Input Prices, Productivity and Trade Dynamics: Long-run Effects of Liberalization on Chinese Paint Manufactures

Paul Grieco, Hongsong Zhang and Shengyu Li
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Paul Grieco: Pennsylvania State University
Hongsong Zhang: University of Hong Kong
Shengyu Li: Durham University

No 874, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Input tariff liberalization encourages direct importing by lowering the relative price of directly imported intermediate inputs relative to domestic alternatives. In turn, the action of importing itself encourages productivity growth. We develop a dynamic structural model to illustrate how input tariff reduction affects trading decisions and firm performance. The model features firm heterogeneity in both input prices and productivity. We find a mild short-term effect of input tariff liberalization from China's accession to WTO in the paint industry. The effect is amplified in the long run by induced trade participation, resulting in even higher aggregate productivity and lower input prices. Overall, this effect increases the average present firm value by 2.3 percent.

Date: 2018
New Economics Papers: this item is included in nep-cna and nep-int
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