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Heterogeneous effects of trade liberalisation on firm‐level markups: Evidence from China
Author(s) -
Xiang Xunyong,
Chen Feixiang,
Ho ChunYu,
Yue Wen
Publication year - 2017
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12516
Subject(s) - tariff , economics , endogeneity , liberalization , competition (biology) , international economics , free trade , transaction cost , industrial organization , microeconomics , econometrics , market economy , ecology , biology
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.