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Trade Liberalization, Intermediate Inputs, and Productivity

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Author Info

  • Mary Amiti
  • Jozef Konings

Abstract

This paper estimates the effects of trade liberalization on plant productivity. In contrast to previous studies, we distinguish between productivity gains arising from lower tariffs on final goods relative to lower tariffs on intermediate inputs. Lower output tariffs can produce productivity gains by inducing tougher import competition whereas cheaper imported inputs can raise productivity via learning, variety, or quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which includes plant-level information on imported inputs. The results show that the largest gains arise from reducing input tariffs. A 10 percentage point fall in output tariffs increases productivity by about 1 percent, whereas an equivalent fall in input tariffs leads to a 3 percent productivity gain for all firms and an 11 percent productivity gain for importing firms.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/146.

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Length: 34
Date of creation: 01 Jul 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/146

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Related research

Keywords: Productivity; Economic models; imported inputs; intermediate inputs; foreign ownership; standard errors; international trade; tariff reductions; tariff structure; statistics; statistic; investment goods; competition effect; effects of trade liberalization; protection rates; unskilled labor; tariff rates; tariff data; trade agreement; instrumental variables; domestic prices; tariff cuts; export share; tariff barrier; econometrics; positive externalities; world trade organization; trade theories; fixed effects model; expanding trade; trade policy issues; trade liberalization; equation; import competition; correlation; trade reform; measurement error; import price; imperfect competition; political economy; wholesale price; free trade; tariff reform; dummy variable; trade reforms; skilled workers; trade protection; free trade agreement; survey; reducing tariffs; tariff structures; import prices; nontariff barriers; employment growth; tariff lines; imported intermediates; domestic producers; trade barriers; tariff increases; liberalized trade; foreign trade; tariff change; domestic suppliers; trade volumes; competition ? effect; equations; linear models; dynamic effects; average tariffs; trade area; linear model; world trade; factor markets; free trade area; producer services; transport equipment; polynomial; commercial policy; wholesale price index; wage distribution; international standard; statistical significance; significance levels; regional integration; tariff reduction; uniform tariffs; probability;

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References

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  1. repec:fth:iniesr:430 is not listed on IDEAS
  2. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  3. Ariel Pakes, 1991. "Dynamic Structural Models: Problems and Prospects. Mixed Continuous Discrete Controls and Market Interactions," Cowles Foundation Discussion Papers 984, Cowles Foundation for Research in Economics, Yale University.
  4. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
  5. Hiroyuki Kasahara & Joel Rodrigue, 2005. "Does the Use of Imported Intermediates Increase Productivity? Plant-Level Evidence," University of Western Ontario, Economic Policy Research Institute Working Papers 20057, University of Western Ontario, Economic Policy Research Institute.
  6. Mark J. Roberts & James R. Tybout, 1991. "Size Rationalization and Trade Exposure in Developing Countries," NBER Chapters, in: Empirical Studies of Commercial Policy, pages 169-200 National Bureau of Economic Research, Inc.
  7. Krishna, Pravin & Mitra, Devashish, 1998. "Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of Development Economics, Elsevier, vol. 56(2), pages 447-462, August.
  8. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  9. Levinsohn, J., 1991. "Testing the Imports-As-Market-Discipline Hypothesis," Working Papers 272, Research Seminar in International Economics, University of Michigan.
  10. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
  11. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
  12. Van Biesebroeck, Johannes, 2005. "Exporting raises productivity in sub-Saharan African manufacturing firms," Journal of International Economics, Elsevier, vol. 67(2), pages 373-391, December.
  13. Adriana Schor, 2004. "Heterogeneous Productivity Response to Tariff Reduction: Evidence from Brazilian Manufacturing Firms," NBER Working Papers 10544, National Bureau of Economic Research, Inc.
  14. Noel Gaston & Daniel Trefler, 1997. "The Labour Market Consequences of the Canada-U.S. Free Trade Agreement," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 18-41, February.
  15. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  16. Amiti, Mary, 2005. "Location of vertically linked industries: agglomeration versus comparative advantage," European Economic Review, Elsevier, vol. 49(4), pages 809-832, May.
  17. Alatas, Vivi & Cameron, Lisa, 2003. "The impact of minimum wages on employment in a low income country : an evaluation using the difference-differences approach," Policy Research Working Paper Series 2985, The World Bank.
  18. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
  19. Head, Keith & Ries, John, 1999. "Rationalization effects of tariff reductions," Journal of International Economics, Elsevier, vol. 47(2), pages 295-320, April.
  20. Schor, Adriana, 2004. "Heterogeneous productivity response to tariff reduction. Evidence from Brazilian manufacturing firms," Journal of Development Economics, Elsevier, vol. 75(2), pages 373-396, December.
  21. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  22. Fernandes, Ana M., 2007. "Trade policy, trade volumes and plant-level productivity in Colombian manufacturing industries," Journal of International Economics, Elsevier, vol. 71(1), pages 52-71, March.
  23. Markusen, James R, 1989. "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review, American Economic Association, vol. 79(1), pages 85-95, March.
  24. Feenstra, Robert C & Markusen, James R & Zeile, William, 1992. "Accounting for Growth with New Inputs: Theory and Evidence," American Economic Review, American Economic Association, vol. 82(2), pages 415-21, May.
  25. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity," IMF Working Papers 04/28, International Monetary Fund.
  26. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
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Citations

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Cited by:
  1. Patrick Paul Walsh & Peter McGoldrick, 2005. "Estimating Productivity Dynamics During Institutional Change: An Application To Chinese State Owned Enterprises 1980-1994," Trinity Economics Papers 2000514, Trinity College Dublin, Department of Economics.
  2. Altomonte Carlo & Barattieri Alessandro & Rungi Armando, 2014. "Import Penetration, Intermediate Inputs and Productivity: Evidence from Italian Firms," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 45-66.
  3. Patricia Augier & Olivier Cadot & Marion Dovis, 2013. "Imports and TFP at the firm level: the role of absorptive capacity," Canadian Journal of Economics, Canadian Economics Association, vol. 46(3), pages 956-981, August.
  4. Joel Rodrigue & Hiroyuki Kasahara, 2004. "Does the Use of Imported Intermediates Increase Productivity? Plant-Level Evidence," Econometric Society 2004 North American Summer Meetings 511, Econometric Society.
  5. Mary Amiti & John Romalis, 2007. "Will the Doha Round Lead to Preference Erosion?," NBER Working Papers 12971, National Bureau of Economic Research, Inc.
  6. Ngo Van Long & Horst Raff & Frank Staehler, 2007. "The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure," Working Papers 0710, University of Otago, Department of Economics, revised Jun 2007.
  7. Yvonne Wolfmayr, 2008. "Producer Services and Competitiveness of Manufacturing Exports," FIW Research Reports series I-009, FIW.
  8. McGoldrick, Peter & Walsh, P. Paul, 2007. "Successful Factor Market Competition Pre-Privatisation? China`s eclectic.com," Research Technical Papers 3/RT/07, Central Bank of Ireland.
  9. repec:tcd:wpaper:tep14 is not listed on IDEAS

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