GEP 14/02: Trade Liberalization, Intermediate Inputs and Firm Efficiency: Direct versus Indirect Modes of Import

Summary

We develop a heterogeneous-firms model to show how trade liberalization in intermediate inputs affects the economy, by allowing for either the direct channel or the indirect channel of import.

Abstract

This paper studies the impact of input trade liberalization on firm efficiency, aggregate productivity and welfare. We extend the Melitz (2003)’s framework to incorporate: a) trade in both intermediate inputs and final goods between similar countries, b) firm’s decision toimport intermediate inputs in addition to the decision to export its final output. This model shows different effects from reducing input tariffs, according to whether intermediates are assumed to be imported directly by final good firms or indirectly through an efficientwholesale system.

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Authors

Michele Imbruno

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