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Input-Trade Liberalization and Markups

Author

Listed:
  • Haichao Fan

    (School of International Business Administration, Shanghai University of Finance and Economics)

  • Yao Amber Li

    (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Tuan Anh Luong

    (School of International Business Administration, Shanghai University of Finance and Economics)

Abstract

This paper presents theory and evidence from Chinese firm-product data that, given firm productivity, trade liberalization increases product markups. This finding calls for a reconsideration of the well-established imports-as-market-discipline hypothesis. This paper further verifies underlying mechanisms behind this finding: input tariff reductions decrease marginal costs, and tariff effects on markup adjustments are more profound among firms of higher import dependence. By comparing results for two trade regimes -- ordinary trade wherein firms pay import tariffs to import, and processing trade wherein firms are not subject to import tariffs -- this paper finds that the aforementioned effects only apply to ordinary trade.

Suggested Citation

  • Haichao Fan & Yao Amber Li & Tuan Anh Luong, 2015. "Input-Trade Liberalization and Markups," HKUST IEMS Working Paper Series 2015-26, HKUST Institute for Emerging Market Studies, revised May 2015.
    • Handle: RePEc:hku:wpaper:201526
    as

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    File URL: http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-26.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
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    Cited by:

    1. Alexander Osharin & Valery Verbus & Irina Bakunina & Vera Silaeva & Marina Silaeva, 2020. "Markups in a two-country monopolistic competition model of trade with heterogeneous consumers," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 9(1), pages 1-12, December.
    2. Haichao Fan & Edwin L.-C. Lai & Han Steffan Qi, 2016. "Imported-input Trade Liberalization and Firms' Export Performance in China: Theory and Evidence," CESifo Working Paper Series 5828, CESifo.
    3. Chunming Zhao & Qun Zhang, 2016. "Input Trade Liberalization and Export Product Scope: Evidence from China," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 118-132, December.
    4. Curzi, D. & Garrone, M. & Olper, A., 2018. "Trade Exposure and Firms Markup Dynamics in the Food Industry," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277465, International Association of Agricultural Economists.
    5. Adriana Peluffo & Juan Ignacio Scasso, 2016. "Destination and source countries: Do they have a role on product quality?," Documentos de Trabajo (working papers) 16-10, Instituto de Economía - IECON.
    6. Lourenço S. Paz & Kul Prasad Kapri, 2019. "The Effects of the Chinese Imports on Brazilian Manufacturing Workers," Economies, MDPI, vol. 7(3), pages 1-22, August.
    7. Alexander Osharin & Valery Verbus, 2016. "Heterogeneous consumers and trade patterns in a monopolistically competitive setting," HSE Working papers WP BRP 131/EC/2016, National Research University Higher School of Economics.

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    More about this item

    Keywords

    Trade liberalization; Input tariff; Markup; Marginal cost; Ordinary trade; Processing trade; Output tariff;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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