Heterogeneous effects of trade liberalisation on firmâ€ level markups: Evidence from China
Chunâ€ Yu Ho and
The World Economy, 2017, vol. 40, issue 8, 1667-1686
This paper analyses how trade liberalisation affects the markups of Chinese firms based on firmâ€ level production data, highly disaggregated transactionâ€ level product trade data and tariff data at the eightâ€ digit Harmonised System (HS) level. Our results show that there is a proâ€ competition effect of output tariff reduction, that is decreasing output tariffs relate to a lower markup, and that there is a costâ€ reduction effect of input tariff reduction, that is decreasing input tariffs relate to a higher markup. Interestingly, there are heterogeneous effects of trade liberalisation on firmâ€ level markups. The costâ€ reduction effect of input tariff reduction is partially offset by the competition effect of new firm entry in moreâ€ concentrated industries. Furthermore, there is a weaker effect of trade liberalisation on processing trade firms and stateâ€ owned enterprises. Finally, our results are robust to the use of an instrumental variable approach to control for the endogeneity of tariffs and sample selection.
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