domestic or the export market.
Finally, these developments provide the theoretical background for an empirical investigation of whether …rms are heterogeneously impacted by changes in their input sector. In this thesis, we empirically test the e¤ect of input trade liberalization on the export performance of downstream …rms. We chose to compare the results with …rm level data on French agrifood …rms and show that the fall in input trade tari¤s leads to reallocation of export market shares from low productivity …rms to more productive ones, and to a fall in the share of …rms able to access foreign markets via exports.
The choice of the agrifood sector is particularly appropriate to test this model 7 for several reasons.
First, the linkage between agrifood goods and their inputs is strong. Indeed, the agricultural sector is the main supplier of inputs for the agrifood sector (Gopinath, 1996) the share of intermediate consumption in production costs is very large (see Chapter 1). In addition, dependence on agricultural inputs is high in this sector. While substitutes exist for some inputs in manufacturing sectors, so that downstream …rms may adapt their input bundle to re‡ect changes in input costs, the use of some agricultural inputs is unavoidable in certain agrifood sectors (like milk for cheese producers, cereals for ‡our producers, and so on).
Second, this choice is also appropriate for policy recommendations. The agricul-tural exception in the rules of the World Trade Organization (WTO) has allowed this sector to maintain a relatively high level of protection, unlike the majority of manufacturing sectors. Although the liberalization process is well advanced in de-veloped countries, the agricultural and agrifood sectors are still protected by trade policies. They are sensitive sectors in international negotiations, where the past lack of consensus led -and continues to lead- to the failure of the ongoing round of negotiations in the WTO (Doha Round). Thus, the existance of trade protection in the agricultural sector means our application is of particular interest, as some results could be used to predict the consequences of future policy choices.
Finally, the structure of this sector is also relevant for our study. Heterogeneity exists between agrifood sectors, but also among the …rms within each sector (see the appendix for some stylized facts and Chevassus and Latouche, 2011 for an empirical study on international trade in the French agrifood sector).
Thus, the aim of this application was to validate our framework, but also to contribute to the literature on agricultural trade liberalization and other studies focused on agrifood sectors. This includes studies on the impact of CAP reforms and agricultural trade liberalization on welfare, preference erosion, location of activities or even their redistribution e¤ects (see for example Decreux et al., 2006, Gohin et al.,2006, Femenia and Gohin, 2009, Bagoulla et al., 2010, Emlinger et al., 2008, Desquilbet and Guyomard, 2002 for studies on European markets, and Gopinath et al., 1996, Gopinath et al. 2004, Ruan and Gopinath, 2008, Lorz and Wrede, 2008 for studies on US or OECD countries). To our knowledge, our study is the …rst to highlight heterogeneous responses of agrifood …rms to input trade liberalization, and the …rst empirical study to show that input trade liberalization may negatively a¤ect some …nal sector …rms.


Organization of the thesis and main results

The …rst two chapters focus on the internationalization strategy of …rms in the …nal good sector, and on the impact of the trade liberalization and prices of intermediate goods on the ability of …rms to access foreign markets. The third and last chapter focuses on the impact of input trade liberalization on the structure of the domestic market.

Does input trade liberalization boost down- stream …rms’exports ? Theory and evidence.

This chapter focuses on the impact of input trade liberalization on the performance of …rms that export. It gives a preview of the theoretical model and compares theoretical predictions with …rm level data.
The theoretical part of chapter 1 is a simple version of the model developed in the two following chapters. As mentioned above, the main assumptions follow the Melitz (2003) model. However, as our analysis focuses on export behavior, we use a simpli…ed version of the model which does not account for the e¤ect on domestic markets. Thus, the mass of domestic …rms is exogenous and, as in Melitz, countries are symmetric.
Input trade liberalization is shown to result in a fall in input tari¤s at the border of the home country. As inputs are homogeneous, a fall in input tari¤s has a direct e¤ect on the domestic price of inputs through …ercer competition. Thus, all …rms pay the same price for the same input, and a fall in input tari¤s reduces the input price for all …rms.
In this model, more productive …rms are more impacted by input trade liberal-ization, because they use relatively more inputs than less productive ones. Thus, input trade liberalization leads to a change in relative variety prices, as well as real-location of export market shares from less productive …rms to more productive ones. In some cases, depending on the level of …xed export costs, input trade liberalization may reduce the probability of exporting.
In the empirical part, we use …rm level data on French agrifood …rms to validate our theoretical predictions. Our dataset includes data from several sources: INSEE-EAE survey, French Customs Register and modi…ed TARIC database.
With these …rm level data, we validate the predictions of the model: input trade liberalization did lead to an increase in export market shares for more productive …rms and to a decrease for less productive exporting …rms, so that the probability of exporting decreased in the …nal sector.
This chapter makes two main contributions. From a theoretical point of view, 9 it shows that input trade liberalization bene…ts more productive exporting …rms most and may reduce the ability of …rms to access foreign markets. It includes an original empirical study that validates these theoretical results using …rm level data on French agrifood …rms.

