Income inequality of destination countries and trade patterns: Evidence from Chinese firm-level data

In this paper, we investigate the relation between the export patterns and the income inequality of the destination countries using the Chinese firm-level data. Our empirical analysis finds two main results: (i) export price decreases in the income inequality of the destination countries; while (ii) the exporting firm number and export value will increase in the inequality level. With a conventionally theoretical framework, we discuss the potential influencing mechanism. A higher income inequality leads to higher share of poor consumers in a country, which will lower the quality threshold for Chinese exporters. In this case, the firms with less competitive and producing low quality products are able to enter this market. As a result, we observe that in response to a higher income inequality, more firms enter the market while the exporting price decreases in this market

Income inequality of destination countries and trade patterns: Evidence from Chinese firm-level data

In this paper, we investigate the relation between the export patterns and the income inequality of the destination countries using the Chinese firm-level data. Our empirical analysis finds two main results: (i) export price decreases in the income inequality of the destination countries; while (ii) the exporting firm number and export value will increase in the inequality level. With a conventionally theoretical framework, we discuss the potential influencing mechanism. A higher income inequality leads to higher share of poor consumers in a country, which will lower the quality threshold for Chinese exporters. In this case, the firms with less competitive and producing low quality products are able to enter this market. As a result, we observe that in response to a higher income inequality, more firms enter the market while the exporting price decreases in this market

Effect of Exchange Rate Volatility on Imports: Evidences from Chinese Firms

The effect of exchange rate movement on trade has been studied widely for a long history. Most literatures focus on its impacts on firms' export performances, and the performances usually refer to the intensive and extensive margins of export. Adding to the existing studies, we explore how firms adjust their imports in response to varying levels of exchange rate volatility using Chinese customs data. Our contributions include three points: (i) we are the first one to test this issue using the Chinese firm level data; (ii) besides the intensive and extensive margins, we also detect how firms adjust the number of import varieties; and (iii) our study detects the role of financial constraints on the effect of the exchange rate risk. Our empirical estimations find that firms reduce their import value, varieties, and import probability from the origin country with relatively high level of exchange rate volatility. The last finding is different from the existing literature

Trade costs, import penetration, and markups

The rise of market power in recent decades has received increased attention, but the determinants of such a rise remain unclear. This paper studies whether and how increasing import penetration of inputs leads to a more concentrated market structure and the associated rise of markups. The use of quadratic preferences in combination with the inclusion of the firm’s choice to import create a link between the use of imported inputs and markups. A reduction in importing costs induces non-importers to start importing intermediates. Yet, the effect on profits is shaped by a trade-off between the potential marginal cost advantage and the fixed cost incurred from importing. As a result, only the most productive firms benefit from globalization, while existing importing firms do not fully pass through the reduction in trade costs using prices. The selection of importers, cost-savings from imported inputs and industry firm turnover jointly explain the rise of average markups in the market. Guided by this theoretical framework, we combine firm-level panel data, sector-level trade data and input-output tables to present empirical evidence on the relationship between the increase in imported input penetration and the rise of market power in the US over the last four decades. Using six-digit sectors as the unit of observation, we show that imported input penetration is positively associated with the size of markups.We test the model predictions on both the import decisions of heterogeneous firms and its implications for market structure. A difference-in-difference exercise that exploits China’s accession to the WTO and the use of input tariffs as a proxy for imported input penetration provide additional supporting evidence. Overall, we find that average industry markups would have been around 1.4% lower each year in the absence of imported inputs

Trade cost and export diversification: Evidence from Chinese firms

We investigate the relationship between the number of varieties a firm decides to export (its export scope) and the characteristics of the destination country. Using Chinese firm-level customs data for 2001 and 2006, we document that Chinese exporters adjust their export scope to different characteristics of destination countries. We show that firms export fewer varieties to countries that display higher exchange rate volatility, that are farther away from China, or that impose higher import-tariff rate. Also, we find that the response to the tariff reduction process due to China’s entry into the WTO in 2001 is heterogeneous across firms: high productivity firms (the total factor productivity is measured through the Olley-Pakes method) expanded their export scope, while low productivity firms reduced it. With this evidence at hand, we develop a flexible and tractable theoretical model to rationalize our empirical findings. Our framework considers heterogeneous firms’ optimization decisions involving both production and export varieties and their interplay with the exchange rate volatility, the distance to the destination country, and the tariff rate. Our model predicts that the export scope decreases in the level of exchange rate volatility, distance, and tariff rate of a destination country: firms can reduce the export scope if the destination countries suffer negative demand shocks, but cannot expand the export scope if positive shocks occur, due to insufficient pre-investment in production capacity. Also, our model predicts that high-productivity firms have an advantage in producing higher quality products, and in response to a tariff reduction the demand for high-quality products increases more than that for low-quality products: thus, high productivity firms react by expanding their export scope, but low productivity firms may reduce their export scope due to the increase in market competition

