Tariffs, Vertical Oligopoly and Market Structure:
Empirical Investigation∗
Tomohiro Ara†

Hongyong Zhang‡

Fukushima University

RIETI

June 2019

Abstract
We study the impact of tariffs on the margins of intermediate-input trade and examine
their impact on optimal tariffs for intermediate inputs. Using China Customs disaggregate
product-level data from 2000 to 2008, we find that (i) China’s WTO accession and the resulting
input import tariff reductions increase China’s input imports through both the extensive andintensive margins; (ii) after China’s WTO accession, China’s input import tariffs are higher,
the more concentrated and hence the less competitive China’s input markets (at the productlevel). We confirm that these findings are robust in alternative specifications. The estimation
results are consistent with the theoretical prediction of the endogenous market structure by
Ara and Ghosh (2017).
Keywords: Tariffs, Intermediate-input Trade, Extensive Margin, Intensive Margin
JEL Classification Numbers: F12, F13∗
This study was conducted as a part of the Project “Analyses of Offshoring” undertaken at the Research Instituteof Economy, Trade and Industry (RIETI). We are grateful to the Ministry of Economy, Trade and Industry (METI) for
providing the micro-data of the Basic Survey of Japanese Business Structure and Activities. We thank Jota Ishikawa
and Hiroshi Mukunoki for helpful comments. We are especially grateful to Keith Head for detailed discussions anduseful suggestions at RIETI 2018 International Workshop “Frontiers in Research on Offshoring.” Financial support
from the RIETI and the JSPS KAKENHI Grant Numbers 16K17106 and 19K01599 is gratefully acknowledged. The
usual disclaimer applies.
†
1 Kanayagawa, Fukushima 960-1296, Japan. Email address: tomohiro.ara@gmail.com‡
1-3-1 Kasumigaseki Chiyoda-ku, Tokyo 100-8901 Japan. Email address: zhang-hong-yong@rieti.go.jp

1

Introduction

Intermediate inputs are a large and growing share of international trade. As shown by Johnson
and Noguera (2012), intermediate inputs account for approximately two thirds of international
trade.1 It is often argued that the rapid growth in intermediate inputs has triggered by “verticalspecialization” or “offshoring” which allows each country to specialize only in a particular stageof final-good production sequences fragmenting production processes across the globe (Yi, 2003,
2010). These pieces of evidence suggest that distinguishing intermediate-input trade from finalgood trade is crucial for understanding current world trade flows.
Despite the importance of intermediate-input trade, the existing literature of trade policy has
not explicitly considered intermediate inputs. For empirical assessments of the optimal tariff,the literature exclusively exploits the theoretical formula that the optimal tariff is the inverse of
a foreign export supply elasticity ϵs (Broda et al., 2008; Soderbery, 2018):
1!
t = s.
ϵShould tariffs on intermediates be lower? Does the optimal tariff just depend on an export supply
elasticity? There is a widely shared intuition that tariffs should be lower (or zero) on imported
inputs, as is clear from criticism of Trump tariffs on steel, aluminum, and other input imports.
Recent theory with numbers corroborates this showing that intermediate inputs quantitatively
matter for welfare; for example, Costinot and Rodrı́guez-Clare (2014) show that a 40% worldwide
tariff results in a 1.1%–7.0% welfare loss, which is more significant with intermediate inputs.
In this paper, we empirically investigate the optimal tariff for intermediate inputs. We buildon the theory by Ara and Ghosh (2017) who show that the extensive margin (“market thickness”)
plays a crucial role in characterizing the optimal tariff (a market is thicker if it accommodates agreater number of firms and more competitive). In particular, the optimal tariff is given by!
t = f (m, n),where m is the number of Home importing firms and n is the number of Foreign exporting firms,
which are either exogenous or endogenous. If m and n are invariant to tariffs in the exogenous
market structure, they find that !
t is higher, the more (less) competitive the Home import (Foreignexport) market. In contrast, if m and n are variant to tariffs in the endogenous market structure,they find that !
t is higher, the less competitive the Home import market and the Foreign export
market. Critically, the difference in the role of the extensive margin leads to the difference in thecharacterization in the optimal tariff. We therefore need to first examine the impact of tariffs on

the margins of intermediate-input trade and then examine their impact on the optimal tariff forintermediate inputs.
1

Decomposing Japan’s imports from China into production use and consumption, Ito (2018) shows that the increasein imports for production use is more prominent than for consumption.

