policymakers demonstrate

256 Cecília Hornok and Miklós Koren
Empirical evidence shows that trading firms facing these costs respond by sending
fewer and larger shipments. This creates losses in the form of higher inventory
expenses (Alessandria et al., 2010) or less consumer satisfaction (Hornok
and Koren, 2015a).
Challenge 11 Understand and quantify nontax, nonquota frictions in trade.
6.3.2 Insights for Policy
Imports Are Important
Earlier empirical studies in trade discussed patterns of exports disproportionately
more than patterns of imports. With the emergence of new firm-level data,
it has become clear that imports are as important as exports, especially when
we think of imports used by firms in their production. Bernard et al. (2007,
2009) show that importers are just as special as exporters: they tend to be larger
and more productive than nontrading firms.
The bigger size and better performance of importers is not only due to selfselection
into importing. Studies show that improved access to foreign inputs
has increased firm productivity in several countries, including Indonesia (Amiti
and Konings, 2007), Chile (Kasahara and Rodrigue, 2008), India (Topalova
and Khandelwal, 2011) and Hungary (Halpern et al., 2015). Results are conflicting
for Brazil: Schor (2004) estimates a positive effect, while Muendler
(2004) finds no effect of imported inputs on productivity. And for Argentina,
Gopinath and Neiman (2014) show that variation in imported inputs may have
contributed to fluctuations in aggregate productivity.
To understand why importers are better, Halpern et al. (2015) formulate a
model of firms who use differentiated inputs to produce a final good. Firms
must pay a fixed cost each period for each variety they choose to import.
Imported inputs affect firm productivity through two distinct channels: as in
quality-ladder models they may have a higher price-adjusted quality, and as in
product-variety models they imperfectly substitute domestic inputs. Because
of these forces, firm productivity increases in the number of varieties imported.
They estimate that importing all tradable inputs raises firm-level productivity
by 22 per cent relative to not importing at all, about half of which is due to
imperfect substitution between foreign and domestic inputs.
Multilateral Agreements Prevent Trade Wars
The canonical view of free trade agreements is that they provide reciprocal market
access to countries participating in them (see Maggi, 2014 for a survey of
theories of trade agreements). Theory provides three reasons why countries sign
trade agreements. First, they want to internalize ‘terms of trade externality’.