Trade Costs, Resource Reallocation and Productivity in Developing Countries

New trade models with heterogeneous firms suggest that international trade plays an important role in reallocating resources from low to high productivity plants. We use plant-level data from Chile and measures of trade costs that include tariffs and freight rates to analyze the importance of this trade-induced market selection process. We find that trade costs affect the reallocation process through the various channels predicted by the theory; however, the effects are approximately half of those reported for the US. We also find that while the tariff rate is responsible for preventing some of the reallocation, transportation costs have the most limiting role in terms of the number of channels affected.