Heterogeneous Firms, Non-tariff Measures, and US Beef Trade

This paper examines the implications of reducing the NTMs associated with beef hormone ban imposed on US exports into the EU. We contribute to this line of literature by taking firm heterogeneity and extensive margin effects prevalent in the processed beef market into account. For this purpose, we use the newly developed firm heterogeneity module of GTAP where we explicitly model monopolistic competition with heterogeneous firms. An additional novelty in this work is to model NTMs as efficiency losses that occur on the supply-side. We treat the processed beef and manufacturing sectors as monopolistically competitive with heterogeneous firms, while we retain the perfectly competitive structure as well as the Armington assumption in the rest of the sectors. Simulation results show that the number of US beef producers that export into the EU increases significantly as a result of fixed cost reductions and average productivity in the US beef industry increases. Furthermore, we observe that welfare in the US increases mainly due to productivity and scale effects, while welfare gain in the EU is primarily due to the allocative efficiency effect. Our study indicates that incorporation of firm heterogeneity in the remainder of the economy, where there are no fixed cost reductions, has an important mitigating effect on the terms-of-trade component of welfare change. While the fixed cost reduction occurs only in processed beef sector, the fact that manufacturing sector is also characterized by heterogeneity leads to modest terms-of-trade effects on welfare both in the US and in the EU.