Over the last three decades, the world economy has witnessed rapid trade liberalization in developing countries, either unilaterally, bilaterally or multilaterally through regional free trade agreements or WTO entry. Naturally, such reforms have important impacts on consumers, exporters, importers and aggregate welfare of the liberalizing countries. So far the literature on the firm level adjustments to trade liberalization mainly focus on either exporting firms or importing firms, rather than the interaction between buyer-seller relationships across countries. What are the impacts of trade liberalization on the establishment of new trade linkages between buyer and sellers (the extensive margin)? Does the removal of trade barriers affect the duration, prices and quantities of trade within buyer-seller relationship (the intensive margins)? What are the aggregate outcomes and consequences of trade shocks through the mechanism of firm to firm trade?
In this project Yu aims to shed some light on these new questions using a unique transaction level customs data with buyer-seller identification from Pakistan, and explores the economic impacts of China-Pakistan free trade agreement in 2007. His research contributes to the growing literature on firm-to-firm trade using customs transaction level data. This project contributes to the literature by providing new evidence on the effects of trade liberalization on buyer-seller relations at both the extensive and intensive margin using a dataset from Pakistan Customs that has never been used in the previous studies.
The transaction level Pakistan data are from 2000 to 2016 and cover the universe of Pakistan’s exports at transaction level in detail. The raw data include nearly 19 million observations, 70,000 pakistan firms and 1.7 million foreign firms. To assess the data, explorative empirical regressions using difference-in-difference strategy will be implemented examining the effect of the China-Pakistan free trade agreement on the value/quantity of trade within a buyer-seller pair and the number of trade partners of a Pakistani firm.
The research has strong policy implications. Export promotion policies in response to trade shocks (such as free trade agreements) should be targeting not only specific export markets but also assist firms establishing new exporter-importer linkages or stabilizing individual firm-firm connections. Our research could justify policies emphasizing the importance to domestic firms not only to overcome the fixed costs of entering foreign markets, but also seek for searching and matching with buyers via market networks. In other words, to fully reap the gains from trade liberalization, further policies facilitating buyer-seller connections in international trade could be important.
