Heterogeneous effects of trade liberalisation on firm‐level markups: Evidence from China

Abstract

AbstractThis paper analyses how trade liberalisation affects the markups of Chinese firms based on firm‐level production data, highly disaggregated transaction‐level product trade data and tariff data at the eight‐digit Harmonised System (HS) level. Our results show that there is a pro‐competition effect of output tariff reduction, that is decreasing output tariffs relate to a lower markup, and that there is a cost‐reduction effect of input tariff reduction, that is decreasing input tariffs relate to a higher markup. Interestingly, there are heterogeneous effects of trade liberalisation on firm‐level markups. The cost‐reduction effect of input tariff reduction is partially offset by the competition effect of new firm entry in more‐concentrated industries. Furthermore, there is a weaker effect of trade liberalisation on processing trade firms and state‐owned enterprises. Finally, our results are robust to the use of an instrumental variable approach to control for the endogeneity of tariffs and sample selection.