Trade policy uncertainty & resource misallocation

This paper investigates the role of trade policy uncertainty (TPU) on resource allocation across heterogeneous Chinese producers and aggregate productivity in the Chinese manufacturing sector. Using detailed Chinese data and common cost minimization conditions we measure the difference between optim...

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Bibliographic Details
Published inEuropean economic review Vol. 164; p. 104720
Main Authors Rodrigue, Joel, Shi, Qing, Tan, Yong
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.05.2024
Subjects
China
Resource misallocation
Trade policy uncertainty
F61
O24
F62
F12
O19
China
F14
F02
F13
F1
Trade policy uncertainty
Resource misallocation
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Summary:This paper investigates the role of trade policy uncertainty (TPU) on resource allocation across heterogeneous Chinese producers and aggregate productivity in the Chinese manufacturing sector. Using detailed Chinese data and common cost minimization conditions we measure the difference between optimal capital and labor holdings for each firm, or the efficiency gap. We document that (i) efficiency gaps decline sharply with China’s accession to the WTO and the declines are disproportionately pronounced among industries most exposed to TPU; (ii) efficiency gap declines were larger among Chinese exporters; (iii) efficiency gap declines occur simultaneously with a rise in the variance of firm-level employment and investment in new capital. Using China’s accession to the WTO as an exogenous change in the degree of uncertainty faced by Chinese producers, we quantify the implied change in productivity due to the reduction in TPU. Our estimates imply that the reduction in TPU induced by WTO accession accounted for a 17% increase in aggregate productivity through reduced resource misallocation.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2024.104720