The Margins of Intermediate Goods Trade: Theory and Evidence

Abstract

This paper develops a heterogeneous-firm model in which firms in asymmetric countries in terms of sizes and trade costs export and import intermediate goods subject to selection. We show that the elasticity with respect to variable trade costs is greater for intermediate goods than for final goods, mainly due to the extensive margin. Using China Customs data with tariff-gravity data, we empirically assess the impact of tariffs as well as distances on China’s imports and find empirical evidence in support of our prediction of the model.