Abstract
This paper explores how reductions in taris on imported inputs and …nal goods aect …rm productivity by exploiting the special taritreatment that processing …rms apply on imported inputs as opposed to those of non-processing …rms. Highly disaggregated Chinese transaction-level trade data and …rm-level production data from 2000 to 2006 are used to construct …rm-level input and output taris. Careful examination of the extent of …rm engagement in processing trade and in controlling for various sources of endogeneity reveal that less productive …rms choose to engage in processing trade. More importantly, unlike previous …ndings, reductions in output taris have a greater eect on productivity improvement compared with reductions in input taris due, in large part, to the fact that processing trade in China enjoys zero taris on imported inputs. JEL: F1, L1, O1, O2
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