Input Prices, Productivity, and Trade Dynamics: Evidence from Chinese Paint Manufacturers
[Abstract] We develop and estimate a structural dynamic model of trade that distinguishes the roles of productivity, materials access, and market access. Our model emphasizes the distinct effect of importing on firms' access to materials---enabling firms to either reduce materials costs or raise materials quality. We use this model to analyze the impact of tariff liberalization on industry performance. By directly affecting the incentives to import, liberalization produces dynamic effects on trade participation and the distribution of productivity that may take years to be fully realized. We estimate the model using a dataset of Chinese paint manufacturers from 2000 to 2006, and find that importing improves materials access and raises the productivity of Chinese paint manufacturers. Moreover, changing firms' incentive to import through tariff liberalization affects both importing and exporting decisions in the long run. We evaluate the effect of China's reduction in import tariffs upon joining the World Trade Organization (WTO) in 2001. Our counterfactual analysis indicates that, although the effect is mild in the short run, over 15 years this policy reduces the aggregate input price level by 2.8 percent and increases productivity by 8.6 percent. More than half of the productivity increase is attributed to firms' increased trade participation in response to the policy change. Overall, this policy increases average firm value by about 2.3 percent (2.4 million US dollars).