Abstract
This paper presents theory and evidence from disaggregated Chinese data that tariff reductions induce a country's producers to upgrade the quality of their exports. The paper first documents stylized facts regarding the effect of trade liberalization on export prices. Next, an analytic framework is developed that relates a firm's choice of quality to its access to imported intermediates. In the model a reduction in import tariffs induces a firm to increase export quality and to raise its export price in industries where the scope for quality differentiation is large while to lower its export price in industries where the scope is small. The predictions are consistent with the stylized facts and are highly robust econometrically.
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