US policy spillover(?) – China’s accession to the WTO and rising exports to the EU

The paper analyzes transmission of bilateral trade policies on multilateral exports, due to existence of a global component in fixed export entry costs. Liberalization in one destination market induces redistribution of this global burden across multiple export destinations, thereby lowering the entry threshold in each of them. The empirical analysis exploits reduced US tariff uncertainty upon China’s WTO accession, and examines its effect on China’s EU exports. The main results reveal that: (i) the structure of China’s export boom to the EU conforms to patterns of US tariff uncertainty; (ii) the adjustment takes place at the extensive margin; and (iii) the effect phases out after a few years. Evidence in support of a fixed-cost redistribution is also presented. The findings have implications for the scope of international policy negotiations and provide suggestive evidence on the nature of fixed costs faced by manufacturing firms in low-wage countries.