Competition, markups, and gains from trade: A quantitative analysis of China between 1995 and 2004

• Main Authors: HSU, Wen-Tai, LU, Yi, WU, Guiying Laura
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Gains from trade; Markups; Pro-competitive effects; ACR formula; Head-to-head competition; Chinese economy; Asian Studies; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2316; https://ink.library.smu.edu.sg/context/soe_research/article/3315/viewcontent/wto_entry_092519_with_tables_av.pdf
• Institution: Singapore Management University

This paper provides a quantitative analysis of gains from trade in a model with head-to-head competition using Chinese firm-level data from Economic Censuses in 1995 and 2004. We find a significant reduction in trade cost during this period, and total gains from such improved openness during this period is 7.1%. The gains are decomposed into a Ricardian component and two pro-competitive ones. The pro-competitive effects account for 20% of the total gains. Moreover, the total gains from trade are 13 − 31% larger than what would result from the formula provided by ACR (Arkolakis et al., 2012), which nests a class of important trade models, but without pro-competitive effects. We find that head-to-head competition is the key reason behind the larger gains, as trade flows do not reflect all of the effects via markups in an event of trade liberalization.