9.WTO Accession and Performance of Chinese Manufacturing Firms__加入WTO与中国制造业企业的绩效

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WTO Accession and Performance of

Chinese Manufacturing FirmsLoren Brandt, Johannes Van Biesebroeck,

Luhang Wang, and Yifan Zhang§

March 24, 2017

Abstract

We examine the effects of the trade liberalization that accompanied China’s WTO

accession on the evolution of markups and productivity of Chinese manufacturing

firms. Although these two dimensions of performance cannot be separately identified

when firm output is measured by revenue, we show that detailed price deflators make

it possible to estimate the average effect of industry-level tariff reductions on both

dimensions separately. Several novel findings emerge. First, cuts in output tariffs

reduce markups, but raise productivity. Second, the pro- competitive effects are most

important for incumbents, while efficiency gains dominate for new entrants. Third,

cuts in input tariffs raise both markups and productivity. We highlight several

mechanisms operating in liberalized sectors that help explain our findings in the

Chinese context. Liberalized sectors saw an increase in the exit of private firms and

more frequent replacement of management in badly performing state-owned firms.

Both patterns are likely to reduce agency problems. The initial productivity of new

entrants is higher in more open sectors. And while lower input tariffs had only a

limited role in increasing access to imported intermediates, they had a strong price-reducing effect, even on domestically produced intermediates.

 We thank seminar participants at Columbia, Frankfurt, Nottingham, Princeton, Yale, the World Bank, and

Zurich, and several conferences for comments. Special thanks to Jan De Loecker for extensive feedback on

estimation and identification problems. Financial support from ERC grant No. 241127, SSHRC, and CFI/OIT is

gratefully acknowledged.

§ Brandt: University of Toronto; Van Biesebroeck (Corresponding author): KU Leuven and CEPR,

Naamsestraat 69, 3000 Leuven, Belgium, E-mail: jo.vanbiesebroeck@kuleuven.be; Wang: Xiamen University;

Zhang: Chinese University of Hong Kong. 2 “The competition arising [from WTO membership] will also promote a more rapid and more healthy

development of China’s national economy”

Premier Zhu Rongji (Press release, Washington, DC, April 1999)

1 Introduction

China’s manufacturing sector experienced impressive productivity growth over much of the 1990s and

2000s before the onset of the Great Recession (Brandt, Van Biesebroeck and Zhang, 2012). Expanded

access to international markets and export growth are often cited as key drivers of this improvement

(Yu, 2014; Khandelwal, Schott and Wei, 2013).1 Largely neglected is the impact on local firms of

reforms that facilitated access to China’s domestic market for the rest of the world. Chinese leaders such

as Premier Zhu Rongji, constrained by domestic political economy considerations in their efforts to

restructure major segments of industry, believed that reforms required as a condition for WTO accession

would be an important catalyst for change.2

A large literature examines the effects of trade liberalizing reforms on productivity, but there is little

work estimating the effects of these same policies on markups. An advantage of looking at markups

compared to productivity is that they can be estimated without observing firm-level prices. A

complication is that, in addition to efficiency gains, they also capture effects on equilibrium prices in

output and input markets. From the definition of the markup, i.e. the ratio of price to marginal cost, we

can decompose trade-induced changes in output prices into changes in markups, input prices, and

production efficiency. These correspond to three independent, welfare-enhancing effects of trade

liberalization. First, lowering import tariffs increases competition and induces firms with market power

to lower their markups (Levinsohn, 1993). This behavior raises consumer surplus at the expense of

producer surplus, but also reduces allocative distortions. Second, lowering tariffs on imports of

intermediate goods directly reduces marginal costs (Tybout and Westbrook, 1995). And third, marginal

costs can also fall due to higher productivity or efficiency. While all three mechanisms, ceteris paribus,

reduce output prices and raise welfare, the second two will increase markups unless pass-through of cost

savings is perfect. The relationship between the markup and gains from trade is thus not monotonic, but

depends on the mechanism at work.3

We use firm-level data that covers most of the manufacturing sector in China to investigate the role

of domestic trade liberalization over a period that spans China’s entry into the WTO in 2001. Our results