1

To test which market structure is more likely in practice, we focus on China’s input imports.
For being consistent with theory, we treat China as an importing country (Home) and “the rest of
the world (ROW)” as an exporting country (Foreign), and examine the following two hypotheses.
The first hypothesis is concerned with the impact of input tariffs on the margins of intermediateinput trade: reductions in China’s input import tariffs increase only the intensive margin (boththe extensive and intensive margins) for China’s input imports in the exogenous (endogenous)
market structure. The second hypothesis is concerned with the impact of the margins of input
trade on the optimal tariff: China’s input import tariffs are higher, the more (less) competitive
China’s input markets in the exogenous (endogenous) market structure.
Using disaggregate product-level data from 2000 to 2008 collected by China Customs, we findempirical support for the prediction of the endogenous market structure. For the first hypothesis,
we find that reductions in China’s input tariffs increase both margins for China’s input imports,
and the effect is stronger particularly after China’s accession into the WTO. However, tariffs havea statistically smaller impact on the extensive margin than the intensive margin. For the second
hypothesis, on the other hand, we find that after China’s WTO accession, China’s input importtariffs are higher, the more concentrated and the less competitive China’s input markets (at the
product level), where “competitiveness” is measured by the Herfindahl-Hirschman index or theshare of state-owned-enterprises. We also confirm that these findings are robust in alternative
specifications. These include China’s input exports in which the ROW (China) is treat as Home
(Foreign) and the ROW imposes input import tariffs on China’s input exports. We find a similar
pattern between China’s input exports and China’s input imports, thereby giving more support
to the prediction in the endogenous market structure.
Our paper is closely related to the recent literature that tries to identify the impact of tariffs
on the extensive and intensive margins (e.g., Debaere and Mostashari, 2010; Buono and Lalanne,2012). These papers find that, though tariff reductions have a statistically significant impact on
the extensive margin, the impact on the extensive margin is relatively smaller than that on theintensive margin.2 Our finding is different from theirs, because we focus on intermediate-input
trade, and more importantly, because we address whether the margins of input trade play a keyrole in characterizing the optimal tariff. Regarding the impact of the margins of trade on tariff
setting, to the best of our knowledge, there exists no empirical work that explores this channel.
The closest work is Broda et al. (2008) who find that U.S. import tariffs are significantly higher
for products where the U.S. faces higher foreign export supply elasticities.3 Their focus, however,is on the impact of export supply elasticities, not margins of trade.
The rest of the paper is organized as follows. Section 2 discusses the data source and Section
3 presents the regression specifications. Sections 4, 5, and 6 respectively report the estimation
results for China’s input imports, China’s input exports, and other trade. Section 7 concludes.
2

Feng et al. (2017) find that reductions in trade policy uncertainty allow Chinese firms to enter the export markets,
which contributes to China’s export growth after China’s WTO accession.
3
See Soderbery (2018) for the extension of their estimation method to allow for different elasticities of supply forvarious source countries.

2

F IGURE 1 – China’s imports from the ROW for 2000-2010

2

Data

2.1

China’s imports

Our dataset is the census of annual firm-level export and import transactions in China for theperiod from 2000 to 2009, collected by China Customs. In the main analysis, we will use the data
only for 2000-2008 to eliminate the global financial crisis but the result is qualitatively similar.
The dataset contains trade value, quantity, and destination at 8-digit Harmonized System (HS)product classification. We use the publicly available concordance tables for 1997, 2002 and 2007
HS codes to make the product code consistent over time. The original dataset from firm-productlevel is aggregated into the 6-digit HS product level to obtain the total number of importers fromthe ROW (extensive margin) and their average import value (intensive margin) in thousand U.S.
dollar. Our China Customs dataset covers a total of over 5,000 products at the 6-digit level frommanufacturing industries.
We divide our dataset into final goods and intermediate inputs by applying United Nations’classification of Broad Economic Categories. We mainly restrict ourselves to ordinary imports.4
Figure 1 presents China’s imports from the ROW for 2000-2010 within the above restriction. It
is evident from the figure that intermediate-input imports are a large and growing share than
final-good imports in China, which is consistent with the empirical regularity demonstrated by
Johnson and Noguera (2012). Further, the rapid growth is fostered by China’s WTO accession in
December 2001 that leads to reductions in China’s import tariffs. This impacts on intermediateinput imports more prominently than final-good imports.5
4

As stressed by Dai et al. (2016), distinguishing between processing and ordinary trade is crucial for China’s trade.
It is interesting to explore this difference and we also make the empirical estimations for processing imports. See
Tables A.3 and A.4 in the Appendix.
5
For a cross-industry distribution between the two types of trade, see Table A.7 in the Appendix.

3T ABLE 1 – Descriptive statistics on China’s import growth rates for 2000-2008

MarginNo. of obs.

Mean

S.D.

25th

Median75th

Total
Extensive
Intensive

23,70523,70523,705

14.8%
4.6%
10.2%

94.9%
32.0%
86.4%

–13.2%–7.4%–17.1%

13.6%
5.3%
7.8%

41.1%
19.3%
34.0%

(a) Intermediate-input imports
MarginNo. of obs.

Mean

S.D.

25th

Median75th

Total
Extensive
Intensive

14,254
14,254
14,254

23.2%
12.7%
10.5%

116.9%
42.8%
105.1%–19.5%–6.9%–28.5%

20.9%
10.5%
9.6%

64.7%
31.8%
47.2%

(b) Final-good imports
T ABLE 2 – Descriptive statistics on China’s import tariffs in 2005
Types of imports

No. of obs.

