Input prices, productivity, and trade dynamics: long‐run effects of liberalization on Chinese paint manufacturers

Abstract

We develop a dynamic model to analyze the impact of input tariff liberalization on input prices, trading decisions, and productivity. Although input tariffs directly affect input price benefits of importing, their impact on trade participation generates indirect benefits through productivity improvements and complementarity between importing and exporting. To disentangle these effects, we separately measure importing's effect on input prices and productivity and examine Chinese paint manufacturers' reaction to input tariff liberalization. We find that a mild short‐term effect of tariff liberalization is amplified in the long run by induced trade participation, resulting in even higher productivity and lower input prices.