Do trade policy differences induce sorting? Theory and evidence from Bangladeshi apparel exporters

► This paper models two dimensions of firm heterogeneity, productivity and demand shocks. ► Various trade policies faced by Bangladeshi garment exporters to the US and EU are incorporated. ► Predictions about how firms sort themselves across markets in response to differences in trade policies are made. ► These predictions are tested non-parametrically and shown to be supported empirically. ► Preferences provided by developed countries may not be as liberal as they seem due to strict rules of origin.