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

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  • Hsu, Wen-Tai

    (School of Economics, Singapore Management University)

  • Lu, Yi

    (School of Economics and Management, Tsinghua University)

  • Wu, Guiying Laura

    (Division of Economics, Nanyang Technological Univeristy)

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 7.1%. The gains are decomposed into a Ricardian component and two pro-competitive ones. The procompetitive effects account for 20% of the total gains. Moreover, the total gains from trade are 13 - 31% larger than what would result from the formula provided by ACR (Arkolakis, Costinot, and Rodríguez-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

  • Hsu, Wen-Tai & Lu, Yi & Wu, Guiying Laura, 2019. "Competition, Markups, and Gains from Trade: A Quantitative Analysis of China Between 1995 and 2004," Economics and Statistics Working Papers 2-2019, Singapore Management University, School of Economics.
  • Handle: RePEc:ris:smuesw:2019_002
    Note: Revised version of Working Paper 12-2017
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    Cited by:

    1. Benedikt Heid & Frank Stähler, 2020. "Structural Gravity and the Gains from Trade under Imperfect Competition," CESifo Working Paper Series 8121, CESifo.

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    Keywords

    Gains from trade; Markups; Pro-competitive effects; ACR formula; Head-to-head competition; Chinese economy;
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