Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters

TLDR: This article examined Chinese textile and clothing exports before and after the elimination of externally imposed export quotas and found that both the surge in export volume and the decline in export prices following quota removal are driven by net entry.

Abstract: If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. We examine Chinese textile and clothing exports before and after the elimination of externally imposed export quotas. Both the surge in export volume and the decline in export prices following quota removal are driven by net entry. This outcome is inconsistent with a model in which quotas are allocated based on firm productivity, implying misallocation of resources. Removing this misallocation accounts for a substantial share of the overall gain in productivity associated with quota removal. (JEL F13, F14, L67, O14, O19, P23, P33) Institutions that distort the efficient allocation of resources across firms can have a sizable effect on economic outcomes. Hsieh and Klenow (2009), for example, estimate that distortions in the Chinese economy reduce manufacturing productivity by 30 to 50 percent relati ve to an optimal distribution of capital and labor across existing manufacturers. While research in this area often concentrates on misallocation among existing firms, distortions can also favor incumbents at the expense of entrants. Trade barriers such as tariffs and quotas can obviously distort resource allocation along these “intensive” and “extensive” margins, and estimation of the productivity growth associated with their removal is a traditional line of inquiry in international trade. But gains from trade liberalization may be larger than expected if the institutions created to manage the barriers impose their own, additional drag on productivity (e.g., arbitrary enforcement of quotas and tariffs). In that case, trade liberalization induces two gains: the first from the elimination of the embedded institution, and the second from the removal of the trade barrier itself. In this article, we examine productivity growth among Chinese exporters following the removal of externally imposed quotas. Under the global Agreement on Textile and Clothing, previously known (and referred to in this article) as the Multifiber Arrangement (MFA), textile and clothing exports from China and other de veloping

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Table 6: Decomposition of Absolute and Relative 2004 to 2005 Changes in MFA Prices

Table 7: Decomposition of Absolute and Relative Changes in MFA Quality

Table 8: Decomposition of Absolute and Relative 2004 to 2005 Changes in MFA Quality-Adjusted Prices

Table 9: Decomposition of 2004 to 2005 Changes in Relative MFA Market Share, Processing Exports

Table 1: Comparison of Outcomes Under the No-Quota and Auction-Allocation Scenarios

Figure 1: Textile and Apparel Producers' TFP, 2005