Working Paper: NBER ID: w20323
Authors: Haichao Fan; Yao Amber Li; Stephen R. Yeaple
Abstract: This paper presents theory and evidence from highly disaggregated Chinese data that tariff reductions induce a country's producers to upgrade the quality of the goods that they export. The paper first documents two stylized facts regarding the effect of trade liberalization on export prices and its relation with product differentiation. Next, the paper develops a simple analytic framework that relates a firm's choice of quality to its access to imported intermediates. The model predicts that a reduction in the import tariff induces an incumbent importer/exporter to increase the quality of its exports 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 for quality differentiation is small. The predictions are consistent with the stylized facts based on Chinese data and robust to various estimation specifications.
Keywords: Trade Liberalization; Export Quality; Tariff Reduction; China
JEL Codes: F0; F1; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in import tariffs (F14) | Increase in quality of exports (F14) |
| Reduction in import tariffs (F14) | Increase in unit value export prices (F14) |
| Larger reductions in tariffs (F12) | Raise export prices significantly (F14) |
| Limited scope for quality differentiation (L15) | Lower export prices (F14) |