The Margins of Intermediate-input Trade: Theory and Evidence

         
Author Name ARA Tomohiro (Fukushima University) / ZHANG Hongyong (Fellow, RIETI)
Creation Date/NO. December 2019 19-E-109
Research Project Analyses of Offshoring
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Abstract

This paper develops a heterogeneous-firm model in which asymmetric countries export and import intermediate inputs. We show that the elasticities with respect to variable trade costs are larger in intermediate-input trade than those in final-good trade, due to an extra adjustment through the extensive margin. To empirically assess this theoretical prediction, we combine the China Customs data with the tariff-gravity data, and explore the impact of tariffs as well as distances on China's imports. We find that the empirical evidence suggests that the trade elasticities with respect to the two variable trade costs are significantly greater for intermediate-input trade than final-good trade.