Input Tariffs Research Articles

A profile of trade protection in Egypt: an effective rate of protection approach adjusting for energy subsidies and non-tariff barriers

This study examines effective rates of protection (ERPs) in Egypt due to tariffs, non-tariff barriers (NTBs), and energy subsidies, and compares them with those of a decade ago. Two sources of cost-share information at different levels of aggregation are used: data on specific industries (four-digit ISIC code, 20 in the private and 17 in the public sector), and data on the inter-industry intermediate input costs from the latest available input–output matrix (2006/2007) with 23 aggregated sectors. Trade liberalization since late-1990s appears to have reduced protection, although some industries remain relatively highly protected due to tariff escalation, NTBs, and energy subsidies. Energy subsidies favor energy intensive sectors, of particular note the electricity sector. Energy subsidies also offset the dis-protection that results from intermediate input tariffs. The cement sector is notable, energy subsidies almost exactly offsetting the negative impacts of tariffs and indirect taxes. The fertilizer sector has zero nominal tariffs (benefiting agriculture) and so has a negative ERP due simply to tariffs on inputs; nevertheless, the sector has a high positive ERP due to energy subsidies. ERPs in the private sector have declined notably, and nominal rates of protection have declined generally. ERP dispersion across industries also fell over the decade, but there remains an unexpectedly high dispersion relative to that suggested by applied tariffs only due to the unequal impact of subsidies. Estimated tariff equivalents of NTBs are also highly dispersed.

Heterogeneous firm-level responses to trade liberalization: A test using stock price reactions

This paper presents novel empirical evidence on key predictions of heterogeneous firm models by examining stock market reactions to the Canada–United States Free Trade Agreement of 1989 (CUSFTA). I derive testable predictions for a class of models based on Melitz (2003). Using the uncertainty surrounding CUSFTA's ratification, I show that the pattern of abnormal returns of Canadian manufacturing firms was strongly consistent with predictions related to export (U.S.) tariff reductions, but less so with predictions related to import (Canadian) tariff reductions. Lower Canadian tariffs did have an effect through the implied reduction in intermediate input tariffs, however.

Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries

AbstractThis paper examines the impact of tariff reduction following China's World Trade Organization (WTO) entry on the productivity of Chinese manufacturing firms using a firm‐level panel database that comprises all of China's manufacturing firms with an annual turnover above 5 million yuan and that spans the period of 2000–2006. An instrumental variable estimator is used to account for the endogeneity of the tariff reduction. The results indicate that China's trade liberalization in the five years following its WTO entry has led to a 0.94% annual increase in total factor productivity for Chinese manufacturing firms. However, the overall productivity gain from the tariff reduction is a net result of a productivity depressing effect of output tariff reduction and a productivity enhancing effect of input tariff reduction. Both effects have diminished in magnitude over the years after China joined the WTO. Firm heterogeneity and turnover plays an important role in generating gains from trade liberalization. The surviving firms have managed to cope with and take advantage of lower tariffs. The extent to which the tariff reduction affects Chinese firms' productivity is also dependent on the ownership structure of the firms with foreign‐invested firms being the clear winner.

Wage Inequality and Input Trade Liberalization: Firm-Level Evidence from China

This paper investigates how input trade liberalization affects firm-level wage inequality between skilled and unskilled labor. A fall in input tariffs generates increased firm profits, which, in turn, widens wage inequality since skilled labor enjoys a larger proportion of the incremental profits. In the paper we analyze this type of channel with an augmented Amiti-Davis(2012) model. Using Chinese firm-level production data, we first estimate and calculate firm-level wage inequality. We find that, in China, wage inequality is much greater than it is in the U.S. After controlling for possible endogeneity, we find empirical evidence consistent with our theoretical prediction that input trade liberalization widens firm-level wage inequality. Reductions in input tariffs are found to increase firm-level wage inequality by approximately 23% during the period under study.

Tariffs and the Organization of Trade in China

This paper examines the impact of China's falling import tariffs on the organization of exports between ordinary and processing trade. These trade forms differ in terms of tariff treatment and the ability of firms to sell on the domestic market. At the industry level, we find that falling input tariffs are the source of 90 percent of the average increase in the share of exports occurring through ordinary trade, most of which occurs on the extensive margin through new entry. The choice of trade is also tied to the size of the domestic market, which processing firms cannot access. Consistent with the literature, we also document that the domestic content share of ordinary exports is 30 percentage points higher than for processing. Our back of the envelope calculations imply an increase in demand for local factors of production of 12-21 billion U.S. dollars in 2006 associated with the change in the composition of trade from processing to ordinary exports resulting from tariff cuts between 2000-2006.

