Trade liberalization and Firms’ export performance in China: Theory and evidence

• Published in: Journal of Comparative Economics 2019-09, Vol.47 (3), p.640-668
• Main Authors: Fan, Haichao, Lai, Edwin L.-C., (Steffan) Qi, Han
• Format: Article
• Language: English
• Subjects: Comparative advantage; Firms’ export performance; Imported-input liberalization
• ISSN: 0147-5967; 1095-7227
• DOI: 10.1016/j.jce.2019.05.001

•We study how final-goods producers respond to trade liberalization in imported intermediate inputs.•This response differs across sectors with different initial comparative advantage.•Trade liberalization in imported output leads to opposite effects on firms’ exporting behaviors compared with trade liberalization on imported intermediate inputs.•To test our hypotheses, we carry out both quantitative analysis and empirical analysis. The focus of the literature surrounding trade liberalization has recently shifted from trade liberalization in imported final goods to studying the effects of trade liberalization in imported intermediate inputs. This emphasis fits very well the trade liberalization experience of China following its accession to the WTO in 2001. In this paper, we build a multi-sector heterogenous-firm model with trade in both intermediate goods and final goods, and we ask: How do final-goods producers respond to trade liberalization in imported inputs? Do they respond differently across sectors? How do firms respond differently to trade liberalization in imported-outputs instead? We separate the total effect of trade liberalization into those caused by inter-sectoral resource allocation (IRA) and by within-sector selection of firms according to productivity (which we call Melitz selection effect). It is the IRA effect that gives rise to differential impacts of trade liberalization in different sectors. These impacts include changes in the probability of entry into the export market, the fraction of firms that export and the share of export revenue. To test our hypotheses, we carry out both quantitative analysis and empirical analysis by using Chinese firm-level data. The results are consistent with our theoretical predictions.