Working Paper: NBER ID: w24527
Authors: Ana Cecilia Fieler; Ann Harrison
Abstract: In a stylized model, firms differentiate their products to escape import com- petition. Facing a nested CES demand, each firm chooses between a nest with competitors and its own nest under higher costs. The profit from differentiation is an inverted U-shaped function of firm productivity. It increases with import competition and is lower than the social benefit. Differentiation increases the gains from trade. In establishment data from China spanning its 2001 WTO accession, tariff cuts are associated with increases in productivity, introduction of new goods, switches to skill-intensive sectors. Markups in the model explain the large increases in revenue productivity among small firms and input suppliers.
Keywords: Import Competition; Product Differentiation; China; Trade Policy
JEL Codes: F12; F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tariff Cuts (F13) | Social Benefits of Product Differentiation (L15) |
| Increase in Productivity (O49) | Introduction of New Goods (D40) |
| Increase in Productivity (O49) | Shift to Skill-Intensive Sectors (J24) |
| Tariff Cuts (F13) | Increase in Productivity (O49) |
| Tariff Cuts (F13) | Introduction of New Goods (D40) |
| Tariff Cuts (F13) | Shift to Skill-Intensive Sectors (J24) |