Effect of Exchange Rate Volatility on Imports: Evidences from Chinese Firms

The effect of exchange rate movement on trade has been studied widely for a long history. Most literatures focus on its impacts on firms' export performances, and the performances usually refer to the intensive and extensive margins of export. Adding to the existing studies, we explore how firms adjust their imports in response to varying levels of exchange rate volatility using Chinese customs data. Our contributions include three points: (i) we are the first one to test this issue using the Chinese firm level data; (ii) besides the intensive and extensive margins, we also detect how firms adjust the number of import varieties; and (iii) our study detects the role of financial constraints on the effect of the exchange rate risk. Our empirical estimations find that firms reduce their import value, varieties, and import probability from the origin country with relatively high level of exchange rate volatility. The last finding is different from the existing literature

Trade costs, import penetration, and markups

The rise of market power and the decline of labor's share of GDP in the United States in recent decades is well documented and have critical macroeconomic implications, but the determinants of such trends remain unclear. This paper asks how and to what degree increasing import penetration contributes to the more concentrated market structure and the associated rise of mark-ups. We provide a general equilibrium framework linking the change of markup with the extensive margin of foreign-input imports. In the model, a reduction of importing costs induces non-importers to start importing intermediates and existing importing firms to increase the share of imported inputs. But the capability of importing more varieties of inputs depends on productivity as it requires fixed costs to select cost-efficient intermediate inputs to import. We then combine firm-level micro panel data, sector-level trade data and input-output table to present empirical evidence on the relationship between the rise of market power and the increase of imported inputs penetration. At the 6-digit sector level, the rise of imported input penetration induced market concentration, implying that only the most productive firms benefit from trade liberalization. We further test our predictions of heterogeneous firms' decisions on intermediates importing and the implications on the market structure using transaction-level custom data: decreasing trade costs induce non-importing firms to start to import intermediates and allow the existing importing firms to charge higher markups than before

Trade cost and export diversification: Evidence from Chinese firms

We investigate the relationship between the number of varieties a firm decides to export (its export scope) and the characteristics of the destination country. Using Chinese firm-level customs data for 2001 and 2006, we document that Chinese exporters adjust their export scope to different characteristics of destination countries. We show that firms export fewer varieties to countries that display higher exchange rate volatility, that are farther away from China, or that impose higher import-tariff rate. Also, we find that the response to the tariff reduction process due to China’s entry into the WTO in 2001 is heterogeneous across firms: high productivity firms (the total factor productivity is measured through the Olley-Pakes method) expanded their export scope, while low productivity firms reduced it. With this evidence at hand, we develop a flexible and tractable theoretical model to rationalize our empirical findings. Our framework considers heterogeneous firms’ optimization decisions involving both production and export varieties and their interplay with the exchange rate volatility, the distance to the destination country, and the tariff rate. Our model predicts that the export scope decreases in the level of exchange rate volatility, distance, and tariff rate of a destination country: firms can reduce the export scope if the destination countries suffer negative demand shocks, but cannot expand the export scope if positive shocks occur, due to insufficient pre-investment in production capacity. Also, our model predicts that high-productivity firms have an advantage in producing higher quality products, and in response to a tariff reduction the demand for high-quality products increases more than that for low-quality products: thus, high productivity firms react by expanding their export scope, but low productivity firms may reduce their export scope due to the increase in market competition

Trade Scopes across Destinations: Evidence from Chinese Firm

Abstract We examine how Chinese exporters adjust their number of exported varieties with respect to different characteristics of destination countries and varying trade cost. Using the Chinese firm-level customs data from the years 2001 and 2006, we show that: (i) firms export fewer varieties (indexed by HS6 code) to the destinations which are with higher exchange rate volatility, farther from China, or impose higher import-tariff rate; (ii) in response to the tariff reduction process by the destination countries after China entering to the WTO in 2001, the high productivity firms expanded the export scope while the low productivity firms reduced it.With a theoretical framework which considers firms' optimization decision involving both production and export varieties, we explain all our empirical findings, highlighting the relation between the exchange rate volatility and the number of export varieties