Essays on International Trade and Financial Frictions

This dissertation studies the role of firm heterogeneity in (1) explaining the impact of unilateral trade liberalization on industry labor productivity, (2) reconciling micro estimates that attribute an important effect of credit constraints on export collapse with macro findings that the impacts are minimal, and (3) interpreting the relationship between firm productivity and liquidity management when financing is costly.

The first chapter theoretically and empirically investigates the impact of trade liberalization on industry labor productivity (i.e. output per worker). Applying a two-country, two-industry, two-factor trade model with firm heterogeneity, I show that the impact of trade liberalization on industry labor productivity depends on the structure of tariff reductions. In particular, a unilateral trade liberalization in a labor-abundant country leads to declines in both industry labor productivity and the real wage. The relative wage, measured as a ratio of the real wage over return to capital, also declines when the unilateral trade liberalization takes place disproportionately in the labor-intensive sector. I find supporting evidence of these predictions from the performance of Chinese manufacturing industries and regional variations following China's entry into the WTO.

The second chapter provides a quantitative macro-assessment on the importance of credit constraints in the collapse of export during the Great Recession. I develop and quantify a dynamic Melitz model that incorporates a working capital constraint. Mapping the model to Chinese-firm level evidence, I find that most of the collapse in Chinese exports during the recent global financial crisis was due to a negative demand shock. Two general equilibrium effects, working through the aggregate exporting price and wage rate, reconcile micro estimates that attribute an important effect of financial constraints with macro findings that the impacts are minimal.

The third chapter explores theoretically and empirically the relationship between firm productivity and liquidity management in the presence of financial frictions. We build a dynamic investment model and show that, counter to basic economic intuition, more productive firms could demand less capital assets and hold more liquid assets compared to less productive firms when financing costs are sufficiently high. We empirically test this prediction using a comprehensive dataset of Chinese manufacturers and find that more productive firms indeed hold less capital and more cash. We do not, however, observe this for U.S. manufacturers. Our study suggests a larger capital misallocation problem in markets with significant financing frictions than previously documented.