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Competition, Markups, and Gains from Trade: A Quantitative Analysis of China Between 1995 and 2004

Author

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  • Wen-Tai Hsu

    (School of Economics, Singapore Management University)

  • Yi Lu

    (School of Economics and Management, Tsinghua University)

  • Guiying Laura Wu

    (Division of Economics, Nanyang Technological University)

Abstract

This paper provides a quantitative analysis of gains from trade in a model with head-to-head competition using Chinese firm-level data from Economic Censuses in 1995 and 2004. We find a significant reduction in trade cost during this period, and total gains from such improved openness during this period is 9:4%. The gains are decomposed into a Ricardian component and two pro-competitive ones. The procompetitive effects account for 25:4% of the total gains. Moreover, the total gains from trade are 17 ? 27% larger than what would result from the formula provided by ACR (Arkolakis, Costinot, and Rodriguez-Clare 2012), which nests a class of important trade models, but without pro-competitive effects. We find that head-to-head competition is the key reason behind the larger gains, as trade flows do not reflect all of the effects via markups in an event of trade liberalization. One methodological advantage of this paper’s quantitative framework is that its application is not constrained by industrial or product classifications; thus it can be applied to countries of any size.

Suggested Citation

  • Wen-Tai Hsu & Yi Lu & Guiying Laura Wu, 2017. "Competition, Markups, and Gains from Trade: A Quantitative Analysis of China Between 1995 and 2004," Economics and Statistics Working Papers 12-2017, Singapore Management University, School of Economics.
    • Handle: RePEc:ris:smuesw:2017_012
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    2. Qin, Ni & Kong, Dongmin & Wang, Qin, 2024. "Trade liberalization and entrepreneurship: Evidence from China’s WTO accession," Journal of International Money and Finance, Elsevier, vol. 147(C).
    3. Koppenberg, Maximilian & Wimmer, Stefan & Hirsch, Stefan, 2025. "Has corporate greed driven inflation in the European Union? An analysis of the food and beverage industry," Economics Letters, Elsevier, vol. 247(C).
    4. James Markusen, 2023. "Incorporating Theory-Consistent Endogenous Markups into Applied General-Equilibrium Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 8(2), pages 60-99, December.
    5. Zhifeng Wang & Guiying Laura Wu & Qu Feng, 2020. "Productivity of core infrastructure investment in China: An input–output approach," The World Economy, Wiley Blackwell, vol. 43(12), pages 3384-3406, December.
    6. Wu, Mingqin & Yu, Linhui & Zhang, Junsen, 2023. "Road expansion, allocative efficiency, and pro-competitive effect of transport infrastructure: Evidence from China," Journal of Development Economics, Elsevier, vol. 162(C).
    7. Wu, Guiying Laura & Feng, Qu & Wang, Zhifeng, 2021. "A structural estimation of the return to infrastructure investment in China," Journal of Development Economics, Elsevier, vol. 152(C).
    8. Heid, Benedikt & Stähler, Frank, 2024. "Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market," Economic Modelling, Elsevier, vol. 131(C).
    9. Pao-Li Chang & Yi-Fan Chen & Wen-Tai Hsu, 2022. "Labor Market Participation, Income Distribution, and Welfare Gains from Trade," Economics and Statistics Working Papers 6-2022, Singapore Management University, School of Economics.
    10. Georg Schneider & Frank Stähler & Georg U. Thunecke, 2022. "The (Non-)Neutrality of Value-Added Taxation," CESifo Working Paper Series 9663, CESifo.
    11. Xie, Enze & Xu, Mingzhi & Yu, Miaojie, 2024. "Trade liberalization, labor market power, and misallocation across firms: Evidence from China's WTO accession," Journal of Development Economics, Elsevier, vol. 171(C).

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