The authors thank for their useful comments the editor, Peter Egger, Liu Haoming, Julian Wright and participants of the 2012 International Workshop on Chinese Productivity at Tsinghua University and the Fall 2012 Midwest Economics Theory and International Trade Meetings, Washington University in St.Louis, 26-28 October 2012. Hu acknowledges financial support from the National University of Singapore Academic Research Fund (FY2011-FRC2-0042) and the NUS Entrepreneurship Centre.
Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries
Version of Record online: 9 APR 2014
© 2014 John Wiley & Sons Ltd
Review of International Economics
Volume 22, Issue 3, pages 488–512, August 2014
How to Cite
Hu, A. G. and Liu, Z. (2014), Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries. Review of International Economics, 22: 488–512. doi: 10.1111/roie.12127
- Issue online: 30 JUN 2014
- Version of Record online: 9 APR 2014
- National University of Singapore Academic Research Fund. Grant Number: FY2011-FRC2-0042
- NUS Entrepreneurship Centre
This paper examines the impact of tariff reduction following China's World Trade Organization (WTO) entry on the productivity of Chinese manufacturing firms using a firm-level panel database that comprises all of China's manufacturing firms with an annual turnover above 5 million yuan and that spans the period of 2000–2006. An instrumental variable estimator is used to account for the endogeneity of the tariff reduction. The results indicate that China's trade liberalization in the five years following its WTO entry has led to a 0.94% annual increase in total factor productivity for Chinese manufacturing firms. However, the overall productivity gain from the tariff reduction is a net result of a productivity depressing effect of output tariff reduction and a productivity enhancing effect of input tariff reduction. Both effects have diminished in magnitude over the years after China joined the WTO. Firm heterogeneity and turnover plays an important role in generating gains from trade liberalization. The surviving firms have managed to cope with and take advantage of lower tariffs. The extent to which the tariff reduction affects Chinese firms' productivity is also dependent on the ownership structure of the firms with foreign-invested firms being the clear winner.