Estimating the Impacts of FTA on Foreign Trade: An analysis of extensive and intensive trade margins for the Japan-Mexico FTA

This paper examines the impacts of the Japan-Mexico free trade agreement (JMXFTA), which was enacted in 2005, on Japanese exports to Mexico. The authors construct a theoretical trade model of heterogeneous firms, which is based on the Melitz-Chaney model, and derive a theoretical relationship of the impacts of tariff changes on extensive and intensive trade margins. Applying this model, the authors estimate the impacts of JMXFTA on product-level extensive and intensive margins of Japan's exports to Mexico by using the most detailed commodity trade data. The results show that the tariff reduction caused by JMXFTA increases intensive margins while no clear evidence is found on the effect on extensive margins. This indicates that in the short-run, the JMXFTA exerts more favorable effect on existing exporters than on new export market entrants.