Complementarity between Firm Exporting and Firm Importing on Industry Productivity and Welfare

How different are the impacts of trade barriers on trade flows between intermediate inputs and final goods? How large are the welfare gains from trade for intermediate inputs relative to final goods? To address these questions, we develop a heterogeneous-firm model in which firm exporting and firm importing play a key role in industry productivity and welfare. We derive a gravity equation in intermediate-input trade to show that reductions in intermediate-input trade costs increase aggregate trade flows more than those in final-good trade costs, due to an extra adjustment operating through the extensive margin. We also find the general condition under which the welfare gains from trade are greater in intermediate-input trade than those in final-good trade.