Imported Intermediate Inputs, Export Prices, and Trade Liberalization

Fan, Haichao and Li, Yao Amber and Yeaple, Stephen (2013): Imported Intermediate Inputs, Export Prices, and Trade Liberalization.

Abstract

This paper presents theory and evidence from highly disaggregated Chinese data that tariff reductions induce a country's producers to upgrade the quality of the goods that they export. The paper first documents two stylized facts regarding the effect of trade liberalization on export prices and its relation with product differentiation. Next, the paper extends Melitz's (2003) model of trade with heterogeneous firms by introducing endogenous quality choice. The model predicts that a reduction in the import tariff induces an incumbent importer/exporter to increase the quality of its exports and to raise its export price in industries where the scope for quality differentiation is large while to lower its export price in industries where the scope for quality differentiation is small. The predictions are consistent with the stylized facts based on Chinese data and robust to various estimation specifications.

• Item Type: MPRA Paper
• Language: English
• Keywords: trade liberalization, tariff, quality, export price, quality upgrading
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

References

Ackerberg, Daniel, Kevin Caves, and Garth Frazer, “Structural identification of production functions,” MPRA Paper 38349, University Library of Munich, Germany December 2006.

Ahn, JaeBin, Amit K. Khandelwal, and Shang-Jin Wei, “The role of intermediaries in facilitating trade,” Journal of International Economics, May 2011, 84 (1), 73–85.

Amiti, Mary and Amit K. Khandelwal, “Import Competition and Quality Upgrading,” The Review of Economics and Statistics, May 2013, 95 (2), 476–490.

Amiti, Mary and Jozef Konings, “Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia,” American Economic Review, December 2007, 97 (5), 1611–1638.

Anderson, James E. and Eric vanWincoop, “Trade Costs,” Journal of Economic Literature, September 2004, 42 (3), 691–751.

Anderson, T. W., An introduction to multivariate statistical analysis Wiley series in probability and mathematical statistics, 2 ed., New York: Wiley, 1984. T.W. Anderson; ;25 cm; Includes index; Bibliography: p. 643-665.

Bernard, Andrew B and J. Bradford Jensen, “Firm Structure, Multinationals, and Manufacturing Plant Deaths,” The Review of Economics and Statistics, May 2007, 89 (2), 193–204.

Brandt, Loren, Johannes Van Biesebroeck, and Yifan Zhang, “Creative Accounting or Creative Destruction? Firm-level Productivity Growth in Chinese Manufacturing,” Journal of Development Economics, 2012, 97 (2), 339–351.

Broda, Christian and David E. Weinstein, “Globalization and the Gains From Variety,” The Quarterly Journal of Economics, 2006, 121 (2), 541–585.

Cai, Hongbin and Qiao Liu, “Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms,” Economic Journal, 04 2009, 119 (537), 764–795.

De Loecker, Jan, Pinelopi K. Goldberg, Amit K. Khandelwal, and Nina Pavcnik, “Prices, Markups and Trade Reform,” Unpublished manuscript August 2012.

Fan, Haichao, Edwin L.-C. Lai, and Yao Amber Li, “Credit Constraints, Quality, and Export Prices: Theory and Evidence from China,” MPRA Paper 40857, University Library of Munich, Germany August 2012.

Feenstra, Robert C, Zhiyuan Li, and Miaojie Yu, “Exports and credit constraints under incomplete information: Theory and evidence from china,” Review of Economics and Statistics, forthcoming.

Ge, Ying, Huiwen Lai, and Susan Zhu, “Intermediates Import and Gains from Trade Liberalization,” Technical Report, mimeo, University of International Business and Economics 2011.

Gervais, Antoine, “Product Quality and Firm Heterogeneity in International Trade,” Working Papers 13-08, Center for Economic Studies, U.S. Census Bureau March 2013.

Goldberg, Pinelopi Koujianou, Amit Kumar Khandelwal, Nina Pavcnik, and Petia Topalova, “Imported Intermediate Inputs and Domestic Product Growth: Evidence from India,” The Quarterly Journal of Economics, November 2010, 125 (4), 1727–1767.

