The Impact of Input and Output Tariffs on Firms' Productivity: Theory and Evidencer oie_988 821..835 (original) (raw)
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Productivity Matters for Trade Policy: Theory and Evidence*
International Economic Review, 2011
There is a growing literature that investigates the effect of trade liberalization on productivity. Nearly all such studies assume that trade policy is determined independently of productivity, hence it is exogenous. I show, both theoretically and empirically, that this assumption is not valid in general and that researchers may be underestimating the positive effect of liberalization on productivity when they do not account for the endogeneity bias. On the theory side, I demonstrate that under a standard political economy model of trade protection, productivity directly influences tariffs. Moreover, this productivity-tariff relationship partly determines the extent of liberalization across sectors even in the presence of a large exogenous unilateral liberalization shock that affects all sectors. The link between productivity and tariffs is maintained after I include in my political economy model a learning-by-doing motive of protection, which also serves as the source of liberalization. On the empirical side, I examine total factor productivity (TFP) estimates obtained at the firm level for Colombia between 1983 and 1998, and find that more productive sectors receive more protection within this period. In estimating the effect of productivity on tariffs, I control for the endogeneity of the two main right-hand-side variables-the inverse import penetration to import demand elasticity ratio and productivity-by employing materials prices, the capital to output ratio, a measure of scale economies, and the TFP of the upstream industries as robust instruments. I also account for the large trade liberalization between 1990 and 1992, and find that the sectors with a higher productivity gain are liberalized less. Finally, I use a system of equations to illustrate that the positive impact of liberalization on productivity grows somewhat stronger when corrected for the endogeneity bias.
New evidence on trade liberalization and productivity growth
2001
Although the subject of a large number of studies, the debate on the links between trade reform and productivity growth is still unresolved and most studies at the micro level have not been able to establish a relationship between the two phenomena. Brazil provides a natural experiment to study this issue that is seldom available: it was one of the closest economies in the world until 1988, when trade reform was launched, and intra-industry data are available on an annual basis before, during and after liberalization. Using a panel of industry sectors this paper tests and measures the impact of trade reform on productivity growth. Results conÞrm the association between the former and the latter and show that the magnitude of the impact of tariff reduction on the growth rates of TFP and output per worker was substantial. Our data reveal large and widespread productivity improvement, so that the estimations in this paper are an indication that liberalization had an important effect on industrial performance in the country. Cross-sectional differences in protection are also investigated. * We gratefully acknowledge the comments of Ed Prescott, João Issler, Ajax Moreira Samuel Pessôa and Eustáquio Reis. Thanks also to Honório Kume for some of the data used, and CNPq and PRONEX for Þnancial support.
Trade Liberalization, Intermediate Inputs and Productivity: Evidence from Indonesia
This paper estimates the eects of trade liberalization on plant productivity. In contrast to previous studies, we disentangle the productivity gains that arise from reducing taris on nal goods from those that arise from reducing taris on intermediate inputs. Lower output taris can produce productivity gains by inducing tougher import competition whereas cheaper imported inputs can raise productivity via learning, variety, and quality eects. We use Indonesian manufacturing census data from 1991 to 2001, which includes plant level information on imported inputs. The results show that a 10 percentage point fall in input taris leads to a productivity gain of 12 percent for rms that import their inputs, at least twice as high as any gains from reducing output taris.
Trade liberalization and the inter-industry wage premia: the missingf role of productivity
Applied Economics, 2013
The literature concerning the effect of tariffs on the inter-industry wage premium has not addressed the role of total factor productivity (TFP) in determining both the wage premium and tariffs. This omission invalidates the use of the pre-reform tariff level as an instrument for the change in tariffs. Based on an analysis of Colombian data, I find that including TFP in the estimated model of the effects of tariffs on the wage premium leads to a 36% decrease in the effect of tariffs on the inter-industry wage premium relative to the model that omits TFP. More specifically, a ten percentage point decrease in tariffs reduces the wage premium by 1.1%. This finding suggests the importance of using policies that boost productivity to offset the effect of tariffs on the wage premium.
