The Effects Of Destination’s Policy Uncertainty On Export Quality:Theory And Evidence From China

The current stage of China’s economy moving towards high-quality development goals is precisely the period of increasing global uncertainty.How to upgrade export quality is a challenge for China’s economic transition in the international markets where uncertainty is intensifying.Existing research on the determinants of export quality from the demand side mainly focuses on the factors such as GDP and GDP per capita in the traditional gravity model,but less concerning policy uncertainty.At the same time,while literature about the economic effects of policy uncertainty is mostly concentrated in the extensive and intensive margin of export growth,it rarely links policy uncertainty with export quality.This dissertation studies the impacts of economic policy uncertainty and trade policy uncertainty of destination markets on China’s export quality,which not only enriches the literature on uncertainty and export quality in terms of theory and evidence,but also has important practical significance for China’s improvement of export quality and competitiveness under the background of foreign uncertainty.Given the assumption of the relationship between economic policy uncertainty and export fixed costs,I construct theoretical models for connecting economic policy uncertainty with export quality.Refining economic policy uncertainty into international trade,this dissertation uncovers the machnisms of trade policy uncertainty on export quality by extending models of existing literature under the trade theory with heterogeneous firms.Furthermore,I incorporate both policy uncertainties into a unified analytical framework emphasizing the importance of extensive margin.This dissertation measures and characterizes the stylized facts of product quality of Chinese exporters.Using cross-country economic policy uncertainty data compiled by Baker et al.(2016),CEPII-BACI database from 1995 to 2010 and 2000-2006 quarterly-level Chinese Customs database,I proposes the product-level economic policy uncertainty index for the first time,and empirically investigates its impacts and mechanisms on export quality at different levels.In order to analyze the effects of trade policy uncertainty,the dissertation takes the decline of US trade policy uncertainty after China’s accession to the WTO as a quasi-natural experiment.Combined with HS6 industry-level data from 1995 to 2010 and 2000-2006 firm-level matching data,as well as US import tariff data,the effects of trade policy uncertainty on export quality are tested using difference-in-difference methods.The main conclusions based on theoretical models and empirical results are:First of all,raising economic policy uncertainty has a significant positive effect on export quality at both HS6 industry-level and firm-level.When destinations’ economic policy uncertainty rises,some exporters with low performance exit from destination markets because profits are difficult to make up for the additional fixed export costs,and some potential entrants with low performance give up entering because of higher fixed export costs.The increasing exits and decreasing entries of low-quality producers improve overall export quality of the industry.Lower firms caused by entry and exit mechanism makes incumbent exporters face less competition and increase profits,which contributes to the improvement of firms’ export quality.Economic policy uncertainty has heterogeneous effects on different types of products and firms,in the subsample of intermediate products,resource-intensive and labor-intensive products,products exported to developed countries,as well as private firms,single-product firms,and single-destination firms,the effects are even greater.In addition,the form of entry and exit mechanism is markets adjustment,that is,firms within a specific HS6 industry exit from destination markets or reduce their entries into some markets.Secondly,the reduction of US trade policy uncertainty after China’s accession to the WTO suppresses both HS6 industries’ and firms’ export quality upgrading.After the reduction of trade policy uncertainty,the minimum threshold of product quality or production efficiency required for export entry is lower,leading more firms offering low-quality products begin to enter the destination market,thus makes the average export quality of the industry decline.Firms’ entries also intensify market competition,markups and export profits shrank,and their export quality decrease.Similar to economic policy uncertainty,effects of trade policy uncertainty are also heterogeneous among different groups.Larger effects are in the groups of more differentiated products,capital-intensive and technology-intensive products,final products,as well as firms in industries with higher product differentiation and capital intensity,firms located in the east,private firms,single-product firms,and single-destination firms.The policy implications of this dissertation are mainly as follows: Firstly,in the process of taking measures to lower foreign policy uncertainty,the government should prevent exporting firms from falling into low-quality trap;secondly,industry associations should establish and improve product quality evaluation systems to help firms make optimal decisions in the face of uncertainty.Thirdly,firms should enhance brand awareness,and improve export competitiveness by producing high quality products to reduce the risk of export failure caused by increased uncertainty.