Do Trade Policy Differences Induce Sorting? Theory and Evidence from Bangladeshi Apparel Exporters

This paper provides new testable predictions of heterogeneous firm (HF) models for trade. Variations in trade policy, trade preferences, and the rules of origin (ROOs) needed to obtain them are incorporated into the model and some analytical means of dealing with the resulting asymmetries are developed. The policy differences modelled correspond to differences across products and destination markets for Bangladeshi garment exports to the US and EU. These turn out to provide an interesting natural experiment. Predictions of the model for the distribitions of TFP of various groups of firms are tested non-parametrically and are supported by the data.