Input-Trade Liberalization and Markups

41 Pages Posted: 16 Jun 2016

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 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

Suggested Citation

Fan, Haichao and Li, Yao Amber and Luong, Tuan Anh, Input-Trade Liberalization and Markups (March 1, 2015). HKUST IEMS Working Paper No. 2015-26. Available at SSRN: https://ssrn.com/abstract=2607794 or http://dx.doi.org/10.2139/ssrn.2607794

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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