Trade Liberalization and Product Dynamics within Firm: Role of Competition and Market Expansion

This study examines the impact of trade liberalization on rms' product mix, highlighting the distinct inuences of tari reductions on imports and exports. Using Korean rm- product data, we nd that Korean rms narrow their product ranges and focus on selected items in response to increased competition from reduced import taris under the Korea-US Free Trade Agreement. Conversely, when taris on Korean exports decline, rms expand their product ranges and distribute their production more evenly across their products, beneting from an enlarged market. This market expansion eect, however, is statistically signicant only for rms in export-oriented industries that directly benet from increased market reach. Moreover, we delve into rms' strategic decisions of changing their product mix by analyzing their choices to drop, add, or adjust the production of specic products. Our ndings indicate that these decisions are primarily driven by the products' relative eciency within the rm rather than by the magnitude of tari changes. In adapting to trade dynamics, rms strategically reallocate resources towards more ecient products by dropping and reducing production of less ecient ones.