Trade Policy Uncertainty, Firm Heterogeneity and Export Mode

ABSTRACT

This paper develops a Melitz-style trade model to consider how trade policy uncertainty (TPU) affects the export mode of heterogeneous firms. With the reduction of TPU, firms are more likely to engage in ordinary exports, and the proportion of ordinary exports relative to processing exports increases. This effect is more pronounced for firms with medium productivity. Based on highly disaggregated product-level trade data and firm-level production data, this paper adopts econometric methods to empirically identify the impact of TPU on heterogeneous firms’ choice of export mode, which provides robust evidence for the prediction of the theoretical model. This paper also puts forward some policy implications.

KEYWORDS:

• Sino-US trade
• TPU
• export mode
• difference-in-differences method

Notes

1. In addition to the above study on the impact of TPU on exports, other studies have found that changes in TPU will also affect employment and innovation (Liu and Ma 2016; Pierce and Schott 2016).

2. Defever and Riaño (2017) also find the “twin peak” in the export intensity of firms in Ireland, Uruguay and China.

3. To simplify the figure, this section shows only the TPU distribution in some of the years, but the distribution in the other years is similar to that in Figure 4.

4. If the TPU of a product in the pre-WTO period is greater than the 90th percentile, it is regarded as a product with high TPU. If the TPU of a product in the pre-WTO period is less than the 10th percentile, it is regarded as a product with low TPU.

5. Many processing exporters are original equipment manufacturers (OEMs), which do not need massive marketing. Therefore, the fixed costs of processing exports maybe smaller than those of ordinary exports. However, this will not change the main results.

6. The rise in export frequency mainly increases a firm’s export costs (not the revenue) and then affects the firm’s profits. However, in the model, the firm’s gross profits are proportional to the revenue. Therefore the higher the export frequency is, the more the distortion of the firm’s exports.

7. If we assume that uncertainty also affects variable cost, the result is still valid. The existing empirical studies mainly find that uncertainty affects the extensive margin of exports rather than the intensive margin.

8. In 2015, more than 400,000 foreign-funded firms engaged in processing exports, and the volume of processing exports created by foreign-funded enterprises was far more than 50%.

9. $\alpha$can also be regarded as a profit-sharing ratio, where a smaller $\alpha$ means less bargaining power and profit.

10. The detailed derivation is shown in the appendix.

11. The magnitude is calculated as 0.0216*(75thTPU-25thTPU)/Change in OT_fht.

12. The magnitude is calculated as 0.0217*(75thTPU-25thTPU)/Change in OT_Share_fht.

13. The regression results of other years is still robust and omitted due to the limitation of length.

Additional information

Funding

This work was supported by National Natural Science Foundation of China [grant number 71873044]; Natural Science Foundation of Anhui Province of China [grant number 1908085QG304]; the Fundamental Research Funds for the Central Universities [grant number JS2019HGXJ0036]; National Social Science Foundation Major Program of China [18ZDA064].