Working Paper: NBER ID: w23690
Authors: Haichao Fan; Yao Amber Li; Stephen R. Yeaple
Abstract: This paper presents an analysis of the effect of China's entry into the WTO on the quality choices of Chinese exporters in terms of their outputs and their inputs. Using highly disaggregated firm-level data, we show that the quality upgrading made possible by China's tariff reductions was concentrated in the least productive Chinese exporters. These firms, which had been laggards in terms of quality prior to the tariff reduction, were the most aggressive in increasing the quality of their exports and their inputs and in redirecting their exports toward high income markets where demand for high quality goods is strong. Our empirical results are consistent with a simple model featuring scale effect and non-Hicks' neutral productivity that disproportionately affects the efficiency with which firms use intermediate inputs. This latter feature does not appear in workhorse models of firm heterogeneity and endogenous quality choice which provide a distorted view of the impact of trade liberalization on quality upgrading.
Keywords: Quality Upgrading; Productivity; China; WTO Accession; Trade Liberalization
JEL Codes: F1; F10; F14; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China's tariff reductions due to WTO accession (F13) | significant quality upgrading among Chinese exporters (L15) |
| China's tariff reductions due to WTO accession (F13) | quality upgrading for less productive firms (L15) |
| China's tariff reductions (F14) | less productive firms increase export prices (L11) |
| China's tariff reductions (F13) | less productive firms redirect exports toward high-income markets (F61) |
| larger market shares incentivize quality innovation (L15) | quality upgrading (L15) |
| productivity (O49) | response to tariff reductions (F69) |