Mixed Duopoly with Foreign Firm and Subcontracting

We consider a Hotelling model, in which a public firm competes with a foreign firm, at the mean time cooperates with it through subcontracting. We find that when there exists subcontracting, the presence of a foreign firm raises social welfare. Comparing to competing with the domestic private firm, when the public firm competing with the foreign firm, social welfare is lower, but consumer welfare is higher. And a variation in firms' costs or tariffs has no effect on either firm's location. Tariff on inputs raises domestic social welfare and government will charge an input tariff to the extent of costs difference. Tariff on final good has no effect on welfare but will raise prices and thus hurts consumers. Compared to no tariff at all, tariff on inputs alone raises retail prices, but tariffs on both inputs and final goods may reduce prices and raise consumer surplus.

Does input trade liberalization boost downstream firms' exports? Theory and firm-level evidence

We analyze the impact of input tariffs on the export status and export performance of heterogeneous processing firms. Using a theoretical model with downstream firms exhibiting different levels of productivity, we show that lower input tariffs may increase the export sales of high-productivity firms at the expense of low-productivity firms and may decrease the probability of firms entering foreign markets. We compare the predictions of the theoretical model with firm-level data from the French agrifood sector by developing a two-stage estimation procedure that uses an equation for selection into export markets in the first stage and an export's equation in the second stage. The liberalization of agricultural trade appears to favor the reallocation of market share from low- to high-productivity agrifood firms. In addition, our results suggest that, whether lower input tariffs increase total export sales (and jobs), a large fraction of the least productive exporting firms may lose from an additional decrease in agricultural input tariffs.

Input tariffs, speed of contract enforcement, and the productivity of firms in India

This paper extends the literature on trade liberalization and firm productivity (TFP) by examining the complementarities between the speed of contract enforcement and the productivity gains from input tariff liberalization. It does so by using firm-level panel data from India along with an objective measure of judicial efficiency at the state level. The results suggest that for a 10 percentage point decline in input tariffs, firms in the state at the 75th percentile of judicial efficiency gain an additional 3.6 percentage points in productivity when compared to firms in the state with the median level of judicial efficiency. The results also indicate that the complementarities are strongest for firms in industries that are contract intensive and imported-capital intensive. These results are robust to using a matching estimator to address the self-selection of firms into states with high judicial efficiency and an IV approach to instrument input tariffs. In addition, the results are also robust to the addition of state–year interaction fixed effects to control for time-varying, unobservable state characteristics. Thus, the results indicate that rapid contract enforcement is necessary to maximize the productivity benefits from input tariff liberalization.

Efficiency Gains from Trade Reform: Foreign Input Technology or Import Competition? Evidence from South Africa

The empirical trade literature examining the effect of tariff reductions on productivity commonly proxies the former with Nominal Tariff Rates (NTR) and estimates the latter as the production function residual. In the context of the South African trade reform experience, we examine the different channels by which tariff cuts affect productivity growth. Using industry-level data for the manufacturing sector and covering the reform period from 1994 to 2004, we disentangle the differential effect of increased foreign competition, proxied by reductions in NTR, and that of the imported technology, proxied by the reductions in Input Tariff Rates (ITR), on productivity growth. Our measure of efficiency growth controls for the effect of tariff reductions on markups. The results suggest that the efficiency difference between foreign and domestic inputs has a major effect on productivity gains. Declines in ITR significantly raise productivity growth compared to an insignificant effect for NTR. Additionally, we find that higher protection rates are associated with higher markups, albeit this finding is not robust across all specifications.

Export Intensity and Input Trade Costs: Evidence from Chinese Firms

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.

Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia

In this paper, we analyze the effect of reducing import tariffs on intermediate inputs and final goods on the wage skill premium within firms in Indonesia – a country with a high share of unskilled workers. We present a new finding that reducing input tariffs reduces the wage skill premium within firms that import their intermediate inputs. However, we do not find significant effects from reducing tariffs on final goods on the wage skill premium within firms.

The Impact of Input and Output Tariffs on Firms' Productivity: Theory and Evidence

AbstractThis paper studies the impact of trade liberalization on productivity. It shows that when intermediate inputs are not highly differentiated, lowering input tariffs leads to a rise in within‐firm productivity and wages, and lowering output tariffs has the opposite effect. When intermediate inputs are highly differentiated, the conclusions reverse. These predictions are supported by the data, given by the industrial survey from INEGI (Mexico's Insitituto Nacional de Estadistica Geografia e Informacion) in the period 1984–90. The paper yields estimates for the elasticity of substitution among intermediate inputs, which are useful in determining the direction of the impact of trade liberalization. These estimates can be used to assess the gains from trade liberalization.

