Making small firms happy? The heterogeneous effect of trade facilitation measures

• DOI: http://doi.org/10.1111/roie.12463
• Date: 01 August 2020
• Published date: 01 August 2020

Rev Int Econ. 2020;28:565–598. wileyonlinelibrary.com/journal/roie

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© 2020 John Wiley & Sons Ltd

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INTRODUCTION

Successful exporting implies a good knowledge and understanding of the destination country’s rules

and regulations. The exporter is required to supply the correct documentation, comply with customs

procedures, and be subject to clearance and inspections. Lack of knowledge or uncertainty on the

outcome of the exact procedures can result in the product not complying with the importing coun-

try’s regulations, and then in the firm facing the costs of rejection at the border of the targeted coun-

try. Hence, in addition to the cost of acquiring information about the rules and regulations in the

Received: 15 January 2019

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Revised: 4 December 2019

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Accepted: 11 December 2019

DOI: 10.1111/roie.12463

ORIGINAL ARTICLE

Making small firms happy? The heterogeneous

effect of trade facilitation measures

LionelFontagné1

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GianlucaOrefice2

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RobertaPiermartini3

1PSE, Université Paris I and CEPII, Paris,

France

2CEPII, Paris, France

3ERSD, WTO, Geneva, Switzerland

Correspondence

Lionel Fontagné, Centre d’Economie de

la Sorbonne, 106-112 Bd de l’Hôpital,

F-75647 Paris Cedex 13.

Email: lionel.fontagne@univ-paris1.fr

Abstract

The different facets of trade facilitation may impact het-

erogeneously exporters of different size and productivity.

Using the cross-sectional variation in procedures at the

border, we identify how red tape affects trade through the

extensive and/or the intensive margin and show that small

and large exporters are affected differently. We observe that

while information availability benefits both small and large

exporters, other measures like advance ruling, appeal proce-

dures and the automation of border formalities tend to favor

large exporters. This result suggests that trade facilitation

policies affect exporters through channels other than simply

the fixed or variable cost component of the red tape barriers.

Beyond affecting the size and composition of trade flows,

uncertainty about the conditions of crossing borders plays

an important role in shaping the demography of exporters

across different destinations.

JEL CLASSIFICATION

F13; F14

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destination market, which is product–destination specific, there are the costs in terms of time and

uncertainty of delivery linked to the import/export procedure.

These trade frictions are sizable and are frequently complained about in surveys of exporters: cum-

bersome and lengthy administrative procedures at home and abroad cumulate, and represent an im-

portant component of trade cost (Anderson & van Wincoop, 2004). Lengthy shipping times (including

long delays at the border) can imply depreciation costs such as literal spoilage and technological

obsolescence, for example, in the case of consumer electronics (Hummels & Schaur, 2013).1

Delays

in getting goods from origin to destination hinder exports more than do foreign tariffs: the average

tariff applied to imports by sub-Saharan Africa is 11.2%, whereas the tariff equivalent for delay cost

is 25.6%.2

Of these costs, the highest portion is due to administrative procedures. Djankov, Freund,

and Pham (2010) claim that 75% of delays to shipping containers between the origin and destination

countries are due to bureaucracy: customs procedures, tax procedures, clearance, and inspections.

Hornok and Koren (2015) using Spanish shipment-level export data, show that a 50% reduction in per-

shipment administrative costs corresponds to a 9% points reduction in the tariff. Carballo, Graziano,

Schaur, and Volpe-Martincus (2017) use detailed import processing data from Peru and estimate a

21% tariff equivalent of border processing cost.

Firms of different size are plausibly affected heterogeneously by these trade frictions: theory sug-

gests different mechanisms through which trade frictions affect trade and margins of trade by firms’

size. First, in a standard heterogeneous firm model of trade with constant elasticity of substitution

(CES) preferences, a reduction in the fixed costs of export allows less productive firms to enter the

export market (Chaney, 2008; Melitz, 2003). Thus, trade facilitation measures reducing fixed costs

to trade should have a positive effect on margins of trade through the entry of small (less productive)

exporters. This class of models predicts no differential effect on the intensive margin of individual

exporters when the variable costs of trade fall. Second, departing from the classical CES preferences

framework and allowing for firm-specific entry cost, Arkolakis (2010) predicts that when trade costs

increase, trade shares are reallocated away from small firms because sales’ elasticity with respect to

variable trade costs is decreasing in firm size. Finally, a recent strand of literature is shedding a new

light on the impact of border-related trade costs on heterogenous exporters. Focusing on the political

economy of red tape, Maggi, Mrazova, and Neary (2018) show that red tape barriers are used to choke

trade in some goods, if the realized political weight for these products is high. Interestingly, this effect

