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This paper presents theory and evidence from Chinese firm-product data that, given firm productivity, trade liberalization increases product markups. This finding calls for a reconsideration of the well-established imports-as-market-discipline hypothesis. This paper further verifies underlying mechanisms behind this finding: input tariff reductions decrease marginal costs, and tariff effects on markup adjustments are more profound among firms of higher import dependence. By comparing results for two trade regimes -- ordinary trade wherein firms pay import tariffs to import, and processing trade wherein firms are not subject to import tariffs -- this paper finds that the aforementioned effects only apply to ordinary trade.
This paper examines how prices, markups and marginal costs respond to trade liberalization. We develop a framework to estimate markups from production data with multi-product firms. This approach does not require assumptions on the market structure or demand curves faced by firms, nor assumptions on how firms allocate their inputs across products. We exploit quantity and price information to disentangle markups from quantity-based productivity, and then compute marginal costs by dividing observed prices by the estimated markups. We use India's trade liberalization episode to examine how firms adjust these performance measures. Not surprisingly, we find that trade liberalization lowers factory-gate prices and that output tariff declines have the expected pro-competitive effects. However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tariff liberalization. The reason for this incomplete cost pass-through to prices is that firms offset their reductions in marginal costs by raising markups. Our results demonstrate substantial heterogeneity and variability in markups across firms and time and suggest that producers benefited relative to consumers, at least immediately after the reforms.
This paper examines the impact of trade liberalization on firms' product and labor market power. We estimate the prevalence and intensity of price-cost markups and either wage markups or wage markdowns, taking the dependence between these model-consistent measures of product and labor market power into account. Exploiting reductions in tariffs upon China's WTO accession, we find that trade liberalization has not switched firms away from exercising product and labor market power. Reducing input tariffs has increased firms' price-cost markups but decreased their wage-setting power. We reveal hetero-geneous trade liberalization effects on the intensity of firms' product and labor market power.
Chapter 1: Re-exploring Markups and the Gains from International Trade This article investigates the welfare implication of trade liberalization, with variable markups, using evidence from the global smartphone industry. Higher trade exposure imposes forces on firms' markups from two directions: more competitive markets induce firms to lower their markups, while lower delivery costs motivate firms to lower their prices to an extent smaller than the decline in costs with the higher market demand and enhance their markups. To date, most structural work in international trade has ignored the potential welfare gains of trade liberalization through the markup channel by alleviating price distortions or has otherwise failed to track both of the directional forces that international trade imposes on markups. Accounting for the smartphone markets of 40 countries, I build a model of supply and demand in which both firms' product portfolio and pricing strategies are endogenous. I find that an increase in tariff rates would prompt mostly low-quality goods producers to exit the affected markets while increasing the price-to-cost margins of the remaining low-quality goods producers; meanwhile, the markups of the high-quality goods incumbents vary only little, or even reducing slightly to offset the market demand slump that the higher costs generate. My results suggest that if researchers only focus on the loss of variety when examining the impacts of higher trade barriers following traditional methods of measurement without paying attention to the markup channel, then the average consumer surplus loss could be underestimated by 7% to 10% through the price distortion. Chapter 2: Export Dynamics This paper studies firms' export dynamics using evidence from the global cellphone industry. Exporters tend to enter foreign markets that are geographically close or culturally similar to their previous export destinations. Most structural work of international trade has ignored firms' sequential export decisions across countries when estimating entry costs or has failed to build a framework in which firms' export-dynamic actions can be tractable or in which entry costs can be accurately estimated. I build a dynamic model in which firms first sequentially choose global regions for penetration and then spread out over the countries in the regions. I estimate firms' region- and country-level entry sunk costs for starting a business and the country-specific fixed costs for maintaining operation. I find that entering a new region with consumer characteristics similar to the previous export regions could reduce the entry costs as drastically as 81%. Relatedly, adding countries after penetrating a region would incur much lower entry costs than the costs associated with entering the first country in that region. Stricter trade regulation in large countries, such as the G7 group, would also reduce importers' entry margins and their trade value in the surrounding, smaller European countries. Moreover, conditional on the same productivity level, the geographical location of a firm's headquarters could determine as much as 70% of the variation in global expansion and sales. My model primitives predict a world with more advanced infrastructure, which can shorten the world's distance by half, could reduce delivery cost, and greatly enhance the consumer surplus in the mobile phone market by 1.3% to 3.87%. Compared to a static model, my dynamic model reports a gradual and less volatile increase in consumer surplus and market competition.
I study how a reduction in trade barriers between two countries affects firms in a third country. I focus on a reduction in trade barriers towards a country that specializes in non-differentiated products. Theoretically, I show that this liberalization increases competition for exporters in the third country. To escape this competition, mid-productivity firms differentiate their products. By differentiating, they move into segments of demand with a lower elasticity and therefore generate higher markups. I empirically test this theoretical finding by analyzing how Turkish firms respond to the elimination of EU quotas on China in 2005. I show that the markups the mid-productivity Turkish firms charge increased by 10.4 pp more following this trade liberalization relative to the control group. This upward adjustment in markups were accompanied by a 23.9 pp increase in the average price of their imported inputs, and a 51.1 pp increase in their number of imported inputs.
