Working Paper: NBER ID: w21985
Authors: Ling Feng; Zhiyuan Li; Deborah L. Swenson
Abstract: This paper studies how reduction in trade policy uncertainty affects firm export decisions. Using a firm-product level dataset on Chinese exports to the United States and the European Union in the years surrounding China’s WTO accession, we provide strong evidence that reduction in trade policy uncertainty simultaneously induced firm entries to and firm exits from export activity within fine product-level markets. In addition, we uncover accompanying changes in export product prices and quality that coincided with this reallocation: firms that provided higher quality products at lower prices entered the export market, while firms that had higher prices and provided lower quality products prior to the changes, exited. To explain the simultaneous export entries and exits, as well as the change in product export prices and quality induced by trade policy uncertainty changes, we provide a model of heterogeneous firms which incorporates trade policy uncertainty, tracing the effects of the changes in policy uncertainty on firm-level payoffs and the resulting selection effects which apply to new entrants and incumbents.
Keywords: trade policy; uncertainty; exports; China; WTO accession
JEL Codes: F13; F14; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in trade policy uncertainty (F13) | simultaneous entries and exits in the export market (F10) |
| reductions in trade policy uncertainty (F13) | incentivized new entries (O31) |
| degree of trade policy uncertainty reduction (F13) | growth of trade volume associated with new export entries (F10) |
| degree of trade policy uncertainty reduction (F13) | exits by incumbent firms (L19) |
| larger reductions in uncertainty (D80) | stronger relationship with new export entries (F10) |
| new entries in the export market (F10) | exit of less productive incumbents (L19) |