Intermediate goods, heterogeneous …rms and Export/FDI trade-o¤.

While the …rst chapter only focuses on the impact of input trade liberalization on export performance, the second chapter improves the theoretical model presented in the …rst chapter by introducing the opportunity for …rms to undertake foreign direct investment (FDI), and focuses on the impact of input price on the trade-o¤ between serving the foreign markets via exporting or producing locally via an a¢ liate.
As multinational enterprise activity in the form of FDI has increased at a faster rate than trade ‡ows, we cannot focus on …rms’access to foreign markets without taking FDI into consideration. In addition, the location of activities is a key issue for industrial polices as it a¤ect the national level of employment, the international distribution of activities, etc.
The assumptions on consumer preferences and production costs resemble those in the …rst model. Like in Melitz (2003), countries remain symmetric, and the mass of domestic …rms is exogenous. In addition, as in Helpman Melitz and Yeaple (2004), …rms can choose to set up an a¢ liate in the foreign country in order to avoid some transport costs. However, …rms have to pay a new …xed cost to set up an a¢ liate abroad.
We …rst investigate the e¤ect of a symmetric and identical fall in input prices in both countries, i.e. the domestic and the foreign one. Like in the …rst chapter, a reallocation process occurs, but this time, it not only concerns export market shares. Whatever the market, a fall in input prices leads to an increase in market shares for more productive …rms and to a decrease in market shares for less productive …rms. In addition, we show that a …rm may gain or lose from this fall in input prices depending on its level of productivity, but not on its status. Finally, we show that the lower the price of the intermediate good, the bigger the di¤erences between …rms in terms of production or pro…t levels, and the bigger the share of FDI sales compared to export sales. This last mechanism is in line with the results of Helpman Melitz and Yeaple: the more heterogeneous the sector, the higher the share of FDI sales compared to export sales.

Table of contents :

1 Trade liberalization and performance of …rms
2 Motivation and contributions
3 Organization of the thesis and main results
3.1 Does input trade liberalization boost downstream …rms’exports ? Theory and evidence
3.2 Chapter 2: Intermediate goods, heterogeneous …rms and Ex-port/FDI trade-o¤
3.3 Chapter 3: Agricultural market liberalization and entry/exit of agrifood …rms in a global economy
1 Does input trade liberalization boost downtream …rms’ exports?
Theory and evidence. 
1 Introduction
2 Theoretical framework
2.1 Technology
2.2 Preferences, demand and prices
2.3 Export revenues and intermediate product prices: some properties
2.4 Impact of input tari¤s on export decisions: the role of …xed export costs
3 Empirical model and estimation strategy
4 Data and variables
4.1 Firm data
4.2 Tari¤s
4.3 Selection variable
4.4 Descriptive statistics
5 Results
5.1 Input tari¤s, export status and exports
5.2 Alternative measures
6 Conclusion
A The impact of T on ri:
B The crossed e¤ect in the probit model
C Results with only importing …rms
2 Intermediate goods, heterogeneous …rms and Export/FDI trade
1 Introduction
2 Set-up of the model
2.1 Demand
2.2 Production
2.3 Entry and exit of …rms on foreign markets
2.4 Market equilibrium
3 Impact of intermediate good and labor subsidies
3.1 Intermediate good subsidy
3.2 Wage subsidy
3.3 Comparison of the two policies and discussion
4 Conclusion
C E¤ect of intermediate good price on the investment threshold
3 Agricultural market liberalization and entry/exit of agrifood …rms in a global economy
1 Introduction
2 Model in a closed economy
2.1 Preferences, technology and market structure
2.2 Firms’entry in and exit from the …nal good sector
2.3 The impact of input prices on entry in/exit from the domestic market
2.4 Welfare
3 International trade in intermediate goods only
3.1 Preferences, technology and market structure
3.2 Intermediate good price and entry/exit with free input trade (A = 1 and fM = 0)
3.3 Intermediate good prices and entry/exit with variable input trade cost (A > 1 and fM = 0)
3.4 Intermediate good prices and entry/exit with …xed input trade costs. (A = 1 and fM > 0)
4 International trade in …nal goods
4.1 Preferences, technology and market structure
4.2 Firm entry and exit in the …nal good sector
4.3 The impact of intermediate good prices on entry in/exit from markets in symmetric countries
4.4 The impact of intermediate good prices on market entry/exit when the countries are asymmetric
4.5 International trade in …nal and intermediate goods
5 Conclusion
A Additional stylized facts on the French agrifood sector
B Model in a closed economy
C Model with input trade only
D Model with output trade only


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