Do Falling Iceberg Costs Account for US Export Growth?
We study the growth in the share of US manufactured output exported from 1987 to 2002 through the lens of the Melitz (2003) model, a monopolistically competitive model with heterogenous producers and fixed costs of exporting. Using the model, we infer that iceberg costs fell from approximately 54 percent in 1987 to nearly 41 percent in 2002. We then take a version of the model calibrated to match the employment size distribution and characteristic of exporters in 1987 and use it to measure the export growth due to the decline in iceberg costs. Contrary to common convention, we find that exports should have actually grown 75 percent more than they did. The models overpredicts export growth in large part because it misses the shift in manufacturing to relatively small establishments that did not invest in becoming exporters. In contrast to the theory, in this period, employment was largely reallocated away from very large establishments, those with more than 2500 employees, towards very small manufacturing establishments, those with less than 100 employees. We also find that trade integration from falling trade costs played a very small role in the contraction of manufacturing employment over this period.
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