Productivity and firm selection:intra- vs international trade

Recent theoretical models predict gains from international trade coming from intra-industryreallocations, due to a firm selection effect. In this paper we answer two related questions. First, whatis the magnitude of this selection effect, and how does it compare to that of intra-national trade ?Second, would the removal of 'behind-the-border' trade frictions between integrated EU countries leadto large productivity gains? To answer these questions, we extend and calibrate the Melitz andOttaviano (2007) model on productivity and trade data for European economies in 2000, and simulatecounterfactual trade liberalization scenarios. We consider 11 EU countries and a total of 31economies, including 21 French regions. Our first result is that, in the French case, international tradehas a sizeable impact on aggregate productivity, but smaller than that of intra-national trade. Second,substantial productivity gains (around 20%) can be expected from 'behind-the-border' integration. Inboth experiments, we predict the corresponding variations in average prices, markups, quantities andprofits. We show that the model fits sales and exports data reasonably well, and we perform a numberof robustness checks. We also suggest some explanations for the substantial cross-economy andcross-industry variations in our estimates of productivity gains, highlighting the importance ofaccessibility and competitiveness....