Trade Liberalization, Markup and Resource Allocation

Abstract

In recent years, the research on Chinese multi-product firms has aroused wide attention. As an important part of Chinese trade, data show that about 75% of the total export enterprises are multi-product firms in China, and the exports of MFNs take up more than 95% of the total export values between 2000 and 2005. Additionally, based on the product classification by BEC (Broad Economic Categories), the imports of intermediate goods account for more than 70% of Chinese total import values. Therefore, it is more in line with China’s national conditions and significant to explore the effect of intermediate trade liberalization on Chinese multi-product firms. Especially, with the rising events of de-globalization, the study on how to face the shock of intermediate liberalization by adjusting the markups of different products, and to optimize the resource allocation within enterprises and improve the competitiveness of Chinese MFNs, becomes of much greater importance for China nowadays.　　In this paper, based on Melitz and Ottaviano (2008), we first theoretically construct a heterogeneous firm model with the variable markup, and then estimate the firm-product level markup of Chinese manufacturing firms by modifying the augmented approach proposed by De Loecker, et al. (2016). Using highly disaggregated Chinese firm-level data from the National Bureau of Statistics of China (NBSC) and Chinese Custom data, this paper empirically uncovers the patterns of how Chinese multi-product exporters adjust the markups of their core and non-core products, during the intermediate trade liberalization. We find that core products enjoy the highest markup in a multi-product firm and the firm tends to adjust its non-core products’ markups more after the reduction of intermediate input tariff. To be more specific, the closer a product situates to the core product in the product rank ladder, the greater extent that the firm would adjust its markup to. This indicates that the intermediate input liberalization would help to narrow the gap between the core and the non-core products within the multi-product firms, and thus optimize the resource allocation. In addition, we do a series of robustness checks, which further support our aforementioned main findings.　　On the one hand, our research contributes to the traditional literature by examining whether and how input tariff reduction would help to adjust the markups between the core and non-core products within MFNs. On the other hand, this paper is complementary to a large body of studies on the impact of trade liberalization on market power and resource allocation. Our results suggest that China should further promote the process of trade liberalization, especially the intermediate trade liberalization, to help to optimize the resource allocation within firms. In contrast to the previous study which shows that trade liberalization can be not to the benefit of the development of weak (non-core) products (industries), we find that after the tariff reduction of intermediate goods, Chinese exporters tend to improve the markups more for the non-core products. Therefore, we suggest that one should continue to implement the product diversification strategy in the MFNs, so as to further enhance the comprehensive competitiveness of Chinese exporters and improve their ability to confront the worldwide intensive pressure by the frequent rising trade frictions, and then help to complement the strategy of building up national strength with international trade in the new era.