Market-specific trade costs and firm dynamics in Pakistan: Evaluating the US integrated cargo containers control programme

Using novel firm-level microdata that track the locations of export-processing stations and modes of shipments over time, this study examines the trade effect of the Integrated Cargo Container Control (IC3) programme, launched between Pakistan and the US in the wake of 9/11 to thwart the potential vulnerability of cargo containers to terrorist exploitations. Although primarily a security measure, IC3 affected the beyond-the-border and behind-the-border costs of exporting to the US. We exploit the exogenous nature of this shock and its specificity to one export market in the identification strategy. Using the EU as a counterfactual, the difference-in-difference estimates show that after this intervention, Pakistan’s overall exports to the US relative to the EU dropped by between 8% and 11% depending on the fixed effects structure. This security policy caused therefore a significant loss of US market access between 2007 and 2014. The IC3 effect on trade was, however, heterogeneous across firms depending upon where they exported from pre-IC3 and whether they switched export location following IC3. These findings have policy implications for the adoption of similar technologies aimed at ensuring the security of the supply chain together with facilitating trade in the wake of the emerging security situation in other parts of the world.