is not driven by a fixed-cost component of red tape, but generated by a nonconvexity in the government

optimization problem. Their model predicts that large firms may be more affected by red tape than

small firms, even on the extensive margin. Focusing on the uncertainty related to the procedures of

crossing the border, Carballo etal. (2017) show that large firms are more elastic to border processing

time because they manage more complicate supply chains and/or systems of shipments and thus gain

relatively more from fast processing times. In the same vein, DeSousa, Disdier, and Gaigné (2016)

argue that large and most productive firms are more exposed to uncertainty: an increase in the volatil-

ity of foreign demand induces the reallocation of market shares from the most to the least productive

exporters. All in all, rather than simply affecting unevenly trade flows of different size,3

such trade

frictions might affect differently exporters of different size. Such hypothesis is the one explored here.

Considering these complex mechanisms, whether the trade costs in terms of time and uncertainty

at the border affect differently exporters of different size is an empirical issue. The identification is

not an easy task for three reasons. First, we lack systematic information on procedures at the border

of importing countries, as opposed to information on tariff duties. How long does it take, and how

uncertain is it to enter a product in a certain market? Outcome-based measures taken from the Doing

Business indicators of the World Bank have often been used in the literature,4

but going deeper in

the details of the exact procedures to cross the border and the associated degree of uncertainty about

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whether a good is allowed to go through (and at what conditions) is worth an investigation. This

paper uses the data on procedures required to cross the border collected in relation with the Trade

Facilitation Agreement (TFA) to study the impact of time and uncertainty at the border on exporters

of different size.5

Trade facilitation indeed reduces the fixed and/or the variable export costs, but also

the uncertainty in the processing time at the border and in the outcome of the procedures. Formalities,

requirements and custom inspections have to be met each time a shipment crosses a border, and the

related uncertainty represents an additional cost for the exporters. We use here the detailed evidence

collected by the OECD (Trade Facilitation Indicators: TFIs in the following) on information availabil-

ity, involvement in trade community, advance rulings, appeal procedures, formalities, documentation,

and procedures in each importing country (dataset OECD, 2018; Moïsé, Orliac, & Minor, 2011)6

The

second difficulty is to observe the impact of TFIs on firms, rather than on aggregate trade flows. To

proceed, we combine data on TFI with transaction level data for the universe of French exporting

firms (export participation, number of products exported, value of product–destination exports) from

the French Customs. The third difficulty is to properly assess the impact of TFI on firms of different

size, instead of trade flows of different size. The main contribution of the present paper is therefore

testing the effect of different determinants of time required, and uncertainty faced, to cross the bor-

der, on the margins of trade of heterogeneous exporters, here grouped by size bins. Using a quantile

regression, we contrast this evidence with the absence of a nonlinear impact of TFI on transactions of

different size of a given exporter.

Importantly, while existing literature at the firm level has looked at how delays at custom in the

exporting country affect firms’ export behavior (Volpe-Martincus, Carballo, & Graziano, 2015), we

are the first to estimate how time and uncertainty at the border of the importing country affect the

behavior of small and large exporters. We do this for a range of measures that not only affect the time

to cross the border, but also account for increased certainty of rules for exporters (e.g., rules that give

an exporter the right to appeal the decisions of the customs at destination).

Our key finding is that all trade facilitation measures have a positive effect on trade of large firms.

We also find a positive effect on trade of small firms but only for the provisions that facilitate the avail-

ability of information (information and forms publicly available and easily accessible on the internet).

In contrast, involvement of the trade community, right to appeal, advance rulings, or automation pro-

cedures—all measures reducing uncertainty in the outcome of the border procedures—benefit only

large exporters. These findings downplay the usual conclusions regarding the expected benefits of

small firms from reducing red tape. We find evidence (somehow) compatible with firm selection ef-

fects only for measures that foster the flow of information between countries. Results concerning other

provisions are not compatible with a firm selection mechanism. This supports the view that red tape

measures impact trade mainly through their effect on uncertainty (Carballo etal., 2017) or because, by

their nature, they are used for political reasons to choke trade (Maggi etal., 2018).

The remainder of the paper is organized as follows. In Section 2, we present Materials and Methods,

we discuss measures of the TFA and we show how the TFIs constructed by the OECD can be mobi-

lized; we also present the administrative data on the universe of French exporters used to “reveal” the

differentiated impact of the trade facilitation measures on firms of different sizes and capabilities; we

finally present the estimation strategy. Results are discussed in Section 3. Section 4 concludes.

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DATA AND EMPIRICAL STRATEGY

Five indexes based on TFI indicators are used in the present paper: Information Availability,

Involvement in Trade Community, Advance Rulings, Appeal Procedures and Formalities Document,