Mean

S.D.

25th

Median75th

Intermediate inputs
Final goods

3,116
1,903

8.00
12.34

5.31
7.53

5
8

6.5
12

10
15.85

Table 1 presents some descriptive statics on the import growth rates between 2000 and 2008,
decomposing China’s total imports into the extensive margin and the intensive margin. As before
we report these statistics for intermediate-input imports and final-good imports. Note that thegrowth rates are higher for final-good imports than intermediate-input imports; and the growth
rates of the intensive margin is greater (smaller) than the extensive margin for intermediateinput imports (final-good imports). Comparing these with those in the existing literature, Buono
and Lalanne (2012) show that the extensive (intensive) margin accounts for 22% (33%) of thegrowth rates of total exports for France between 1994 and 2001 without distinguish final goods
and intermediate inputs.6

2.2

China’s import tariffs

The dataset of China’s import tariffs is obtained from the Trade Analysis Information System(TRAINS) database in the World Integrated Trade Solution (WITS) website. For each productat the 6-digit HS level, the tariff dataset provides detailed information on tariff lines, average,
minimum and maximum ad-valorem tariff duties.
6

Focusing on the impact of reductions in trade policy uncertainty, Feng et al. (2017) show that the contribution of
new entrants (i.e., extensive margin) is important for China’s export growth between 2000 and 2006, though they do
not pay attention to the intensive margin.

4

F IGURE 2– China’s import tariffs on the ROW for 2000-2010

Following the literature (e.g., Buono and Lalanne, 2012), we measure tariff reductions facedby the ROW using effectively ad-valorem applied tariffs at the product-country-time level fromthe TRAINS database. In addition, since Foreign is treated as the ROW, we use China’s simple
average of ad-valorem applied tariffs on world exports. This means that world exports include
not only exports from WTO members but also exports from non-WTO members (such as Vietnam
that became a WTO member in January 2007). Our tariff measure takes both types of countries
into account, which is crucial for estimating the optimal tariff.7
Table 2 reports the descriptive statistics on China’s import tariffs on world exports in 2005
for final goods and intermediate inputs. We find that the average import tariffs on intermediate
inputs are lower than those on final goods; and the variations on intermediate inputs are also
lower than those on final goods. To show that these patterns are not specific to a particular year,
Figure 2 illustrates changes in the simple average of China’s effectively applied tariffs on world
exports between 2000 and 2010 during which China’s import tariffs on final goods (intermediate
inputs) decreased from 21.3% (14.2%) in 2000 to 10.8% (6.0%) in 2010. These tariff reductions
are sharper particularly after China’s WTO accession in 2001.
We recognize that the Chinese government does not optimally choose the import tariffs as thetheory predicts. As argued by Broda et al. (2008), however, the insight that the optimal tariff isincreasing in market power does not require governments to maximize welfare. It is also hard
to believe that the Chinese government sets randomly the tariff rates without taking account oftrading environments to which Chinese firms belong. Given considerable tariff variations acrossimported products, our purpose here is to capture these variations by the market thickness thatcrucially affects market power.
7

For example, Brora et al. (2008) focus mainly on non-WTO members because WTO members are constrained tocharge MFN tariffs to other WTO members.

5T ABLE 3 – Descriptive statistics on China’s HHI and SOE share in 2005
No. of obs.

Mean

S.D.

25th

Median

75th

3,031
3,031
3,031
3,031

0.260
0.225
0.186
0.164

0.264
0.241
0.249
0.216

0.072
0.06
0.010
0.026

0.162
0.132
0.081
0.08

0.339
0.292
0.252
0.202

HHI in ordinary imports
HHI in whole imports
SOE share in ordinary imports
SOE share in whole imports

T ABLE 4 – Correlations between the key variables in 2005

HHI in ordinary
HHI in whole
SOE in ordinary
SOE in whole

HHI in ordinary

HHI in whole

SOE in ordinary

SOE in whole10.7590∗∗∗0.0748∗∗∗0.0849∗∗∗10.1259∗∗∗0.1471∗∗∗

10.7970∗∗∗1

Note: ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01

2.3

China’s market thickness

The dataset of “market thickness” is hard to obtain and there is no established measure for it.
It is natural, however, to assume that a thicker market accommodates a larger number of firms
and hence it is more competitive. From this reason, we employ the Herfindahl-Hirschman index(HHI) at the 6-digit HS product level. To complement this, we also use the share of state-ownedenterprises (SOEs) at the 6-digit HS product level.8 Both of the variables are calculated for thecase of ordinary imports and whole imports (i.e., ordinary imports plus processing imports) fromthe China Customs data.
Table 3 reports the descriptive statistics on China’s HHI and SOE shares in 2005. We findthat the HHI is on average higher than the SOE shares (in terms of values and numbers) withgreater variations; and the higher the HHI, the higher the SOE shares across products. Table 4reports simple correlations between the key variables. As expected, the correlation between the
HHI and the SOE shares is significantly positive at the 1% level.

