Firm Heterogeneity and Comparative Advantage: The Response of French Firms to Turkey's Entry in the European Customs Union

58 Pages Posted: 2 Mar 2010

Date Written: June 10, 2009

Abstract

I analyse the effects of a reduction in the tariffs of a trading partner on the exports of domestic firms. More precisely, I focus on how cross-industry differences in factor intensities and within-industry differences in firm productivities shape the response of the extensive (decision to export) and the intensive (exported volumes per firm) margins of exports. I examine the response of French firms to the reduction of Turkish import tariffs that followed the entry of Turkey into the European Customs Union in 1996. A reduction in tariffs increases the probability to export and, surprisingly, the effect is stronger in comparatively disadvantaged sectors. I provide a possible explanation using a partial equilibrium model which includes firm-level heterogeneity and sector-level comparative advantage. In this model, as trade partner tariffs fall, the productivity threshold separating exporters from non-exporters decreases more in comparatively disadvantaged sectors. This occurs because, even if the productivity threshold to enter the export market falls in the same proportion as tariffs in all sectors, its level was initially higher in comparatively disadvantaged ones.

Keywords: heterogeneous firms, Custom Union, intensive and extensive margins

JEL Classification: F12, F13, F15

Suggested Citation

Buono, Ines, Firm Heterogeneity and Comparative Advantage: The Response of French Firms to Turkey's Entry in the European Customs Union (June 10, 2009). Bank of Italy Temi di Discussione (Working Paper) No. 715, Available at SSRN: https://ssrn.com/abstract=1523213 or http://dx.doi.org/10.2139/ssrn.1523213

Ines Buono (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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