Essays on the impact of renegotiating trade agreements

This thesis explores the impact of the renegotiation of trade agreements when there is a threat that trade barriers could increase. The thesis addresses the following questions: 1. What is the impact on firm exporting decisions of the trade policy uncertainty generated by the renegotiation of trade agreements? 2. What is the role of a customer base in export dynamics, and does an exporter customer base respond to the renegotiation of trade agreements? 3. How do industries restructure in response to changing economic competition driven by trade agreements? 4. What is the impact of exchange rate movements (driven by the renegotiation of a trade agreement) on exporter prices and quantities, and are the effects heterogeneous across firms? 5. How important are firms that trade goods internationally for the UK economy and how could these firms respond to the future renegotiation of trade agreements following Brexit? The second chapter (joint with Meredith Crowley and Lu Han) introduces the concept that the renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016 the British electorate unexpectedly voted to leave the European Union, introducing a new era in which the UK and EU began to renegotiate the terms of the UK-EU trading relationship. We exploit this natural experiment to estimate the impact of uncertainty associated with trade agreement re-negotiation on the export participation decision of firms in the UK. Starting from a model of exporting under trade policy uncertainty, we derive testable predictions of firm entry into and exit from a foreign market under an uncertain `renegotiation regime'. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level and cross-sectional variation in `threat point' tariffs, we estimate that entry in 2016 would have been 5.0% higher and exit 6.1% lower if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016. In the third chapter (joint with Davide Rigo) we investigate the role of customer base in export market dynamics. First, we provide evidence that exporters grow in a foreign market by accumulating customer base. Second, we show that customer base can explain up to 30% of the growth in a destination market. Third, we explore potential mechanisms and find no evidence that exporters use customer specific price dynamics to attract new customers or expand existing customer relationships. Fourth, we explore how exporters adjust customer base in response to changes in market access by exploiting the trade policy uncertainty associated with the renegotiation of the UK-EU trade relationship and Sterling depreciation following the Brexit referendum. We show that French exporters in 2016-2017 were less likely to enter into exporting to the UK and incumbent exporters acquired a lower number of new buyers in the UK compared with the other European countries. Overall our results indicate that customer base is an important margin for export market growth and provides another margin that firms may adjust in response to changing market conditions. The fourth chapter shows that the rise in import competition from China following China's accession to the World Trade Organization contributed to the decline in UK manufacturing activity post 2000. A significant proportion of this decline in manufacturing activity is driven by firms switching their industrial activity out of manufacturing production and towards services. In particular, firms switch into business services such as research and development and wholesale and retail. This paper also shows that the speed of the transition across industries is fast, with the majority of the employment and turnover effects occurring in the first few years. This is primarily driven by the largest firms, as the switching effect on the number of firms is substantially smaller. The final chapter explores why the value of UK goods exports increased following depreciation of Sterling after the Brexit referendum. This paper shows that most of the response was initially driven by an increase in prices, although export quantities did also increase. The largest exporters were most responsive to the depreciation, increasing both quantities and prices more than smaller exporters. The paper also provides new facts on the importance of firms engaged in international trade in goods for the UK economy. Only 3% of UK firms are engaged in international trade in goods, yet these firms account for over 30% of employment and over 50% of UK turnover. The top 1% of goods exporters are pivotal in shaping UK export patterns as they account for 70% of exports, 5% of employment, and 12% of turnover.