Heterogeneous effects of trade liberalisation on firm-level markups: Evidence from China

This paper analyses how trade liberalisation affects the markups of Chinese firms based on firm-level production data, highly disaggregated transaction-level product trade data and tariff data at the eight-digit Harmonised System (HS) level. Our results show that there is a pro-competition effect of output tariff reduction, that is decreasing output tariffs relate to a lower markup, and that there is a cost-reduction effect of input tariff reduction, that is decreasing input tariffs relate to a higher markup. Interestingly, there are heterogeneous effects of trade liberalisation on firm-level markups. The cost-reduction effect of input tariff reduction is partially offset by the competition effect of new firm entry in more-concentrated industries. Furthermore, there is a weaker effect of trade liberalisation on processing trade firms and state-owned enterprises. Finally, our results are robust to the use of an instrumental variable approach to control for the endogeneity of tariffs and sample selection.