Trade Liberalization and Import Margins

Trade policy has well-documented effects on trade volumes. Reaching beyond volumes, I explore the effect of European emerging economies' recent institutional trade liberalization on extensive (i.e., the set of imported goods) versus intensive import margins (volumes per imported good) with highly disaggregated data. Differentiating goods categories by use, I find robust evidence of stronger extensive import margin effects of liberalization for intermediate and capital goods compared to consumer goods. This identifies an important channel for the link between reforms and growth in transition. The results also support new models of heterogeneous firms and trade, which predict that extensive import margin effects of a country's institutional trade liberalization should-through lowering fixed costs for rest-of-the-world exporters-increase with decreasing substitutability among products.