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Protection and Exports

Periodic Reporting for period 1 - PROTEXPO (Protection and Exports)

Reporting period: 2018-05-01 to 2020-04-30

This project aims to resolve two themes: (i) how firms' imports activity affect the product quality of exported products; and (ii) how firms adjust their export behavior, particularly product quality, in response to the time-varying and market-specific trade policy shocks stemming from the imposition of antidumping (AD) measures. These questions are essential because firms do not operate in a vacuum and trade policies evolve. While it is well-known that China's accession to WTO has spurred its exceptional growth in export, the growth in import is no less astounding. However, literature to date has dedicated to less attention on the effect of imports on firm export outcomes. The first objective of this project seeks to determine whether the connection between imports and exports is causal rather than a byproduct of trade. With respect to AD policy, it has emerged as one of the most intensive used form of trade protection in the trade policy arena since the mid-1990s, and meanwhile China has been the world's top target country of AD sanction. While there have been voluminous research examining AD activities, there remain many insights to be gained from examining its usage, especially when it comes to China's exports experience. The second objective of this project intends to provide an in-depth analysis of the evolution of AD activities since the 1980s, with a particular focus on the emergence of China as a major target of administered trade protection by the European Union (EU) and the United States (US). Moreover, recent literature has gained significant insights into the effectiveness of AD in protecting firms and jobs, the ways these trade restrictions shape targeted firms' export behavior remains poorly understood. The third objective of this project attempts to shed new light on the patterns of export adjustments to AD shocks among firms that were hit with such trade restrictions. The analysis of how targeted firms respond to such trade restrictions not only allows us to paint a complete assessment of such trade policy but also is relevant for policy, in particular in light of the heated discussion on whether the EU should grant China market economy status (MES). A better understanding of the interconnections between targeted firms' export adjustments and temporary trade protections is crucial for designing appropriate policy interventions.
We have published two papers and completed one research paper under the project. The first paper provides a comprehensive analysis of the relationship between import activities and the quality of exports, using Chinese customs data for the manufacturing sector from 2000-2013. We improve upon existing analyses by estimating quality from the demand side and thus delivering quality estimates at the firm-product-destination level. We find that sourcing from abroad enhances the export quality and quality improvements are particularly strong when firms purchase inputs from high-income countries. These findings suggest that greater openness to trade in the form of expansion in import scale could not only stimulate the diffusion of the modern technologies embodied in imported inputs but also improve the quality of exported products. Policies directly aimed at restricting imports by increasing trade costs can indirectly harm the export performance of domestic firms. In contrast, policies that facilitate the inflows of foreign inputs are essential for contributing to growth.

The second paper provides a thorough description of AD activities in the period 1980-2015, with a focus on measures imposed on China by the EU and the US. We contribute to the existing literature by painting a complete picture of AD protection in the EU and the US to the period after the global financial crisis. We document a series of stylized facts, such as the growing focus on China, the concentration of AD duties in few sectors, and the increasing share of intermediate goods subject to such measures. Second, we reveal the historic all foreign use of AD against China's exports, moving from an aggregate level down to sectors and firms. We find that AD duties exert a negative effect on trade flows from China, with both the intensive and extensive trade margin contributing to the fall in export values. Moreover, in line with the previous literature, we find a strong reduction in export quantities and a small increase in the free on board price of products facing AD measures. In this respect, AD duties have achieved the goal of containing Chinese exports.

The third paper examines how temporary increases in export costs in one market affect firms’ export behavior across markets. For this purpose, we investigate how Chinese exporters respond to market-specific tariff shocks that arise when importers impose AD duties. By exploiting the time-varying trade policy changes from the Global Antidumping Database and transaction-level Chinese customs data between 2000-2015, we find that the use of contingent duties in one market leads to a severe reduction in export flows by Chinese firms serving that market. Additionally, the trade-restrictive AD measures are associated with little-to-no impact on prices, indicating that duties are most likely to pass through to importers completely. More importantly, the negative effect on trade transits through the product quality dimension. We furthermore consider the force that drives the declining quality: reduced export revenues prevented Chinese firms from buying more expensive and better quality foreign-made inputs, which in turn, deterred them from producing high-quality goods. Our paper highlights that the distortions in product quality, not just the trade that is subject to AD measures, should be taken into account when measuring the losses on exporters. We therefore contribute to the literature by exploring the quality channel through which AD shocks impact exporters, in addition to the well-documented effect on constraining trade flows.
So far, not many studies have comprehensively explored the connections between import activities and firms’ product quality as well as the role of trade policy barriers, i.e. AD, in distorting the firms’ export performance using transaction-level data from China after the 2008 global financial crisis. Our sample period covers dramatic expansion in China’s export and import activity. This aggregate expansion is accompanied by significant advancement in firms’ engagements in the global value chain and by considerable development in firms’ export product quality. The findings from this project identified that import activities are important factors contributing to firms’ success in international markets. More importantly, the results discovered from this project can answer how adverse trade shocks impact firms’ export outcomes. This is particularly important for the EU as AD is at the heart of its trade policy. While policy debates often center on the effectiveness of such policies on protecting EU firms in industrial output and employment, the results from current research provide reliable estimates of the consequences of these measures on targeted firms. The findings in this project therefore gives insight into the impact of granting MES to China on EU trade policy and European welfare, which would allow policymakers to make an informed decision.
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