Trade liberalisation and the extensive margin of differentiated goods: Evidence from China

We exploit tariff reductions associated with China's entry into the WTO to evaluate whether the response of trade flows at the extensive margin depends on the degree of product differentiation. We adopt a 4-way difference-in-differences approach to identify the effects as cleanly as possible by comparing market entry of products from each WTO member into China with entry into India and Indonesia. The absolute tariff elasticities are estimated to be relatively large, compared to existing estimates. This is especially true for differentiated goods, for goods with low Chinese demand elasticity and for exports from OECD countries. We provide both new evidence and a theoretical justification for the heterogeneity of these effects across products and countries.

Automated summary

This study examines the effect of product differentiation on trade flows at the extensive margin by exploiting the tariff reductions associated with China's entry into the WTO. Using a four-way difference-in-differences approach, the study compares the market entry of products from each WTO member into China with entry into India and Indonesia. The findings show that the absolute tariff elasticities are relatively large, especially for differentiated goods, goods with low Chinese demand elasticity, and exports from OECD countries.