Trade preferences and adjustment at the firm level

Our research will contribute to the firm-level literature, but through an empirical approach that focuses more narrowly on how firms differentially respond to a discrete foreign market access shock: the result of a well-defined, but unexpected, change in foreign policy. Our specific approach will be to first trace the information on policy preferences granted by the 2002 US policy, along with those preferences granted by the EU and China in similarly timed and constructed trade policies, to firm- and product-level data for Indian steel producers. We expect our resulting estimates from a panel of firm-level and product-level data to document heterogeneity in the Indian firms’ response to the foreign market access shock, thus generating insights into some of the mechanisms through which firms take advantage of new export opportunities. In particular, we will study the behaviour of Indian firms that produced cold rolled flat (CRF) and clad, plated or coated flat rolled (CPCF) products during this time period, as these were the products facing the largest market access shock via combined (US, EU and China) preferences to Indian producers. Rather than estimate a structural model on firm-level productivity which may be better suited to a longer-run analysis, we plan to take a less parameterized approach to examining how Indian firms differentially responded to this particular shock. Our data set will also allow us to examine product switching, and in particular, to identify some of the characteristics of firms that successfully enter into producing CRF/CPCF products for foreign markets after the imposition of the shock.