Firm size‐specific trade effects of regional trade agreements: Estimating extensive and intensive margins of trade

• Published date: 01 March 2023
• Author: Soonchan Park,Innwon Park
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/asej.12290

ORIGINAL ARTICLE

Firm size-specific trade effects of regional trade

agreements: Estimating extensive and intensive

margins of trade

Soonchan Park

1

| Innwon Park

2

1

Department of Economics and International Trade, Kongju National University, Kongju, Korea

2

Division of International Studies, Korea University, Seongbuk-gu, Seoul, Korea

Correspondence

Innwon Park, Division ofInterna tionalStudies, Ko rea Universi ty, 145 Anam- ro, Seongbuk -gu, Seoul

02841, Korea.

Email: iwpark@korea.ac.kr

Funding information

Korea University, Grant/Award Number: K2208051

Abstract

We estimate the impacts of Korean firms’participation in regional trade agreements

(RTAs) on the extensive and intensive export margins by identifying exporting firms

based on their firm size—small and medium-sized enterprises (SMEs) and large

enterprises (LEs) at the 5 399 HS six-digit commodity level—and specifying charac-

teristics of RTAs from 2004 to 2015. We apply the EK Tobit estimation technique to

control zero trade and the OLS estimation with importer-product and time fixed

effects to alleviate the endogeneity problem. We find that firm size, product type,

and depth of RTA significantly matter. Specifically, we find that deeper RTAs with

larger, developing, and closer members significantly enhance the export creation

effects of SMEs and LEs. Regarding the firm size-specific effects, we find that SMEs

are less sensitive to exploiting RTA participation but more sensitive to the import

market size, bilateral and relative trade costs, and the RTA characteristics. LEs’

export creation is mainly driven by the intensive margin, while SMEs’export crea-

tion is driven by extensive and intensive margins(slightly more by the extensive mar-

gin). For the product-specific effects, we find that Korea’s major exportable

products such as chemicals, basic metals, motor vehicles, and transport equipment

generate significantly strong export creation effects for both LEs and SMEs through

their participation in RTAs.

KEYWORDS

extensive margin, intensive margin, large enterprises, regional trade agreements, small and medium-

sized enterprises

DOI: 10.1111/asej.12290

© 2023 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Received: 25 July 2022; Accepted: 11 March 2023

82 Asian Econ. J. 2023;37:82–112.

wileyonlinelibrary.com/journal/asej

JEL CLASSIFICATION

C23, F60, L25, L60

1|INTRODUCTION

The trade liberalization efforts through forming regional trade agreements

(RTAs) reallocate resources across industries and within an industry, resulting

in less productive firms exiting and more productive firms expanding or enter-

ing. Melitz (2003) introduces the “new–new trade theory”of heterogeneous

firms’trade activities, elaborating on inter-firm reallocations of resources within

an industry, resulting in welfare gains. Thereafter, equipped with more sound

theoretical frameworks, the firm-specific extensive margin (EM) (trade diversifi-

cation measured by the number of trading firms) and the intensive margin

(IM) (trade concentration measured by trade volume per trading firm) of trade

generated by changes in the trading environment have been investigated exten-

sively. Bernard et al. (2007), Chaney (2008), Helpman et al. (2008), Redding

(2011), Lapham (2017), and Fernandes et al. (2019) critically discuss limitations

in “old trade theories”and related conventional gravity model analysis in which

representative firms are assumed and industry-level data are used to estimate

effects of trade friction or liberalization on aggregated trade flows. Seeking an

appropriate methodology, they introduce more applicable theoretical models

for structural gravity regression model analysis by focusing on heterogeneous

firms’responses to the changes in market conditions and empirically test the

validity of the models by utilizing firm-level data.

The firm heterogeneity is derived from differences in firms’productivity, sig-

nificantly determined by the size of a firm. Accordingly, firms’decisions to exit

from or enter into the post-RTA markets are distinct based on firm size

(Bernard et al., 2012; Chaney, 2008; Melitz, 2003). However, the firm size-

specific trade effects of RTAs have been rarely investigated. Chowdhry and Fel-

bermayr (2021) is the only exception, but the study applies to a specific RTA

case, the EU–South Korea Free Trade Agreement by using French customs

data from 2000 to 2016. Besides, the conventional method of investigating the

trade effects of RTAs by specifying a binary membership dummy variable in a

standard gravity equation will not accurately estimate the trade effects consider-

ing that the RTA effects significantly depend on members’economic character-

istics (Vcard, 2011) and the depth of RTA provisions (Cho, 2020; Felbermayr

et al., 2018; Mattoo et al., 2017; Mulabdic et al., 2017).

Distinguished from earlier studies, this study investigates heterogeneous

firms’response to the formation of RTAs not by assuming a representative firm

but by explicitly identifying firms’activities by size: small and medium-sized

enterprises (SMEs) and large enterprises (LEs). Additionally, our empirical

ASIAN ECONOMIC JOURNAL 83