Does Import Trade Liberalization Affect Firms’ Output Volatility?

Abstract

Since its accession to the WTO, China has actively promoted trade liberalization. It is undeniable that trade liberalization has brought excellent products, production technologies and solutions from all over the world. However, it is also important to note that with the deepening of trade liberalization reforms, a large number of high-quality foreign products flood into the domestic market, making the production and sales activities of domestic firms inevitably affected by the impact of import factors, which has a profound impact on the stability of firms’ output growth path（i.e. output volatility）.This paper uses China’s accession to the WTO as the research background, using Chinese micro data to test the relationship between trade liberalization and output volatility. First, we use the residual regression method to calculate the annual fluctuation index and window fluctuation index of the output growth rate of manufacturing enterprises in China from 1998 to 2013. Second, we combine the product tariff data of WITS products and the input-output table to calculate the import trade liberalization index of China’s manufacturing industry. Finally, we use multiple econometric analysis methods（including: fixed effect/difference-in-differences/panel IV）to systematically evaluate the causal relationship between trade liberalization and output volatility, and then demonstrate the mechanism.Input-trade liberalization has a significant stabilizing effect on the output volatility of Chinese manufacturing enterprises. For every 0.01 unit of absolute change in input-import tariff, the volatility of enterprise sales will decrease by 0.785%, and the volatility of total output will decrease by 0.896%. In terms of the impact mechanism, due to cost-saving effect and factor market diversification effect, input-trade liberalization can effectively improve firms’ intermediate input cost and intermediate input source, and thereby smooth the output volatility. On the other hand, output-trade liberalization has not significantly affected the output volatility. This may be because of the influence of China’s unique large economy, such as large market size or export expansion; the competitive effect of trade liberalization has been gradually weakened, so it does not show a significant effect.The main contributions of this paper are: First, it helps us understand the relationship between import trade and output volatility at a micro level. Second, based on the existing research, we can have a more comprehensive understanding of the effect of trade liberalization on the performance of firm behavior. Third, trade liberalization is divided into two levels: output-trade liberalization and input-trade liberalization, so as to better identify how import trade liberalization affects firms’ output volatility.