3

Specifications

3.1

Specifications for the extensive and intensive margins

We first consider the response of the extensive and intensive margins to exogenous tariff changes
which is different between the exogenous and endogenous market structures. More specifically,
reductions in China’s input import tariffs increase China’s input imports by an increase in only
8

In China, it is known that SOEs are less productive than non-SOEs (Feng et al., 2017); and the higher the shareof SOEs, the harder for new non-SOEs to enter (Freund and Sidhu, 2017; Yao et al., 2018).

6

the intensive margin (both the intensive and extensive margins) in the exogenous (endogenous)
market structure. To test this hypothesis, let Qjt , mjt and qjt denote China’s input imports, thenumber of Chinese importers, and China’s average imports in product j and year t respectively,
which satisfy Qjt = mjt ∗ qjt . Then, we conduct the following regressions:ln Qjt = α0 + α1 ln(1 + τjt ) + α2 W T Oj + α3 (1 + τjt ) ∗ W T Oj + θj + θt + ϵjt ,ln mjt = β0 + β1 ln(1 + τjt ) + β2 W T Oj + β3 (1 + τjt ) ∗ W T Oj + θj + θt + ϵjt ,ln qjt = γ0 + γ1 ln(1 + τjt ) + γ2 W T Oj + γ3 (1 + τjt ) ∗ W T Oj + θj + θt + ϵjt ,

(1)
(2)
(3)

where τjt is the simple average of China’s effectively applied tariffs, W T Oj is a dummy variablewhich is one after year 2002, θj is the product fixed effects, θt is the year fixed effects, and ϵjt isan error term. We employ the fixed effects model and include the two fixed effects to control forany product-specific and macroeconomic shocks. Further, the WTO dummy is included in (1)-(3)to examine whether China’s WTO accession caused a structural change in China’s imports.9
Our interests lie in the coefficients on ln(1 + τjt ). We hypothesize that α1 , α3 < 0, β1 = β3 = 0,and γ1 , γ3 < 0 in the exogenous market structure (see Lemma 3.1 in Ara and Ghosh (2017)). In
contrast, we hypothesize that α1 , α3 < 0, β1 , β3 < 0, and γ1 , γ3 ! 0 in the endogenous market
structure (see Lemma 4.2 in their paper).
To explore this possibility alternatively, we divide the full sample into “before WTO” (20002001) and “after WTO” (2002-2008), and regress (1)-(3) without the WTO dummy for each subsample. This allows us to investigate whether China’s WTO accession caused a structural change
more clearly. We hypothesize that only for the “after WTO” periods, α1 , β1 and γ1 are the samesigns with those of the full sample with the WTO dummy, while leaving them insignificant for
the “before WTO” periods.

3.2

Specifications for the impact of market thickness

We next consider the impact of market thickness on the optimal tariff, which is different between
the exogenous and endogenous market structures. More specifically, China’s input import tariffs
are higher, the more (less) competitive China’s input markets in the exogenous (endogenous)
market structure. As noted in Section 2.3, we employ the HHI and the SOE shares to measure!jt and SOE" jt ) denote China’s HHI
competitiveness at each product. Let HHIjt and SOEjt (HHIand SOE share in terms of ordinary (whole) imports in product j and year t respectively. Then,ln(1 + τjt ) = δ0 + δ1 HHIjt + δ2 W T Oj + δ3 HHIjt ∗ W T Oj + θj + θt + ϵjt ,ln(1 + τjt ) = η0 + η1 SOEjt + η2 W T Oj + η3 SOEjt ∗ W T Oj + θj + θt + ϵjt ,(5)" jt + ζ2 W T Oj + ζ3 SOE" jt ∗ W T Oj + θj + θt + ϵjt .
ln(1 + τjt ) = ζ0 + ζ1 SOE(7)!jt + ξ2 W T Oj + ξ3 HHI!jt ∗ W T Oj + θj + θt + ϵjt ,ln(1 + τjt ) = ξ0 + ξ1 HHI
9(4)

We also examine a simple Chow test in the time series of China’s imports; see Appendix B.

7(6)

T ABLE 5 – Extensive and intensive margins in China’s ordinary input importsI
ln QjtIIln mjtIIIln qjtIVln QjtVln mjtVIln qjtln(1 + τjt ) ∗ W T Oj

–0.494∗∗∗(0.074)1.472∗∗∗(0.144)–0.232∗∗∗(0.056)–0.261∗∗∗(0.032)0.642∗∗∗(0.058)–0.034(0.023)–0.233∗∗∗(0.055)0.830∗∗∗(0.112)–0.197∗∗∗(0.044)–0.064(0.069)1.962∗∗∗(0.144)–0.137∗∗∗(0.055)–0.096∗∗∗(0.030)0.801∗∗∗(0.058)0.001(0.023)0.032(0.053)
1.162∗∗∗(0.113)–0.138∗∗∗(0.043)