The Impact of Trade Liberalization on Industrial Productivity
Journal of the European Economic Association, 2015
This paper calls into question the currently most influential model of international trade. An empirical finding by Trefler (2004, AER) and others that industrial productivity increases more strongly in liberalized industries than in non-liberalized industries has been widely accepted as evidence for the Melitz (2003, Econometrica) model. We show that a multiindustry version of the Melitz model does not predict this relationship. Instead, it predicts the opposite relationship that industrial productivity increases more strongly in non-liberalized industries than in liberalized industries. JEL-Code: F120, F130.
The desire to increase manufacturing productivity has been a commonly cited goal of the trade liberalization episodes that have swept several developing countries since the 1980s. The literature has found evidence supporting such an increase in productivity. However, this paper finds that the methodology used in the literature ignores inter-industry productivity spillovers and suggests that this omission biases estimates of the impact of import tariff reduction on industry-level productivity. The findings from a case study of the Brazilian trade liberalization episode (1989-1998) indicate that the literature has overestimated the direct effect of trade liberalization by at least 25%, and that inter-industry productivity spillovers exist, are positive, and account for 70% of the increase in productivity that results from a reduction in import tariffs.
Trade Policy Reform and Productivity: The Colombian Manufacturing Sector from 1977 to 2001
This paper analyzes the effects on Colombian manufacturing productivity of foreign trade policy changes during the 1990s. Our results indicate that between 1978 and 1998, aggregate manufacturing productivity largely stagnates and even declines in some of the larger industries. Between 1999 and 2001, however, manufacturing productivity shows significant growth. Contraction of the economic activity in 1999 appears as a positive shock. There is little entry and exit of plants or reallocation of labor throughout the observed period. The productivity stagnation can be explained by this lack of liquidation of unproductive plants combined with slow technological advance. Dynamics vary significantly across sub-sectors, however, and our findings attribute this variation primarily to within-sector output reallocation. The importance of industrial policy is large. Sector-level productivity declines coincide with protectionist policies in the form of import tariffs, while rising productivity is...
Imported Intermediate Inputs, Export Prices, and Trade Liberalization
This paper examines how trade liberalization affects unit value export prices via firms' import decisions on input quality and the number of imported varieties. The paper extends Melitz's (2003) model of trade with heterogeneous firms by introducing endogenous quality and endogenous number of imported varieties. The key predictions are as follows. First, an increase in productivity or a reduction in import tariff induces firms to spend more on each import variety, and choose to import higher-quality inputs (the "quality effect"). Second, higherproductivity firms or firms facing lower import tariff tend to import more varieties (the "variety effect"). Third, more importantly, due to the quality effect and the variety effect, there is a clear pattern of "quality ladder": firms importing more varieties or with higher productivity set higher export prices; trade liberalization further raises export prices set by firms. However, if one adopts the alternative assumption that quality is exogenous across firms, then completely opposite results would be expected: import tariff reduction would decrease export prices, and firms importing more varieties or with higher productivity set lower export prices. We test two competing theories using the merged Chinese firm-product trade data and the tariff data at the HS8 level by computing firm specific tariff. Our empirical results strongly support all the predictions of the endogenous-quality model, validate the mechanisms of the quality effect and the variety effect, and therefore confirm the pattern of the "quality ladder". Moreover, we find evidence to support the exogenous-quality model using quality-adjusted price estimates and the subsample of the goods with more homogeneity of quality.
The effects of trade liberalization on productivity growth in Brazil: competition or technology?
Revista Brasileira de …, 2010
This paper examines the effects of trade liberalization on productivity growth in Brazil. In contrast with the previous literature, we examine whether this relationship is driven by product or input market effects, by including both output and input tariffs in firm-level productivity regressions and allowing for imperfect competition in the product market. The results show that the reductions of input tariffs were more important to explain the productivity growth that took place during trade liberalization in Brazil. Moreover, we find that the reduction in input tariffs led to a rise in mark-ups, while the reduction in output tariffs did the opposite.