Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters

TLDR

Trade liberalization can yield greater-than-expected gains when trade barriers are managed by inefficient institutions. The study investigates how Chinese textile and clothing exports changed before and after the elimination of externally imposed export quotas. The authors compare export volumes and prices before and after quota removal to assess the impact. The removal of quotas led to a surge in export volume and a decline in export prices driven by net entry, contradicting a productivity‑based quota allocation model and indicating misallocation, and eliminating this misallocation accounts for a substantial share of the productivity gains. JEL codes: F13, F14, L67, O14, O19, P23, P33.

Abstract

If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. We examine Chinese textile and clothing exports before and after the elimination of externally imposed export quotas. Both the surge in export volume and the decline in export prices following quota removal are driven by net entry. This outcome is inconsistent with a model in which quotas are allocated based on firm productivity, implying misallocation of resources. Removing this misallocation accounts for a substantial share of the overall gain in productivity associated with quota removal. (JEL F13, F14, L67, O14, O19, P23, P33)