Trade Liberalization and Industry Dynamics

This paper uses a large data set for 28 industries in 40 countries to examine the effects of trade liberalization on the number of firms, the average size of surviving firms, and markups. We extend previous studies by examining not only tariff changes in the liberalizing country but also trade reforms in the rest of the world. In addition, we look at whether these effects differ across industries depending on their degree of comparative advantage. The results show that a reduction in home tariffs decreases the number of establishments, firms average size, and markups. All of these three effects are found to be of lower magnitude for comparative advantage industries. In the case of foreign tariffs, our results show that a reduction in protection in the rest of the world is associated with an increase in the number of establishments (which is likely to be reflecting an increase in export profitability), a decrease in average size, while markups are mostly unaffected. As with home tariffs, these effects tend to be less pronounced in comparative advantage industries.