Input-Trade Liberalization and Markups

39 Pages Posted: 28 Mar 2015

See all articles by Haichao Fan

Haichao Fan

Shanghai University of Finance and Economics - School of International Business Administration

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

Tuan Anh Luong

Shanghai University of Finance and Economics

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Date Written: March 1, 2015

Abstract

This paper presents theory and evidence from Chinese firm-product data that, given productivity, trade liberalization via input tariff reductions induces an incumbent importer/exporter to increase product markups. This finding calls for a reconsideration of the well-established imports-as-market-discipline hypothesis, which states that a higher volume of imports intensifies competition and hence decreases the market power of a firm. This paper presents further empirical evidence to verify underlying mechanisms behind this finding: input tariff reductions decrease marginal costs, and tariff reduction effects on markup adjustments are more profound among firms of higher import dependence. Moreover, this paper exploits unique features of Chinese data 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). While the aforementioned effects of input-trade liberalization and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. These findings are robust to various estimation specifications and alternative markup measures.

Keywords: Trade liberalization; Input tariff; Markup; Marginal cost; Ordinary trade; Processing trade; Output tariff

JEL Classification: F12, F14, L11

Suggested Citation

Fan, Haichao and Li, Yao Amber and Luong, Tuan Anh, Input-Trade Liberalization and Markups (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2585543 or http://dx.doi.org/10.2139/ssrn.2585543

Haichao Fan

Shanghai University of Finance and Economics - School of International Business Administration ( email )

777 Guo-ding Road
Shanghai, 200433
China

Yao Amber Li (Contact Author)

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

HOME PAGE: http://yaoli.people.ust.hk/

Tuan Anh Luong

Shanghai University of Finance and Economics ( email )

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