Trade, Firms, and Wages: Theory and Evidence

How does trade liberalization affect wages? This is the first paper to consider in theory and data how the impact of final and intermediate input tariff cuts on workers' wages varies with the global engagement of their firm. Our model predicts that a fall in output tariffs lowers wages at import-competing firms but boosts wages at exporting firms. Similarly, a fall in input tariffs raises wages at import-using firms relative to those at firms that only source inputs locally. Using highly detailed Indonesian manufacturing census data for the period 1991--2000, we find considerable support for the model's predictions. Copyright 2012, Oxford University Press.

The impact of trade liberalization on productivity: Evidence from India's formal and informal manufacturing sectors

Despite a large literature investigating the impacts of trade on firm productivity, there is almost no evidence on how small firms react to trade liberalization. Using a unique dataset of firm-level surveys that are representative of the entire Indian manufacturing industry, I show that India's unilateral reduction in final goods tariffs increased the average productivity of small, informal firms, which account for 80% of Indian manufacturing employment but have been excluded from previous studies. In contrast, the increase in productivity among larger, formal firms was driven primarily by the concurrent reduction in input tariffs. By examining the effect of the tariff liberalization on the distributions of productivity and firm size, I find evidence consistent with the exit of the smallest, least productive firms from the informal sector. In addition, I find that although the decline in final goods tariffs did not significantly impact average formal sector productivity, it did increase productivity among the top quantiles of the distribution.

Input-trade liberalization and firm export decisions: Evidence from Argentina

Trade openness contributes to the diffusion of the modern technologies embodied in imported intermediate goods, which play a central role in the economic growth of developing countries. This paper investigates the micro-economic effects of input-trade liberalization. Previous work has found positive effects of access to foreign inputs on firm performance. If the availability of imported intermediate goods yields firm productivity gains, we would also expect a positive effect of input-trade liberalization on firm export decisions. This paper contributes to this literature by looking at the relationship between changes in input tariffs and within-firm changes in export status. Using detailed firm-level data from Argentina, I demonstrate that the probability of entering the export market is higher for firms producing in industries that have experienced greater input tariff reductions. These empirical findings are robust to alternative specifications that control for other trade-policy reforms, and industry and firm characteristics.

Processing Trade, Tarff Reductions, and Firm Productivity: Evidence from Chinese Products

This paper explores how reductions in tariffs on imported inputs and final goods affect the productivity of large Chinese trading firms, with the special tariff treatment that processing fi rms receive on imported inputs. Firm-level input and output tarffs are constructed. Both types of tariff reductions have positive impacts on productivity that are weaker as firms ’share of processing imports grows. The impact of input tariff reductions on productivity improvement, overall, is weaker than that of output tari¤ reductions, although the opposite is true for non- processing firms only. Both tariff reductions are found to contribute at least 14.5% to economy-wide productivity growth.

The effects of trade liberalization on productivity growth in Brazil: competition or technology?

This paper examines the effects of trade liberalization on productivity growth in Brazil. In contrast with the previous literature, we examine whether this relationship is driven by product or input market effects, by including both output and input tariffs in firm-level productivity regressions and allowing for imperfect competition in the product market. The results show that the reductions of input tariffs were more important to explain the productivity growth that took place during trade liberalization in Brazil. Moreover, we find that the reduction in input tariffs led to a rise in mark-ups, while the reduction in output tariffs did the opposite.

Imported Intermediate Inputs and Domestic Product Growth: Evidence from India

New goods play a central role in many trade and growth models. We use detailed trade and firm-level data from India to investigate the relationship between declines in trade costs, imports of intermediate inputs, and domestic firm product scope. We estimate substantial gains from trade through access to new imported inputs. Moreover, we find that lower input tariffs account on average for 31% of the new products introduced by domestic firms. This effect is driven to a large extent by increased firm access to new input varieties that were unavailable prior to the trade liberalization.

Trade Protection and Capital Imports in the Mexican Manufacturing Sector

Several studies have investigated the link between trade protection and productivity in developing economies. Others have looked into the relationship between technology imports and in-house technology production. This paper contributes to the literature by estimating the effect of trade protection on purchases of foreign capital goods for a panel of Mexican manufacturing plants. Product-market tariffs lower the probability that a plant will import capital goods, while both output and input tariffs are associated with smaller quantities of capital imports. Capital imports are also associated with higher productivity. Thus, trade barriers may indirectly lower productivity by inhibiting the importation of foreign technologies through capital goods.

Poster Abstracts

Recent work indicates that the joint effects of intermediate input and final output tariff reforms on equilibrium in the differentiated final products sector are analytically ambiguous. This issue is addressed empirically for disaggregate, imperfectly competitive U.S. food manufacturing industries. The input tariff effect dominates in most industries, leading to increases in the number of U.S. firms and total industry output as a result of tariff reform. This provides evidence that the existing U.S. tariff profile discriminates against domestic food manufacturers, as input tariff effects outweigh the protection offered by output tariffs. This conclusion is robust to changes in the degree of interfirm rivalry (monopolistic competition or cournot oligopoly).