Tariffs and the organization of trade in China

Abstract

This paper examines the impact of China's falling import tariffs on the organization of exports between ordinary and processing trade. These trade forms differ in terms of tariff treatment and the ability of firms to sell on the domestic market. At the industry level, we find that falling input tariffs are the source of 90 percent of the average increase in the share of exports occurring through ordinary trade, most of which occurs on the extensive margin through new entry. The choice of trade is also tied to the size of the domestic market, which processing firms cannot access. Consistent with the literature, we also document that the domestic content share of ordinary exports is 30 percentage points higher than for processing. Our back of the envelope calculations imply an increase in demand for local factors of production of 12-21 billion U.S. dollars in 2006 associated with the change in the composition of trade from processing to ordinary exports resulting from tariff cuts between 2000-2006.

Globalization, ownership, and the effects of trade liberalization on Chinese import prices

“…We exclude processing trade transactions from our analysis, since the contractual nature of processing production implies that processing trade is conducted by related parties. However, since Brandt and Morrow (2015) show that product level trade tends to sort either into processing or ordinary trade,our results should not be driven by large shifts into or out of processing trade. 5.…”

Made and Created in China: Super Processors and Two-way Heterogeneity

“…Lastly, the evaluation of processing policy in this paper is broadly linked to the quantitative literature on the welfare implications of processing trade (Defever and Riaño, 2017;Deng, 2017;5 The literature has also studied the factors which determine the selection between ordinary and processing trade. Factors that are emphasized include preferential policy for processing exports (Dai et al, 2016;Brandt and Morrow, 2017;Defever and Riaño, 2017;Deng, 2017), foreign firms' outsourcing decisions (Feenstra and Hanson, 2005;Fernandes and Tang, 2012), and credit constraints (Manova and Yu, 2016). However, none of these frameworks generate the coexistence of the three types of exporters (ordinary, processing, and mixed) alongside the performance ranks we observe in the data.…”

“…We find it intriguing to think about the non-trivial existence of mixed exporters. The theoretical literature typically assumes either that processing is a different sector (Deng, 2017;Brandt et al, 2019) or that Melitz-type firms sort themselves into processing versus ordinary trade based on productivity differences combined with a variable-fixed cost trade-off (Brandt and Morrow, 2017;Defever and Riaño, 2017). Mixed exporters, if mentioned, are generated by bringing in some product-or destination-specific shock to fixed costs.…”

Input trade liberalization and import switching: Evidence from Chinese firms

“…However, the results could also be driven by the decline of processing trade. Brandt and Morrow () argue that China's processing trade has declined since 2005, because input tariff reduction reduces the opportunity cost of doing ordinary trade. To nullify this channel, we separate the samples into labor‐intensive and capital‐intensive industries, given that processing trade is more concentrated in labor‐intensive industries.…”

“…An important alternative explanation for source switching might be the decline of processing trade in China since 2005. As Brandt and Morrow () argue, to some extent, this decline can be attributed to the reduced input tariff, which decreases the opportunity cost of engaging in ordinary trade. This effect is unlikely to be important here, given that the sample ends in 2006, the starting year of the decline in import‐processing trade.…”