Upstream Trade Liberalization and Domestic Upgradings: Firm-Level Evidence from China’s Green Industries

Hiau Looi Kee, Daria Taglioni and Enze Xie

No 11240, Policy Research Working Paper Series from The World Bank

Abstract: Middle-income economies can enter global value chains through assembly that relies heavily on imported inputs, but sustained upgrading requires competitive domestic sup-pliers and a rising share of value created locally. This paper asks whether openness faced by upstream firms can support that transition. We combine Chinese firm-level customs data for 2000–2016 with tariffs and ad valorem equivalents of non-tariff measures, identify potential domestic suppliers from product-level input matches, and measure downstream domestic content using the domestic value-added ratio (DVAR). Processing exporters imported eligible inputs duty-free, while their potential domestic suppliers remained exposed to tariffs on their own inputs. Panel tariff variation yields a mutually consistent chain of evidence: lower upstream tariffs are associated with greater supplier imported-input variety; greater supplier input variety is associated with higher domestic content among green processing exporters; and higher domestic content is accompanied by stronger ex-port value and variety. Cross-sectional NTM evidence for 2016 provides corroboration, and a simple model rationalizes the mechanism. The results suggest that upstream openness can connect GVC entry to domestic capability formation, subject to complementary conditions and without implying that the full empirical chain is causally identified.

Date: 2025-10-23
New Economics Papers: this item is included in nep-bec, nep-cna, nep-env, nep-int and nep-sea
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