Input-Trade Liberalization and Markups
41 Pages Posted: 16 Jun 2016
Date Written: March 1, 2015
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
JEL Classification: F12, F14, L11
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