Product FE
Year FE
No. of observations
R2

Yes
No
26,662
0.865

Yes
No
26,662
0.944

Yes
No
26,662
0.799

Yes
Yes
26,662
0.880

Yes
Yes
26,662
0.951

Yes
Yes
26,6620.812

ln(1 + τjt )W T Oj(a) Full sample

I

Before WTO
II

III

IV

After WTOV

VI

ln(1 + τjt )–0.643(0.416)–0.062(0.157)–0.581(0.355)–0.195(0.066)–0.045(0.026)–0.150∗∗∗(0.055)

Product FE
Year FE
No. of observations
R2

Yes
Yes
5,739
0.953

Yes
Yes
5,739
0.983

Yes
Yes
5,739
0.921

Yes
Yes
20,923
0.901

Yes
Yes
20,923
0.963

Yes
Yes
20,923
0.841

∗∗∗

∗

(b) Before/after WTO
Note: Standard errors in brackets (∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01)

We hypothesize that δ1 , δ3 < 0, η1 , η3 < 0, ξ1 , ξ3 < 0 and ζ1 , ζ3 < 0 in the exogenous market
structure (see Proposition 3.1 in Ara and Ghosh (2017)). In contrast, we hypothesize the opposite
signs in the endogenous market structure (see Proposition 4.1 in their paper).

4

Estimation results

4.1

Estimation results of the extensive and intensive margins

Panel (a) of Table 5 presents the impact of tariffs on China’s input imports in (1)-(3). Columns
I-III do not include the year fixed effects in the regression. The coefficients on ln(1 + τjt ) are all
negative at the 1% level, which suggests that reductions in China’s input import tariffs increase
China’s input imports through both the extensive and intensive margins.10 The coefficients on
W T Oj is all positive, which suggests that China’s WTO accession and the resulting import tariff
reductions increase China’s imports through both the extensive and intensive margins.
10

Following Buono and Lalanne (2012), we do not consider a lag in the regressions, but the results are qualitatively
similar if we take one-period lag for China’s import tariffs.

8Columns IV-VI include the year fixed effects in (1)-(3). The coefficient on ln(1 + τjt ) in column
V is significant and negative at the 1% level and the others are not significant, which suggeststhat only the extensive margin increases by reductions in China’s input import tariffs. However,as in columns I-III, the coefficients on ln(1 + τjt ) ∗ W T Oj in columns IV and VI are negative andsignificant, while the coefficient in column V is not significant. This suggests that import tariff
reductions have a small impact on the extensive margin.
Panel (b) of Table 5 reports the estimation results dividing the full sample into the “before
WTO” and “after WTO.” In the “before WTO,” the coefficients on ln(1 + τjt ) are all negative but
not significant, which implies that reductions in China’s import tariffs have virtually no effect on
China’s imports through both of the margins. In contrast, in the “after WTO,” the coefficients onln(1 + τjt ) are all negative and significant, and the results in columns IV-VI mean that reductionsin China’s input tariffs from 10% to 0% increase China’s input imports, extensive margin, andintensive margin by 1.8%, 0.4%, and 1.4% respectively.11 Note that the coefficient in column V issmaller than that in column VI, which confirms that tariff reductions have a smaller impact on
the extensive margin than the intensive margin. While the extensive margin plays a smaller rolein China’s imports, it is true that input tariff reductions have a statistically significant impact
on the margin. Thus we can safely conclude that the result in Table 5 supports the prediction in
the endogenous market structure.
The finding in line with the recent literature showing that tariff reductions have a limited
impact on entry of new firms and instead they mainly induce incumbent firms to increase their
shipments (e.g., Debaere and Mostashari, 2010; Buono and Lalanne, 2012). However, the crucial
difference is that we focus only on the impact of import tariffs between the two countries (China
and the ROW) with fixed distances. In this sense, our estimation is differernt from that typically
employed in the gravity equation. The difference may explain why the estimated coefficients onln(1 + τjt ) are smaller than those in the literature.

4.2

Estimation results of the impact of market thickness

Table 6 reports the impact of market thickness on input import tariffs in (4)-(6). Column I (II)corresponds to (4) where market thickness is measured by China’s HHI without (with) the year
fixed effects. The coefficients on HHIjt are negative (though not significant), but the coefficientson HHIjt ∗ W T Oj are positive at the 1% level, which means that after China’s WTO accession,

China’s import tariffs are higher, the more concentrated and the less competitive China’s market.
Columns III and IV correspond to (5) where market thickness is measured by the SOE share. The
coefficients on SOEjt ∗ W T Oj are positive at the 1% level, which means that after China’s WTO

accession, China’s import tariffs are higher, the higher share of SOEs and the less competitive
China’s market. The results hold not only for ordinary imports but also whole imports. As with
Table 5, the result in Table 6 also supports the prediction in the endogenous market structure.
11

The increase in China’s input imports, for example, is calculated as − ln(1 + 0.10) ∗ (−0.195) = 0.018.

