Media Briefings

Free Trade Agreements Boost Established Exporters

  • Published Date: May 2010

Do new free trade agreements encourage exports of new products and entry of new firms into export markets – or do they only benefit existing exporters? Analysis of the Mexican export boom following the North American Free Trade Agreement (NAFTA) in 1994 shows that the boom was mostly driven by incumbent exporters expanding foreign sales of their existing export products.

The study by Leonardo Iacovone and Beata Javorcik, published in the May 2010 issue of the Economic Journal, indicates that expansion of the range of products exported by incumbent exporters accounted for only 10% of the export growth. And the emergence of new exporters (producers who did not export before NAFTA) played only a marginal role in the total export growth.

The continuing failure to conclude the Doha Round of multilateral trade negotiations has renewed the interest of policy-makers in regional and bilateral trade agreements. Policy-makers believe that such agreements offer a quick way of boosting their countries’ exports.

But does it actually happen? If so, how? Do trade agreements encourage exports of new products, entry of new firms into export markets or do they only benefit existing exporters? If one channel is more important than the other, why is this the case?

This study sheds light on these questions by examining the case of Mexican export boom (a 300% increase in exports between 1993 and 2002), which took place after Mexico joined NAFTA in 1994. Analysis of the data suggests that:

  • The Mexican export boom was mostly driven by expanding foreign sales of their existing export products.
  • Expansion of the range of export products on the part of incumbent exporters accounted for only 10% of the observed export growth.
  • Emergence of new exporters (producers who did not export before the NAFTA period) played a marginal role in the total export growth.

A closer analysis of the data reveals other interesting patterns:

  • First-time entry or introduction of a new product into export markets is preceded by large investment outlays on the part of the producer, which suggests that products are being upgraded or modified to suit the tastes of foreign consumers and that this process requires significant investment.
  • Producers enter export markets with a single product and a very small volume of exports. Both the number of products and the export volume expand as the producers’ experience in export market increases, which suggests that they are ‘testing the market’.
  • The cautious approach to entering foreign markets is warranted, as about 60% of newly introduced products are withdrawn from export markets within one year.
  • To limit this uncertainty, most producers break into export markets with products already tested at home, though this pattern is less prevalent among established exporters. This is not surprising, given that established exporters are likely to have more information about export markets.

These results have two policy implications:

  • Providing information about export markets may reduce uncertainty and thus stimulate expansion of the range of export products.
  • Tackling obstacles that limit firm access to financing may help potential exporters to prepare their products for entry into foreign markets and thus constitutes an important policy tool for stimulating exports.

ENDS

Notes for editors: ‘Multi-product Exporters: Diversification and Micro-level Dynamics’ by Leonardo Iacovone and Beata Javorcik is published in the May 2010 issue of the Economic Journal.

Leonardo Iacovone is at the World Bank. Beata Javorcik is at Oxford University.

For further information: contact Beata Javorcik on 01865-271065 (email: beata.javorcik@economics.ox.ac.uk); or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).