Wednesday, January 4, 2017

What If US Importers and Exporters are Largely the Same?

A lot of the US discussion about international trade seems to assume that we can simultaneously discourage the importers and encourage the exporters. But this belief assumes, implicitly, that importers and exporters are different firms. If the US firms that import have a lot of overlap with firms that also export, then if you impose costs on these firms by hindering their imports, you will also make it harder for them to export.

In fact, the main US importers do have a lot of overlap with the main US exporters. J. Bradford Jensen offers a useful figure in a blog post at the Peterson Institute for International Economics,: "Importers are Exporters: Tariffs Would Hurt Our Most Competitive Firms." For example, out of the 2,000 US firms that are in the top 1% of exporters, 36% are also in the top 1% of importers; conversely, of the 1,300 US firms that are in the top 1% of importers, 53% are also in the top 1% of exporters.

The figure emerges from ongoing work by Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott. For a recent example, see their working paper "Global Firms," available as National Bureau of Economic Research Working Paper #22727 (October 2016). Or for an earlier overview of this work, the same four authors wrote "Firms in International Trade," which appears in the Summer 2007 issue of the Journal of Economic Perspectives.  As they note in the NBER working paper:
"Research in international trade has changed dramatically over the last twenty years, as attention has shifted from countries and industries towards the firms actually engaged in international trade. ... [M]uch of international trade is dominated by a few “global firms,” which participate in the international economy along multiple margins and account for substantial shares of aggregate trade." 
Jensen explains further in the PIIE blog post:
"First, it is costly for firms to start importing and exporting—effort and investments are required to start doing each. This implies that only the most productive firms will engage in importing or exporting. Once a firm starts importing, it reduces the firm’s costs and thus makes it possible to export. Similarly, exporting increases a firm’s revenue and this makes it possible for the firm to import. These two aspects of firm behavior are intertwined and both would be damaged by higher tariff costs.

"In a world with these types of interdependent firm decisions, small decreases in trade costs (such as reductions in tariffs) can have magnified effects on trade flows, as they induce firms to serve more markets, export more products to each market, export more of each product, source intermediate inputs from more countries, and import more of each intermediate input from each source country. But the process can work in reverse. Hence, policies to restrict imports, such as tariffs, that are intended to help a nation’s firms can end up hurting its most successful producers, for whom importing is part and parcel of exporting and a central pillar of their overall business strategy."