Trade liberalization and firm productivity: New evidence from Chinese manufacturing industries Albert Guangzhou Hu, Zhengning Liu (presenter) National University of Singapore Midwest, October 2012

Introduction  China joined WTO in  Trade barriers were reduced. Exports and imports grew fast.  Firms have more business opportunity, but also face increasing competition (The“wolf”is coming?).  The net impact of trade liberalization on firms’ performance is not clear.  It is also a concern for many other countries.

Key findings  Overall, tariff reduction for had led to 0.94 percent annual increase in TFP for average Chinese manufacturing firms.  Output tariff reduction is productivity depressing, while input tariff reduction is productivity enhancing.  Both effects diminished after China joined WTO.  Firm heterogeneity plays a role.  Results are robust to alternative productivity and tariff measures, as well as other estimation strategies.

Research question and methodology  We examine how tariff reduction affects firm productivity using Chinese manufacturing data.  We separate the effect into that of output (final goods) tariff and input (intermediate) tariff.  Final goods  product competition  Intermediate goods  production input  We place particular emphasis on the endogeneity of tariff reductions.

Theoretical Literature  Scale effect: Krugman (1979), Rodrik (1988)  Reallocation effect (aggregate): Melitz (2003), Melitz & Ottaviano (2008), Bernard et al. (2007)  Residual effect: Tybout & Westbrook (1995), Young (1991), Aw et al. (2011)  Firm Rationalization: Bernard et al. (2011)

Empirical literature PapersCountry studied Bustos (2012)Argentina Head & Ries (1999) Trefler (2004) Lileeva & Trefler (2010) Canada Pavcnik (2002)Chile Yu (2011) Brandt et al. (2012) China Fernandes (2007)Colombia Topalova & Khandelwal (2010) Goldberg et al. (2010) India Amiti & Konings (2007)Indonesia Bernard et al. (2006) Pierce (2011) U.S.

China’s tariff reductions  From 1992 to 1999, China reduced average nominal tariff from 43% to 17%.  By 2005, average tariff was further lowered to 9.4% in order to meet WTO commitment.  Input tariff: where, is the share of intermediate input j in the total value of final output i.

Chinese tariffs

Empirical strategy  Estimation equation:  TFP is estimated using Olley-Pakes methodology.  We allow one-period lag of industry-level tariffs.  Firm- and year- fixed effects are included.

Endogeneity of trade policy  Industry lobbying (by firms) e.g. Goldberg & Pavcnik (2005)  Political lobbying (by local government officials) e.g. Li & Zhou (2005)  We adopt instrumental variable estimation using Philippine tariff as instruments.  Check: relevant condition and exogeneity condition.

Chinese vs. Philippine tariff

Tariff reductions

The data  Firm-level data is compiled by NBS for  Drop firms with incomplete information or extreme production values.  Use industry concordance and deflators developed in Brandt et al. (2010)  The final dataset contains around 580,000 observations for seven years.  Tariff data is from WITS.

Baseline results

First and long-difference

Tariff reduction and WTO membership

Tariff reduction and firm ownership

Conclusion  Tariff reductions have positive and negative effects on TFP.  The net impact is positive, leading to 0.94 percentage annual increase.  Both effects diminished after China joined WTO.  Surviving firms managed to cope with lower tariffs.  Foreign firms were the clear winners.

Limitation and future research  It is better to have TFPQ rather than TFPR.  Need to find more evidence on the channel through which TFP is depressed.  Inefficient resource reallocation?  Costly within-firm adjustment?  Questions and comments are welcome!  Thank you!

First stage