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