9

T ABLE 6 – Tariffs and market thickness in China’s ordinary input importsln(1 + τjt )

I

II

HHIjt

–0.005(0.028)0.150∗∗∗(0.030)–0.045(0.030)0.114∗∗∗(0.030)

HHIjt ∗ W T Oj
SOEjt
SOEjt ∗ W T Oj

III

IV

–0.041∗(0.022)0.141∗∗∗(0.023)–0.067∗∗∗(0.022)0.071∗∗∗(0.023)! jt
HHI! jt ∗ W T Oj
HHI

V

VI

–0.215∗∗∗(0.033)0.298∗∗∗(0.036)–0.244∗∗∗(0.033)0.275∗∗∗(0.036)

!jt
SOE

VII

VIII

–0.026(0.020)0.028∗(0.036)–0.510∗∗∗(0.011)
Yes
Yes
26,662
0.899

W T Oj–0.474∗∗∗(0.014)–0.533∗∗∗(0.015)–0.468∗∗∗(0.011)–0.524∗∗∗(0.012)–0.505∗∗∗(0.013)–0.568∗∗∗(0.014)0.019(0.020)0.097∗∗∗(0.035)–0.454∗∗∗(0.010)

Product FE
Year FE
No. of observations
R2

Yes
No
26,662
0.889

Yes
Yes
26,662
0.899

Yes
No
26,662
0.889

Yes
Yes
26,662
0.899

Yes
No
26,662
0.890

Yes
Yes
26,662
0.900

Yes
No
26,6620.889!jt ∗ W T Oj
SOE

Note: Standard errors in brackets (∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01)

In every column, the coefficients on W T Oj are negative and statistically significant at the
1% level, which suggests that China’s import tariffs are declined significantly by China’s WTO
accession. This is consistent with Figure 2 in that tariff reductions are sharper particularly after
China’s WTO accession in 2001.

5

China’s input exports

In the previous section, we have treated China as an importing country (Home) that sets tariffs
on world exports, but it is possible to consider the opposite situation in which China is treated an
exporting country (Foreign) that faces import tariffs by the ROW. This section turns to examining
hypotheses 1 and 2 in the context of China’s exports. (Theoretically, we have similar predictions
between exporting and importing.) As in the previous section, we continue to restrict the analysis
to intermediate inputs.

5.1

Specifications

We first consider the response of the extensive and intensive margins to exogenous tariff changes.
Since China is now an exporting country, the first hypothesis is modified as follows: reductions inworld import tariffs increases China’s exports by the increase in only the intensive margin (boththe extensive and intensive margins) in the exogenous (endogenous) market structure. Let Xjt ,10njt and xjt denote China’s input exports, the number of Chinese exporters, and China’s averageexports in productj and year t respectively, which satisfy Xjt = njt ∗ xjt . Then, we conduct thefollowing regressions:WW
ln Xjt = α0 + α1 ln(1 + τjt) + α2 W T Oj + α3 (1 + τjt) ∗ W T Oj + θj + θt + ϵjt ,

(8)

W
W
ln xjt = γ0 + γ1 ln(1 + τjt) + γ2 W T Oj + γ3 (1 + τjt) ∗ W T Oj + θj + θt + ϵjt ,

(10)

W
W
ln njt = β0 + β1 ln(1 + τjt) + β2 W T Oj + β3 (1 + τjt) ∗ W T Oj + θj + θt + ϵjt ,(9)

W is the simple average of world effectively applied tariffs on China’s input exports. We
where τjt

hypothesize the same signs for α1 , α3 , β1 , β3 , γ1 and γ3 as those in the previous section.
We next investigate the impact of market thickness on the optimal tariff, in which case thesecond hypothesis is given as follows: world import tariffs are higher, the more (less) competitive
China’s market in the exogenous (endogenous) market structure. Accordingly, we have
E

E

E

E

W
!jt + δ2 W T Oj + δ3 HHI!jt ∗ W T Oj + θj + θt + ϵjt ,ln(1 + τjt) = δ0 + η1 HHI
W" jt + η2 W T Oj + η3 SOE" jt ∗ W T Oj + θj + θt + ϵjt ,ln(1 + τjt) = η0 + η1 SOE
E

(11)
(12)

E

!jt and SOE" jt are the HHI and the SOE share in China’s input exports. (The variables
where HHIin (4)-(5) are those in China’s input imports.) Note that we examine the relationship between
Foreign competitiveness and Home tariffs in (11)-(12), which has a similar flavor to some of theexisting literature. (As reviewed in the Introduction, the literature has primarily examined therelationship between Foreign export supply elasticities and Home tariffs.) As with (8)-(10), we
hypothesize the same signs for δ1 , δ3 , η1 , η3 , ζ1 and ζ3 as those in the previous section.12