"This thesis investigates the impacts of changes in the trading environment on the behavior and performance of exportingfirms and of firms that import intermediate inputs. The thesis consists of three essays. Each essay contributesboth a theoretical development and an empirical analysis, using large scaled micro data from multiple sources. Thefirst essay studies how increased import penetration of inputs affects firms’ optimal mark-up and industry concentration.A theoretical model is developed to show how firms, operating under monopolistic competition, may choose toincur a fixed cost of foreign sourcing in order to replace some domestically sourced input with more efficient foreignsubstitutes. It is shown that changes in variable trade costs not only affect firms’ importing decision but also thenumber and identity of firms in the market and ultimately markups and market structure. We find evidence of a positiverelationship between imported input penetration and markup: the average markup rises when import penetrationincreases following a reduction in trade costs. The second essay develops a two-stage theoretical model to investigatehow firms’ decision on the number of varieties to export (i.e., their export scope) depends on exchange rate volatilityand on other characteristics of the destination countries. In the model, in the first stage, multi-product firms decide ontheir optimal product scope (the number of varieties to be produced for exporting), incurring fixed investment costs.In the second stage, they decide on the export scope for each destination country, based on country-specific tradecosts and expectation of idiosyncratic exchange rate shocks. Firms reduce their export scope to destination countriesthat suffer negative demand shocks, but they cannot increase their export scope beyond the production scope that theyhave chosen in the first stage. Using Chinese customs transaction data, we are able to provide empirical evidence thatsupports the predictions of our theoretical model. The third essay studies the effect of foreign tariff reductions on the adjustment of average quality and export scope of multi-product exporting firms, using China’s firm-level microdata and highly disaggregated customs data from 2000 to 2006. We find that in response to tariff cuts in destinationcountries, exporting firms upgrade product quality and adjust export scope. Our finding provides a novel explanationof what the phenomenon called incomplete tariff pass-through. A fall in the tariff rate seems to be associated with anincrease in the tariff-inclusive prices, but this is because the price data has not been adjusted to reflect the increase inproduct quality"--
This paper introduces a quasi-natural experimental framework into trade policy evaluation and reassesses China's trade liberalization through the survival of export products. We use propensity score matching and China's dual trade system to design a quasi-natural experiment based on Chinese industrial enterprises, customs import and export, and tariff data over the period of 2000-2006; we then use survival analysis to study the impacts of China's trade liberalization on the export duration of manufacturing firms' products. We find that the substantial reduction in import tariffs after China's accession to the World Trade Organization enhances the export duration of firm products, indicating that trade liberalization ameliorates the survival of export products. The promotion effects of tariff reduction on export duration are obviously stronger for core products than for noncore products.
This book focuses on input trade liberalization in China and discusses the underlying causes and profound effects of Chinese enterprises facing import liberalization of intermediate input. The content of this book includes ten chapters. The analysis of this book mainly uses academic research, with policy study for a few chapters. Most chapters in this book apply the standard method of contemporary economic systems, integrating into the most advanced economic theories of international trade. The author uses theoretical models to obtain predictions which receive empirical support and carries out strict empirical research using data of China's manufacturing enterprises and China's customs to analyze the causes which affect Chinese enterprises facing import liberalization of intermediate input after China’s reform and opening-up. The suggested readership would be the public who are willing to understand the issues closely related to China’s input trade liberalization and opening-up policy, and basic knowledge in economics would be necessary in understanding the academic research part of the book. Meanwhile, this book is also specifically compelling to business persons and policy makers in that it enables deeper understanding on issues about outward foreign investment of enterprises and China’s opening-up policy and facilitates their decision-making process.
The overarching theme of this dissertation is the analysis of trade policy implication in the presence of firm heterogeneity, variable markups, and multinational production. Chapter 1 surveys the main ingredients and results of heterogeneous firms trade policy literature that has been developing since the early 2000s. First, I present in great detail various stylized facts regarding firm heterogeneity, firm-level markups, and the global structure of multinational production. Second, I summarize the results of the recent development of theoretical approaches of modeling the firm-level markups. Third, I discuss the theoretical frameworks that incorporates multinational production into heterogeneous firms framework. Fourth, I review the trade policy literature that features firm heterogeneity, variable markups, and multinational production. Finally, I highlight the contribution of this dissertation and discuss directions for future research. Chapter 2 introduces ad valorem tariff and horizontal FDI into the Melitz and Ottaviano [2008] framework, producing the first framework in the trade policy literature that incor- porates firm heterogeneity, variable markups, and multinational production. The model generates novel equilibrium implications. First, the presence of multinational production generates a competitive effect on the economy, and firms need to be more productive to survive the competition. Second, the ad valorem tariff and quadratic quasi-linear preference collectively result in an endogenous level of firm entry. Therefore, the impact of trade/tariff liberalization depends on the equilibrium number of firms. In the short-run, when the firm entry is prohibited, an increase in import tariff shields the domestic economy from the For- eign competition, making it easier for firms to survive. This result is overturned when firms can enter the market freely in the long-run. In the long-run, an increase in Home's import tariff will make the Home country a more desirable environment to do business, attracting more entrants in the Home market, making the Home market more competitive. Firms need to be more productive to survive. Home0́9s tariff increase also makes it harder for the least productive Foreign exporters to survive, and triggers tariff-jumping FDI among the most productive exporters. Markups also respond to tariff change differently in the short-run vs. long-run, primarily due to the change of competitive environment associated with firm entry. Chapter 3 studies the welfare implication of tariff and optimal tariffs in an environment features firm heterogeneity, variable markups and FDI. The findings can be broadly sum- marized in three aspects. First, the quadratic quasi-linear preference generates multiple externalities in this economy, causing market outcome to differ from the socially optimum outcome systematically. Permitting FDI lowers the domestic cutoff levels and reduces the misallocation in the economy. Second, free trade is not always socially optimal. If the do- mestic cutoff is sufficiently high, an additional firm entry can improve social welfare. In this case, a positive import tariff is welfare-improving because it encourages firm entry. Third, both positively and normatively, the interaction of variable markup and FDI generates novel trade policy insights that are absent if consumers possess CES preference.
We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation, i.e., large inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.