Trade Liberalization And Total Factor Productivity

This paper examines the impact of trade liberalization on the total factor productivity of Chinese manufacturing firms using a large firm-level database that comprises all of China’s manufacturing firms and spans the period of1998to2007. And it starts the analysis under the basic framework of the theory of heterogeneous firms, and separate the effect of trade liberalization into that of output tariff and input tariff reduction. Moreover, considering the well-known simultaneity bias and sample selection bias, this paper uses the semi-parametric estimator to calculate the total factor productivity. In comparison, I also apply the OLS estimator and Fixed-effect estimator to estimating the TFP of Chinese manufacturing firms.The results indicate that trade liberalization can significantly promoting the total factor productivity of Chinese manufacturing firms by two composite effects. First, output tariff reduction can increase the firm’s TFP by intensifying the competition of domestic market and importing market, that’s so called "positive effect". Second, input tariff reduction may increase effective protection and weakening the importing competition, furthermore, there’s lots of processing trade firms in Chinese manufacturing who has embraced the tariff privilege. Therefore, input tariff reduction could depress the firm’s productivity instead of increasing it, that’s so called "negative effect". However, the "positive effect" dominates the "negative effect" in our data.Considering the firm’s exporting status, ownership and size, the results shows that trade liberalization can make different impacts on different type of firms. When the tariff reduced, non-exporter may benefit more than the exporter, and the private firms enjoy the most increase of productivity, foreign-invested firms and HMT less, but the state-owned firms depressed from it. At last, the paper analyses the effects of tariff reduction on industries, and the results also indicate that the average productivity of industries are boosted.