New Publication in The Review of International Organizations

Preferential Trade Agreements (PTAs) have become the most prevalent form of international trade liberalization in recent decades, even though it remains far from clear what their effects on economies and their key units, firms, are. The paper evaluates the distributional consequences of trade liberalization within industries differentiating two distinct aspects in which trade liberalization could result in higher trade flows: the intensive vs. the extensive margin of trade. In particular, the authors analyze whether trade liberalization leads to increased trade flows because either firms trade more volume in products they have already traded before (intensive margin) or because they start to trade products they have not traded previously (extensive margin), or both. They test these arguments for the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR) and exporting firms based in Costa Rica for the time-period 2008–2014.

The results of their study suggest that the effects of CAFTA-DR depend not only on whether one analyzes the extensive versus the intensive margin of trade but also whether the product in question is homogenous or differentiated and whether the exporting firm under analysis is small or large. In particular, the researchers find support for the theoretical expectation that firms exporting heterogeneous products, such as textiles, gain from trade agreements, such as CAFTA-DR, in that they can export more varieties of their products. Yet at the same time, they tend to lose at the intensive margin by a reduction in their trade volume while the opposite pattern occurs for firms exporting homogenous products.