Heterogeneous Effects of Trade Liberalisation on Firm‐Level Markups: Evidence from China

20 Pages Posted: 11 Aug 2017

See all articles by Xunyong Xiang

Xunyong Xiang

Jinan University - Institute of Industrial Economics

Feixiang Chen

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics

Wen Yue

Jiangnan University

Date Written: August 2017

Abstract

This paper analyses how trade liberalisation affects the markups of Chinese firms based on firm‐level production data, highly disaggregated transaction‐level product trade data and tariff data at the eight‐digit Harmonised System (HS) level. Our results show that there is a pro‐competition effect of output tariff reduction, that is decreasing output tariffs relate to a lower markup, and that there is a cost‐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 firm‐level markups. The cost‐reduction effect of input tariff reduction is partially offset by the competition effect of new firm entry in more‐concentrated industries. Furthermore, there is a weaker effect of trade liberalisation on processing trade firms and state‐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.

Suggested Citation

Xiang, Xunyong and Chen, Feixiang and Ho, Chun-Yu and Yue, Wen, Heterogeneous Effects of Trade Liberalisation on Firm‐Level Markups: Evidence from China (August 2017). The World Economy, Vol. 40, Issue 8, pp. 1667-1686, 2017, Available at SSRN: https://ssrn.com/abstract=3016903 or http://dx.doi.org/10.1111/twec.12516

Xunyong Xiang (Contact Author)

Jinan University - Institute of Industrial Economics ( email )

Guangdong
China

Feixiang Chen

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics ( email )

1400 Washington Ave
Albany, NY 12222
United States

Wen Yue

Jiangnan University

1800 Lihu Ave.
Wuxi, Jiangsu Sheng 214122
China

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