Trade Liberalization Along the Firm Size Distribution: The Case of the EU-South Korea FTA

45 Pages Posted: 26 Mar 2021

See all articles by Sonali Chowdhry

Sonali Chowdhry

Kiel Institute for the World Economy

Gabriel J. Felbermayr

Kiel Institute for the World Economy

Date Written: 2021

Abstract

How do firms of different sizes react to trade liberalization? Leading theories suggest that, amongst continuing exporters, lower trade costs should boost exports of smaller firms by the same or a greater rate than those of larger firms. However, studying the entry into force of the ambitious EU-South Korea Free Trade Agreement (EUKFTA) with French customs data, we find robust evidence to the contrary. Applying a triple-difference framework, we report that the FTA increased sales in the top quartile of continuous exporters by 71 percentage points more than in the bottom quartile. More than 90 percent of that growth premium is driven by a stronger effective reduction in broadly defined non-tariff barriers (NTBs); the remainder by a higher sensitivity to trade costs. These findings have implications for both heterogeneous firm trade models and for the capacity of FTAs to magnify inequality. In contrast, on the entry margins, our results are in line with the literature with the FTA selecting intermediate-sized firms into exporting to South Korea.

JEL Classification: F130, F140

Suggested Citation

Chowdhry, Sonali and Felbermayr, Gabriel J., Trade Liberalization Along the Firm Size Distribution: The Case of the EU-South Korea FTA (2021). CESifo Working Paper No. 8951, Available at SSRN: https://ssrn.com/abstract=3812068 or http://dx.doi.org/10.2139/ssrn.3812068

Sonali Chowdhry (Contact Author)

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Gabriel J. Felbermayr

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

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