Research On Trade Liberalization And Multiproduct Firms

After entering the World Trade Organization in 2001,China lowered its tariff rates of most products during the following 5-year transition period.According to Finance Yearbook of China,the average tariff rate reduced from 16.4% to 9.9%,with a drop of over 35%.Along with trade liberalization,the reduction of trade cost affects the firms' production and export decision,giving rise to gains of trade and consumer welfare.Recent New-New trade theory emphases such a fact that most industries are dominated by firms that produce more than one product(multiproduct firms).Multiproduct firms contribute a large percent to international trade.In China,they account for almost 80% of the total number of all exporting firms,contributing nearly 92% of the total export value.Therefore,it is of practical significance to analyze the impact of trade liberalization form the angle of multiproduct firms.This paper consists of six chapters.The first chapter discusses the purpose and significance of this research,reviews relevant literature and describes the thesis structure and main contents.In Chapter 2,I analyze the impact of trade liberalization on product scope of multiproduct firms and the welfare gains.First,I develop a two-stage framework of multiproduct firms.In the first stage,a multiproduct firm chooses its spending on product differentiation and process innovation;In the second stage,the firm simultaneously chooses the quantity produced of each good and the number of products produced.The main results are as follows: trade liberalization,which can be modelled as a reduction in trade cost or an increase in the market size,will enhance the profit maximizing product range of a multiproduct firm and optimal spending in both product differentiation and process innovation.Consumers benefit from more variety(love of variety),lower prices,and,notably,from the degree of product differentiation(love of diversity).Next,I review and summarize one major paper in the field of product scope of multiproduct firms.The key finding is that a fast-rising variety introduction fee is necessary and sufficient to induce productive firms to expand their scope in response to globalization.Finally,I use China's tariff data and product-level trade data for 2002-2006 to empirically analyze this topic and I find that firms in differentiated product sector expand export product lines greatly,firms in non-differentiated product sector do not expand export product scope significantly,which is robust to different definitions of varieties.In Chapter 3,the impact of trade liberalization on trade margins is analyzed.First,I review and summarize one classical theory about trade margins of multiproduct firms.The model is built on that of Melitz(2003)and allows firms to produce more than one product.The model assumes heterogeneity in ability across firms and in product attributes within firms.One of the main findings that is relevant to this is topic is that The impact of variable trade costs on aggregate trade flows is also mediated by the optimal choice of product range for each firm.A reduction in variable trade costs:(a)increases the share of products exported to a given country by existing exporters(within-firm product extensive margin),(b)increases the expected number of countries to which a given product is supplied by existing exporters(within firm country extensive margin),(c)increases the share of firms that export(across-firm extensive margin),(d)increases exports of a given product to a given country by a given firm but has an ambiguous effect on average ability.Then I decompose China's export and import into dual margins using micro data from China's Customs Database during 2000-2006.It can be shown that China's export increases mainly at the intensive margin but the extensive margin's contribution to export growth is slightly higher than the intensive margin following approach of time dynamic change after considering product and market-dimension.In Chapter 4,I build a framework to study the relocation of whole varieties within the boundaries of a firm and how trade liberalization affects firm's decision through changes of offshoring cost.I set up a general oligopolistic equilibrium model of multiproduct firms and offshoring,which allows me to study the consequences of globalization in the sense of declining costs of offshoring.It is shown that better prospects for offshoring affect the geographic organization and the product range of a multiproduct firm.Giving a firm the opportunity to offshore the production of labor-intensive products will lead to a broader product range.Considering the offshoring impacts on domestic employment,the model highlights the cannibalization effect of foreign output on domestic output.Having wages endogenized,the model suggests ambiguous tendencies on the cutoff of production.The more do domestic wages respond to changes in offshoring costs and the higher are the benefits from lower wages in domestic production,the more likely is an even extended domestic production in an economy with increasing globalization.In Chapter 5,the effect of trade liberalization on wages is analyzed.The theoretical and empirical literature on this topic is briefly reviewed,and then I summarize the theoretical model I intend to test and illustrate the empirical estimation strategy.Under the OLS approach,the empirical results show that decreasing output tariff rates can induce a higher wage for firms selling final outputs in the domestic market but induces a lower wage for exporting firms relative to non-exporters,whilst decreasing input tariff rates can induce a higher wage for firms sourcing intermediate inputs domestically.Chapter 6 is a summary for the thesis from both the theoretical angle and the empirical angle.