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Input-Trade Liberalization and Markups

Haichao Fan (), Yao Li () and Tuan Anh Luong ()
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Haichao Fan: School of International Business Administration, Shanghai University of Finance and Economics

No 2015-26, HKUST IEMS Working Paper Series from HKUST Institute for Emerging Market Studies

Abstract: 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.

Keywords: Trade liberalization; Input tariff; Markup; Marginal cost; Ordinary trade; Processing trade; Output tariff (search for similar items in EconPapers)
JEL-codes: F12 F14 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-int
Date: 2015-05, Revised 2015-05
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