Gopinath, Gita and Brent Neiman, “Trade Adjustment and Productivity in Large Crises,” NBER Working Papers 16958, National Bureau of Economic Research, Inc April 2011.

Hallak, Juan Carlos, “A Product-Quality View of the Linder Hypothesis,” The Review of Economics and Statistics, 09 2010, 92 (3), 453–466.

Halpern, Laszlo, Miklos Koren, and Adam Szeidl, “Imported Inputs and Productivity,” CeFiG Working Papers 8, Center for Firms in the Global Economy September 2011.

Head, Keith and John Ries, “Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade,” American Economic Review, September 2001, 91(4), 858–876.

Johnson, Robert C., “Trade and prices with heterogeneous firms,” Journal of International Economics, 2012, 86 (1), 43 – 56.

Kasahara, Hiroyuki and Joel Rodrigue, “Does the use of imported intermediates increase productivity? Plant-level evidence,” Journal of Development Economics, August 2008, 87 (1), 106–118.

Khandelwal, Amit K., Peter K. Schott, and Shang-Jin Wei, “Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters,” American Economic Review, forthcoming.

Kleibergen, Frank and Richard Paap, “Generalized reduced rank tests using the singular value decomposition,” Journal of Econometrics, July 2006, 133 (1), 97–126.

Kugler, Maurice and Eric Verhoogen, “Prices, Plant Size, and Product Quality,” Review of Economic Studies, 2012, 79 (1), 307–339.

Levinsohn, James and Amil Petrin, “Estimating Production Functions Using Inputs to Control for Unobservables,” The Review of Economic Studies, 2003, 70 (2), pp. 317–341.

Manova, Kalina and Zhiwei Zhang, “Export Prices Across Firms and Destinations,” The Quarterly Journal of Economics, 2012, 127, 379–436.

Manova, Kalina and Zhiwei Zhang, “Multi-Product Firms and Product Quality,” NBER Working Papers 18637, National Bureau of Economic Research, Inc December 2012.

Melitz, Marc J., “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, November 2003, 71 (6), 1695–1725.

Melitz, Marc J. and Gianmarco I. P. Ottaviano, “Market Size, Trade, and Productivity,” Review of Economic Studies, 2008, 75 (1), 295–316.

Olley, G. Steven and Ariel Pakes, “The Dynamics of Productivity in the Telecommunications Equipment Industry,” Econometrica, 1996, 64 (6), pp. 1263–1297.

Pavcnik, Nina, “Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants,” Review of Economic Studies, January 2002, 69 (1), 245–76.

Rauch, James E., “Networks versus markets in international trade,” Journal of International Economics, June 1999, 48 (1), 7–35.

Schott, Peter K., “Across-product Versus Within-product Specialization in International Trade,” The Quarterly Journal of Economics, May 2004, 119 (2), 646–677.

Smeets, Valerie and Frederic Warzynski, “Estimating productivity with multi-product firms, pricing heterogeneity and the role of international trade,” Journal of International Economics, 2013, 90(2), 237 – 244.

Tang, Heiwai and Yifan Zhang, “Quality Differentiation and Trade Intermediation,” Technical Report 2012.

Topalova, Petia and Amit Khandelwal, “Trade Liberalization and Firm Productivity: The Case of India,” The Review of Economics and Statistics, August 2011, 93 (3), 995–1009.

Trefler, Daniel, “The Long and Short of the Canada-U. S. Free Trade Agreement,” American Economic Review, September 2004, 94 (4), 870–895.

Tybout, James, Jamie de Melo, and Vittorio Corbo, “The effects of trade reforms on scale and technical efficiency : New evidence from Chile,” Journal of International Economics, November 1991, 31 (3-4), 231–250.

Verhoogen, Eric A., “Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector,” The Quarterly Journal of Economics, 05 2008, 123 (2), 489–530.

Waugh, Michael E., “International Trade and Income Differences,” American Economic Review, December 2010, 100 (5), 2093–2124.

Yu, Miaojie, “Processing Trade, Tariff Reductions, and Firm Productivity: Evidence from Chinese Products,” Unpublished Manuscript, CCER at Peking University October 2011.