WTO Accession and Performance of Chinese Manufacturing Firms

TLDR

Trade liberalization in China has made it difficult to separate markups and productivity effects when firms report revenue, but detailed price deflators enable estimation of tariff reductions’ impact on both. The study examines the effects of trade liberalization in China on the evolution of markups and productivity of manufacturing firms. Using detailed price deflators, the study estimates the average effect of tariff reductions on both markups and productivity. Output tariff cuts lower markups yet boost productivity, with pro‑competitive effects dominating incumbents and efficiency gains prevailing for new entrants, while input tariff cuts raise both markups and productivity. JEL codes: D24, F13, L25, L60, O14, P31, P33.

Abstract

We examine the effects of trade liberalization in China on the evolution of markups and productivity of manufacturing firms. Although these dimensions of performance cannot be separately identified when firm output is measured by revenue, detailed price deflators make it possible to estimate the average effect of tariff reductions on both. Several novel findings emerge. First, cuts in output tariffs reduce markups, but raise productivity. Second, pro-competitive effects are most important among incumbents, while efficiency gains dominate for new entrants. Third, cuts in input tariffs raise both markups and productivity. We highlight mechanisms that explain these findings in the Chinese context. (JEL D24, F13, L25, L60, O14, P31, P33)