turnover rates (measured as the sum of entry and exit divided by the number of establishments).
This suggests that plant entry and exit dampen scale adjustments, and hence that industries
characterized by free entry and exit are not much affected by tariff reductions. This result is in
line with results reported by Roberts and Tybout (1991) for Chile and Colombia, showing that the
effect of import penetration on employees per plant decreases with industry turnover.
Head and Ries also look at plant size heterogeneity to examine whether plants belonging to
different size groups show a different response to trade policy changes. Their main result is that
only the scale of large plants is responsive to tariff reductions. Conversely, small plants are de
facto insulated from the effects of trade liberalization.
To sum up, the plant-level evidence illustrated in this section suggests that trade-induced scale
efficiency gains are generally small in magnitude, because: 1) a disproportionate share of industry
output is produced by large firms, which appear to have reached minimum efficient scale; 2) small
plants’ output does not respond much to tariff reductions; 3) entry and exit of firms in response
to changing profit opportunities lower the quantity adjustment by incumbent firms in sectors with
high turnover rates. The evidence also shows that unilateral trade liberalization generally reduces
firm size and scale efficiency in import competing sectors. This is not a worrisome result, however,
since the evidence also shows that, notwithstanding this negative effect, overall trade-induced
productivity gains are higher in import competing sectors.
4 Trade and Technology Advancement
In addition to the static effects illustrated in Section 2, trade liberalization has also been argued
to have other static and dynamic effects, most of which are related to knowledge diffusion and
technology advancement. Here we briefly review some of these effects.
Imports of differentiated intermediate inputs and capital goods
As first shown by Ethier (1982), in the presence of firm-level scale economies, free trade in
differentiated intermediate inputs is formally equivalent to technical progress. The reason is that
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