Export Intensity and Input Trade Costs: Evidence from Chinese Firms

Abstract

How do reductions in input trade costs affect firm's sales decision between domestic and foreign markets? Aside from tariffs cut in ordinary imports over time, a large extent of firms engaged in duty-free processing trade also experienced a decline in input trade cost. Accordingly, the imported input tariffs reduction (or exemption) introduces firms to access more imported intermediate inputs and then export a larger proportion of final products since, compared to goods for domestic sales, exporting goods use higher-quality imported intermediate inputs. By using Chinese firm-level production data and transaction-level trade data during 2000-2006 to construct firm-specific input trade costs, we find rich evidence that a reduction in input trade cost for large trading firms leads to an increase in export intensity (i.e., exports over total sales). Such results are robust to different empirical specification and econometric methods.