Regional Effect of Trade Liberalization on the Firm-level Exports

Abstract

This paper extends the model of Melitz (2003) to decompose the tariff and wage effect of trade liberalization on the firm-level intensive margin of exports. The tariff effect of trade liberalization is associated with the reduction in exporting firms' variable trade costs, on the contrast, the wage effect manifests itself through increasing regional wages caused by rising local labor demand. The model shows that the two types of effects have opposite influence on the firm-level exports. The wage effect varies across regions due to the different regional industrial composition, which leads to different regional response to trade liberalization