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Competition, markups, and gains from trade: A quantitative analysis of China between 1995 and 2004

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  • Hsu, Wen-Tai
  • Lu, Yi
  • Wu, Guiying Laura

Abstract

This paper provides a quantitative analysis of gains from trade in a model with head-to-head competition using Chinese firm-level data from Economic Censuses in 1995 and 2004. We find a significant reduction in trade cost during this period, and total gains from such improved openness during this period is 7.1%. The gains are decomposed into a Ricardian component and two pro-competitive ones. The pro-competitive effects account for 20% of the total gains. Moreover, the total gains from trade are 13 − 31% larger than what would result from the formula provided by ACR (Arkolakis et al., 2012), which nests a class of important trade models, but without pro-competitive effects. We find that head-to-head competition is the key reason behind the larger gains, as trade flows do not reflect all of the effects via markups in an event of trade liberalization.

Suggested Citation

  • Hsu, Wen-Tai & Lu, Yi & Wu, Guiying Laura, 2020. "Competition, markups, and gains from trade: A quantitative analysis of China between 1995 and 2004," Journal of International Economics, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:inecon:v:122:y:2020:i:c:s0022199619300881
    DOI: 10.1016/j.jinteco.2019.103266
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