5.2

Estimation results

Table 7 presents the impact of tariffs on China’s input exports in (8)-(10). We find that the resultsin Table 7 are similar with those in Table 5.13 Nonetheless, we find some important differences.
W ) ∗ W T O are significantly positive in columns II and V,
In Panel (a), the coefficient on ln(1 + τjtjwhich suggests that China’s WTO accession and the resulting import tariff reductions decrease
the number of China’s exports. This may reflect that tariff reductions induce foreign entry into
China, which force less productive firms to stop exporting. In Panel (b), the coefficient in column
V is negative but not significant, which suggests that China’s WTO accession and the resulting

import tariff reductions have a smaller impact on the extensive margin in exports than imports.
The result implies that, relative to imports, tariff reductions might not be sufficient to help new
firms to export, or a fixed entry cost might be greater for exports.
12

In contrast to China’s imports, the Foreign government sets same tariffs between ordinary inputs and processing
inputs for China’s exports. From this reason, we only consider the HHI and the SOE share in whole exports.
13
For example, in Panel (b) of Table 7, the results in columns IV-VI mean that reductions in world tariffs from 10%
to 0% increase China’s input exports, extensive margin, and intensive margin by 2.0%, 0.3%, and 1.7% respectively.

11

T ABLE 7 – Extensive and intensive margins in China’s ordinary input exportsWln(1 + τjt)

W T OjWln(1 + τjt) ∗ W T Oj

I
ln XjtIIln njtIIIln xjtIVln XjtVln njtVIln xjt–0.740∗∗∗(0.089)1.635∗∗∗(0.147)–0.238∗∗∗(0.064)–0.478∗∗∗(0.032)0.609∗∗∗(0.053)0.077∗∗∗(0.024)–0.262∗∗∗(0.073)
1.026∗∗∗(0.122)–0.315∗∗∗(0.053)–0.182∗∗(0.087)2.104∗∗∗(0.145)–0.014(0.061)–0.177∗∗∗(0.029)0.730∗∗∗(0.050)0.195∗∗∗(0.022)–0.006(0.075)1.374∗∗∗(0.122)–0.209∗∗∗(0.052)

Yes
No
26,641
0.828

Yes
No
26,641
0.918

Yes
No
26,641
0.727

Yes
Yes
26,641
0.858

Yes
Yes
26,641
0.944

Yes
Yes
26,641
0.746

Product FE
Year FE
No. of observations
R2(a) Full sample

I

Before WTO
II

III

IV

After WTOV

W
ln(1 + τjt
)

VI

0.114
(0.207)0.063(0.056)0.051(0.191)–0.229(0.086)–0.038(0.028)–0.191∗∗(0.075)

Product FE
Year FE
No. of observations
R2

Yes
Yes
5,777
0.951

Yes
Yes
5,777
0.983

Yes
Yes
5,777
0.903

Yes
Yes
20,864
0.878

Yes
Yes
20,864
0.953

Yes
Yes
20,864
0.783∗∗∗(b) Before/after WTO
Note: Standard errors in brackets (∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01)

Next, Table 8 presents the impact of market thickness on import tariffs in (11)-(12). Again,
the coefficients in columns I and II are qualitatively similar between exports and imports. TheE!jt ∗W T Oj are positive at the 1% level, which suggests that after China’s WTO
coefficients on HHI

accession, world import tariffs are higher, the more concentrated and hence the less competitive
China’s market. As with Table 7, however, there are some noticeable differences between exports
and imports. The coefficients in columns III-IV tend to be blurred and the results seem to dependW ) ∗ W T O in column
on the measure of competitiveness. In particular, the coefficient on ln(1 + τjtj

IV is not significant (though negative), which might result from the insignificant effect on theextensive margin for the case of exports. As with Table 6, the coefficients on W T Oj are negativeand statistically significant at the 1% level and thus world import tariffs on China’s exports are
declined significantly by China’s WTO accession.
Overall, we find that the relationship in China’s input imports generally continues to hold in
China’s input exports. Compared with imports, however, the relationship is relatively weaker inexports through the impact on the extensive margin. We may safely conclude that the results inTable 7 and 8 give more support to the prediction in the endogenous market structure.
12T ABLE 8 – Tariffs and market thickness in China’s ordinary input exports
I

II

0.019
(0.022)–0.038∗(0.022)0.088∗∗∗(0.023)0.048∗∗(0.023)Wln(1 + τjt
)
E

!jt
HHI
E

!jt ∗ W T Oj
HHI
E

" jt
SOE
E

" jt ∗ W T Oj
SOE

III

IV

0.025
(0.018)–0.001(0.018)0.010(0.019)–0.227∗∗∗(0.009)Yes
Yes
26,641
0.858

W T Oj–0.202∗∗∗(0.007)–0.242∗∗∗(0.008)0.073∗∗∗(0.019)–0.194∗∗∗(0.008)

Product FE
Year FE
No. of observations
R2

Yes
No
26,641
0.847

Yes
Yes
26,641
0.858

Yes
No
26,6410.847

Note: Standard errors in brackets (∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01)

6Discussions

So far we have restricted our attention to intermediate-input trade only. It is natural to address
whether the results also hold for total trade (i.e., intermediate inputs plus final goods). Similarly,
it is interesting to address whether the estimation results for hypotheses 1 and 2 apply not only
for China but also for different countries. In what follows, we will mainly consider imports (theresults for exports are similar as shown above) and briefly describe the estimation results for thefollowing three datasets: (i) China’s ordinary total imports, (ii) China’s processing input imports,and (iii) Japan’s input imports. The detailed estimation results are relegated to the Appendix.

