Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit 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 trade liberalization effects 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. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Reassessing the productivity gains from trade liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country‐industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non‐tariff barriers. Finally, we find suggestive evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.     

Non-tariff measures: What's tariffs got to do with it?

After successive rounds of tariff reductions by GATT/WTO members, non-tariff measures (NTMs) have increasingly become the focal point of multilateral trade negotiations. It remains an open question whether the liberalization in tariff rates has subsequently been weakened or even erased by increases in NTMs. Using a product-level global panel of WTO members over the period 1996–2019, this paper systematically examines the empirical link between various tariff measures and the imposition of NTMs. I find that bound or applied tariff reductions do not correlate much on their own with NTM incidence. The relevant trade policy margin for detecting a tariff–NTM nexus is instead tariff overhangs, the difference between WTO members' bound and applied tariff rates. Countries impose more NTMs when their sectoral applied tariffs are close to their respective bound rates, indicating that small tariff overhangs signal limited legal trade policy flexibility.     

Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries

This paper examines the impact of tariff reduction following China's World Trade Organization (WTO) entry on the productivity of Chinese manufacturing firms using a firm‐level panel database that comprises all of China's manufacturing firms with an annual turnover above 5 million yuan and that spans the period of 2000–2006. An instrumental variable estimator is used to account for the endogeneity of the tariff reduction. The results indicate that China's trade liberalization in the five years following its WTO entry has led to a 0.94% annual increase in total factor productivity for Chinese manufacturing firms. However, the overall productivity gain from the tariff reduction is a net result of a productivity depressing effect of output tariff reduction and a productivity enhancing effect of input tariff reduction. Both effects have diminished in magnitude over the years after China joined the WTO. Firm heterogeneity and turnover plays an important role in generating gains from trade liberalization. The surviving firms have managed to cope with and take advantage of lower tariffs. The extent to which the tariff reduction affects Chinese firms' productivity is also dependent on the ownership structure of the firms with foreign‐invested firms being the clear winner.     

Preferential Liberalization,Antidumping, and Safeguards: Stumbling Block Evidence from MERCOSUR

There is not yet consensus in the trade agreements literature as to whether preferential liberalization leads to more or less multilateral liberalization. However, research thus far has focused mostly on tariff measures of import protection. We develop more comprehensive measures of trade policy that include the temporary trade barrier (TTB) policies of antidumping and safeguards; studies in other contexts have also shown how these policies can erode some of the trade liberalization gains that arise when examining tariffs alone. We examine the experiences of Argentina and Brazil during the formation of the MERCOSUR over 1990–2001, and we find that an exclusive focus on applied tariffs may lead to a mischaracterization of the relationship between preferential liberalization and liberalization toward non‐member countries. First, any “building block” evidence that arises by focusing on tariffs during the period in which MERCOSUR was only a free trade area can disappear once we also include changes in import protection that arise through TTBs. Furthermore, there is also evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which MERCOSUR became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, we also provide a first empirical examination of whether market power motives can help explain the patterns of changes to import protection that are observed in these settings.     

Pitfalls in the Theory of International Trade Policy: Concertina Reforms of Tariffs, and Subsidies to High-Technology Industries

This paper explores the links between international trade theory and the practice of trade and industrial policy in open economies, with special attention to three areas where theoretical lessons have been misunderstood in policy debates. I argue that the "concertina rule" for tariff reform justifies reductions in high tariffs but not moves towards uniformity and particularly not increases in low tariffs. I show that the basic principles of tariff reform are the same in unilateral, multilateral and customs union contexts. Finally, I suggest that the theory of strategic trade policy does not justify subsidies to high-technology industries.     

Input-trade liberalization and firm export decisions: Evidence from Argentina

Trade openness contributes to the diffusion of the modern technologies embodied in imported intermediate goods, which play a central role in the economic growth of developing countries. This paper investigates the micro-economic effects of input-trade liberalization. Previous work has found positive effects of access to foreign inputs on firm performance. If the availability of imported intermediate goods yields firm productivity gains, we would also expect a positive effect of input-trade liberalization on firm export decisions. This paper contributes to this literature by looking at the relationship between changes in input tariffs and within-firm changes in export status. Using detailed firm-level data from Argentina, I demonstrate that the probability of entering the export market is higher for firms producing in industries that have experienced greater input tariff reductions. These empirical findings are robust to alternative specifications that control for other trade-policy reforms, and industry and firm characteristics.     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.     

Trade tariff,wage gap and public spending

This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.     

Tariff reduction and employment in Canadian manufacturing

Abstract.  This paper uses firm-level tax data to investigate whether the link between tariff changes and manufacturing employment differed across firms with various productivity and leverage characteristics over the period 1988–94. The results suggest that the effect of domestic tariff reductions on employment was typically small, but that losses were significantly larger for less productive firms. For instance, firms with average productivity in 1988 responded to domestic tariff changes by cutting employment by 11.3% over the period 1988–94, while lower-productivity firms typically shed 20.8% of their workforce over the same period. This paper also indicates that firms with unhealthy balance sheets – those with relatively too much equity or too much leverage – downsized more in the face of declining domestic tariffs, suggesting that financial constraints became more binding when tariff cuts were implemented. These results suggest that firms with high productivity and better financial health were better positioned to face the challenge of trade liberalization.     

Asymmetric trade protection leading not to productivity but to export share change

This article revisits a classical theme in economics, that is, the relationship between trade protection and economic performance, with an improved treatment of the endogeneity of tariffs and with consideration of alternative performance criteria. This paper also considers the effects of asymmetric protection, such as higher tariffs on consumer goods and lower tariffs on producer goods. Using sectoral data on Korean manufacturing during the period from 1967 to 1993, this study finds that the effect of trade protection by tariff tends to show up not in terms of total factor productivity but in terms of revealed comparative advantage and export shares of sectors. Such an effect tends to be greater in consumer goods, which are the main targets of promotion by higher tariffs. This study verifies the potentially positive role of tariffs under certain conditions, especially under discipline from world markets.     

Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform

This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.     

Structure and performance of the service sector in transition economies1

This paper examines the performance of the service sector in the Eastern European transition economies during the 1997–2004 period. The performance of the service sector as a whole and of its sub‐sectors is very heterogeneous within the region. Service sub‐sectors that are information and communications technology producers or users and those using skilled labour more intensively exhibit the highest labour productivity growth. Our estimates show a positive and significant effect of liberalization on service labour productivity growth that is stronger for sub‐sectors that are more distant from the technological frontier. Service liberalization is also shown to have a positive effect on labour productivity levels and growth of downstream manufacturing industries.     

Effects of tariffs and real exchange rates on job reallocation: evidence from Latin America

Openness to international competition can lead to enhanced resource allocation in the end. While factor reallocation is essential if net benefits are to be derived from trade liberalization, the process generates costs both for transitioning workers and for employers undergoing personnel turnover. Net welfare gains depend on adjustment costs. Understanding of these issues has been hampered by data limitations. In this paper, we overcome some of these limitations by using new, harmonized measures on job creation and destruction for a number of countries in Latin America. We use these new series to investigate the impact of the removal of protectionism on net employment and gross job reallocation in Latin America. We find a robust pattern showing that reductions in tariffs and exchange rate appreciations increase the pace of job reallocation within sectors. We also find, however, some evidence of declining net employment growth as trade exposure increases. For example, we find some evidence that in the wake of tariff reductions, there is lower net employment growth.     

Analyzing the System of Preferential Tariffs for Least Developed Countries

This paper analyzes the rents available from non‐reciprocal preferential tariffs for least developed countries (LDCs) on all exports to the quad countries at the tariff line level. Most of the rents come from the European Union (EU) in clothing and textiles, while the USA and Canada offer few rents and charge significant tariffs to LDCs. We develop a dual economy labor market model that generates an income distribution and simulates the distributional effects of preferences. We find that the benefits of the preferences outweigh any adverse distributional effects. Relative inequality may increase with preferences in some cases, but absolute incomes increase in every case. We conclude that in the absence of multilateral liberalization, preferences are beneficial to some LDCs and expansion of preferences is desirable. In the event of multilateral liberalization, an import subsidy scheme that maintains the rents is the most desirable outcome.     

Trade Liberalization and the Profitability of Mergers: a Global Analysis*

We analyze the effects of bilateral tariff reductions on the profitability of cost‐reducing horizontal mergers. Given Cournot competition in a two‐country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.     

Trade Liberalization and Wage Inequality: Evidence from India

We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to most earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization‐induced productivity increases at the firm level, which get passed on to industry wages. We also find that trade liberalization has led to decreased wage inequality between skilled and unskilled workers in India. This is consistent with the magnitude of tariff reductions being relatively larger in sectors with a higher proportion of unskilled workers.     

The effect of the Canada‐US Free Trade Agreement on Canadian multilateral trade liberalization

In this paper show that the Canada‐US Free Trade Agreement (CUSFTA) tariff preferences have triggered a decline in Canadian external tariffs, explaining a two percentage point reduction in the average tariff between 1989 and 1998. Next, we found that industries that generate the least export rent to the US firms experienced deeper tariff cuts in Canada; this result provides evidence of cooperation in trade policies between the US and Canada. Finally, we estimate the effect of the CUSFTA on the intensity of industrial lobbying for trade policy in Canada and find no relationship between preferential trade liberalization and lobbying activity.     

Disaggregated data and trade policy analysis: The value of linking partial and general equilibrium models

Computable General Equilibrium (CGE) models are now routinely utilized for the evaluation of trade policy reforms, yet they are typically quite highly aggregated, which limits their usefulness to trade negotiators who are often interested in impacts at the tariff line. On the other hand, Partial Equilibrium (PE) models, which are typically used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which is required to examine the overall impact of broad-based trade policy reforms. Therefore, a PE–GE, nested modeling framework has the prospect of offering an ideal tool for trade policy analysis. In this paper, we develop a PE model that captures international trade, domestic consumption and output, using Constant Elasticity of Transformation (CET) and Constant Elasticity of Substitution (CES) structures, market clearing conditions and price linkages, nested within the standard GTAP model. In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this PE–GE model in order to contrast the sources of welfare gain in PE and GE analyses. To illustrate the usefulness of this model, we examine the contentious issue of tariff liberalization in the Indian auto sector, using PE, GE and PE–GE models. Both the PE and PE–GE models show that the imports of motorcycles and automobiles change drastically with both unilateral and bilateral tariff liberalization by India, but the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. On the other hand, the GE model overestimates substitution between regional suppliers due to “false competition” and underestimates the welfare gain, due to the problem of tariff averaging in the aggregated model. These findings are shown to be robust to wide variation in model parameters. We conclude that the linked model is superior to both the GE and PE counterparts.     

Effects of Multilateral Trade Liberalization on Prices*

To analyze the effects of simultaneous tariff reductions by multiple importing countries on prices, we construct a simple three‐country model where a good is produced by a monopolist with nonconstant marginal cost and imported by two countries. We compare two representative tariff‐reduction formulas: the “fixed‐amount” and the “uniform percentage” reductions. The uniform percentage reductions may increase the consumer price in the importing country, whose initial tariff is lower. Thus, importing countries with relatively low tariffs may prefer a bilateral trade agreement to a multilateral one to ensure consumer gains.