Impact of border rejection experience on export performance: Firm-level evidence from China

When serving a foreign market, firms must comply with the country’s technical regulations and product standards. If they fail to meet technical requirements, shipments are refused entry into the market due to consumer safety and public health concerns, which are known as import refusals or border rejections. To the best of our knowledge, this is the first study to examine firms’ export performance concerning their experiences of border rejection. To do so, we use a unique dataset that connects US import refusal episodes against Chinese shipments (including manufacturer and product information) with Chinese firm-level customs and manufacturing survey data. We find evidence of substantial compliance costs in exporting: Prior border rejection increases the likelihood of exiting the market and discourages (re-)entry into the market at the extensive margin of exports. However, conditional on continued exporting, prior rejection increases export quantity, price, and quality at the intensive margin. Compliance with technical requirements appears to both hinder market entry and catalyze the firm’s upgrading of capacity and competitive repositioning, especially in the case of firms based in developing countries and exporting to advanced economies with more stringent technical requirements.