The Impact Of Preferential Trade Agreements On The Margins Of International Trade
Posted on April 13, 2021
On the other hand, the response to the large margin should be reversed: if products are easily substitutable (homogeneous products), new companies can cover only a small part of their export activities. The reason for this is the discussion we had above: a change in trade barriers implies that new companies can enter the market more easily when they have not yet exported until they are generally less productive than companies that already export. While products can easily replace these new, less productive products, companies can reap only a small market share because they cannot easily compete with the most productive firms that have already exported. However, if the elasticity of substitution is low (differentiated products), companies are better protected from competition and can reap a greater market share. The argument is that in the case of low substitution elasticity, demand for each variety should be less affected by trade barriers. Therefore, the large margin should be small for homogeneous products, but stronger for differentiated products, since in the latter case, new businesses will be able to enter more easily. Osgood, I. (2017). Breakdown of industrial resistance to trade: business, product diversity and mutual liberalization. World Policy, 69 (1), 184-231.
In addition to the emphasis on the consequences of the distribution of trade liberalization within industries, the literature has begun to separate two different aspects in which trade liberalization could lead to an increase in trade flows: the intensity of the trade margin (Chaney 2008). As a result, trade liberalization could lead to increased trade flows, either because companies are trading more volume with products they have traded before (intense margin), or because they are starting to trade products they have not previously marketed (significant margin), or both. In the WTO, for example, Dutt et al. (2013) can demonstrate that the WTO and its predecessor, THE GATT, influence the extended trade margin almost exclusively. This means that once they become members of the WTO, countries will begin to negotiate products that they have not yet traded. At the same time, however, the WTO/GATT appears to have a negative impact on the intensive product range, which would mean that member countries, if they are members, are negotiating fewer products than they have previously marketed. However, despite the great theoretical literature that distinguishes the vast from the intense commercial margin (Chaney 2008; Helpman et al. 2008; Manova 2013), there are few empirical studies on this distinction.
Footnote 1 In the following paragraphs, we first describe how we expect CAFTA-DR to influence the number of companies and products and the volume of products traded. Second, we introduce product differentiation to theoretically deduce a different effect from CAFTA-DR on the extensive vs.