Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters

Abstract

If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. We examine Chinese textile and clothing exports before and after the elimination of externally imposed export quotas. Both the surge in export volume and the decline in export prices following quota removal are driven by net entry. This outcome is inconsistent with a model in which quotas are allocated based on firm productivity, implying misallocation of resources. Removing this misallocation accounts for a substantial share of the overall gain in productivity associated with quota removal. (JEL F13, F14, L67, O14, O19, P23, P33)Institutions that distort the efficient allocation of resources across firms can have a sizable effect on economic outcomes. Hsieh and Klenow (2009), for example, estimate that distortions in the Chinese economy reduce manufacturing productivity by 30 to 50 percent relative to an optimal distribution of capital and labor across existing manufacturers. While research in this area often concentrates on misallocation among existing firms, distortions can also favor incumbents at the expense of entrants. Trade barriers such as tariffs and quotas can obviously distort resource allocation along these "intensive" and "extensive" margins, and estimation of the productivity growth associated with their removal is a traditional line of inquiry in international trade. But gains from trade liberalization may be larger than expected if the institutions created to manage the barriers impose their own, additional drag on productivity (e.g., arbitrary enforcement of quotas and tariffs). In that case, trade liberalization induces two gains: the first from the elimination of the embedded institution, and the second from the removal of the trade barrier itself.In this article, we examine productivity growth among Chinese exporters following the removal of externally imposed quotas. Under the global Agreement on Textile and Clothing, previously known (and referred to in this article) as the Multifiber Arrangement (MFA), textile and clothing exports from China and other developing seminar participants for helpful comments and suggestions. Di Fu provided excellent research assistance. We acknowledge funding from the Program for Financial Studies at Columbia Business School and the National Science Foundation (SES-0550190).

Rapid expansion of international new ventures across institutional distance

“…Exporters are surrounded by various institutional environments in destination markets, e.g., legal, cultural, and regulative ones, but not all institutional dimensions bear the same importance for international business (Cuervo-Cazurra & Genc, 2008, p. 963). One of the most pertinent dimensions for exporters is trade openness or liberalization (Baggs & Brander, 2006;Khandelwal, Schott, & Wei, 2013). Trade openness, as a form of formal institution, refers to the efforts of a government to lower both import tariffs and non-tariff barriers against foreign products (Edwards, 1993).…”

Microeconomic mechanisms behind export spillovers from FDI: evidence from Bulgaria

“…Relying on the standard literature on quality and trade, where the unit value of a product would proxy its quality (Schott, 2004), we might conclude that these results do not provide evidence of quality effects from FDI spillovers. However, when disentangling the quality component from unit values, as in Khandelwal et al (2013), we find significant effects on quality with no change in prices, i.e. quality upgrading from forward spillovers and quality downgrading from both horizontal and backward spillovers.…”

“…we still observe positive forward spillovers on export value, which mainly occur through the quantity channel, since the impact on average unit values is not statistically significant. Nevertheless, when using Khandelwal et al (2013)'s approach to estimate product quality, we obtain evidence that existing exporters increase…”

“…In the spirit of Khandelwal (2010), Khandelwal et al (2013) relax the quality equals unit value assumption, assigning higher quality to exports with higher market shares in a given destination, conditional on price. In other words, quality is considered as any attribute of the good, other than price, which increases consumer demand.…”

“…Following Khandelwal, et al (2013), we are able to disentangle the quality component from the unit value.…”