6.1

China’s ordinary total imports

When regressing (1)-(3) without distinguishing intermediate inputs and final goods, we find thatthe estimation results are qualitatively similar to those in Table 5 (see Table A.1 in the Appendix
for details). The estimated coefficients on ln(1 + τjt ) are relatively bigger in total imports than
input imports, however, which would stem from the fact that China’s import tariffs are higher
for final goods than intermediate inputs (see Figure 2 and Table 2). More interestingly, we findthat the estimated coefficient on the extensive margin is much smaller for total imports than
input trade only. This means that trade liberalization of final goods reduces the number of firmsthat export in a liberalizing country.14
14This is known as “firm delocation” in the literature (see, e.g, Melitz and Ottaviano, 2008). Indeed, we find thatthe coefficient on the extensive margin is positive and statistically significant if we regress (2) for final-good imports.

13

When regressing (4)-(7) without distinguishing intermediate inputs and final goods, we findthat there are several differences between input imports and total imports (see Table A.2). For
example, the coefficients on HHIjt in columns I and II are negative at the 1% level, which are notsignificant in Figure 6. In contrast, the coefficients on HHIjt ∗ W T Oj in the same columns arestill significantly positive at the 1% level, as in Figure 6. The coefficients in the other columns
tend to be blurred and the estimated signs in columns V and VIII are overturned (though they
are not significant). The results in total imports are thus not so clear relative to those in input
imports. The fact that the results fit well with intermediate inputs implies that we might needto distinguish intermediate inputs from final goods to estimate the optimal tariff.

6.2

China’s processing input imports

While we have considered ordinary trade, it is interesting to consider China’s processing trade
because distinguishing between processing and ordinary trade is crucial for China’s trade (Dai etal., 2016). To explore this possibility, we also examine (1)-(7) for processing imports (see Tables
A.3 and A.4).
The most crucial difference arises for hypothesis 1. We find that after China’s WTO accession,
tariff reductions decrease input imports of processing firms, which operates through both of themargins. As shown by Dai et al. (2016), processing firms are systematically different from nonprocessing firms in China: processing firms are smaller and less productive than non-processing
firms and purely domestic firms. Thus competition pressures outweigh benefits from reductions
in trade costs for processing firms who are least productive among other kinds of surviving firms.
The difference between processing trade and ordinary trade is consistent with the caveat raised
by Dai et al. (2016), even though they confine their analysis to firm exporting rather than firm
importing.

6.3

Japan’s input imports

We also examine (1)-(7) for Japan’s input imports using the national survey data, collected by
Japan’s Ministry of Economy, Trade and Industry.15 We aggregate the original firm-level data to
the 3-digit industry-level data to implement our analysis, and use the data only for 2000-2008 to
make it comparable with the baseline estimations (see Tables A.5 and A.6).
The results are similar with those in Tables 5 and 6 for hypotheses 1 and 2, in that (i) importtariff reductions increase Japan’s imports through both of the margins (though tariff reductions
have a smaller impact on the extensive margin); (ii) Japan’s import tariffs are higher, the moreconcentrated and hence the less competitive Japan’s market (at the industry level). However, thesignificance levels are lower than those in Tables 5 and 6, probably due to the 3-digit industrylevel limitation of the dataset.
15

It covers all firms with at least 50 employees and paid-up capital is at least 30 million Japanese yen in mining,
manufacturing and some service industries. We consider only manufacturing industries, leaving about 10,000 firms.

14

7

Conclusion

This paper studies the impact of tariffs on the margins of intermediate-input trade and examine
their impact on optimal tariffs for intermediate inputs. We show that import tariff reductions
after China’s WTO accession increase China’s imports through both the extensive and intensive
margins, though tariffs have a relatively smaller impact on the extensive margin. We also findthat after China’s WTO accession, China’s import tariffs are higher, the more concentrated andhence the less competitive China’s markets. We confirm that these two findings similarly hold inalternative specifications, including China’s input exports. The estimation results are consistent
with the theoretical prediction of the endogenous market structure by Ara and Ghosh (2017).
Our findings suggest that tariff reductions has a statistically significant effect on inducing
entry of new firms into import markets, but this effect is limited relative to an increase in import
shipments of incumbent firms. One of key policy implications from this is that tariff reductions
might not be enough to help new firms to start importing, and this holds not only for final goods
but also for intermediate inputs. To facilitate competition from trade liberalization, governments
may need to implement other policies to reduce entry barriers. Our analysis also suggests thatwhen governments set tariffs, they have to take account of the extent to which tariffs impact on
entry of new firms into import markets.

15

References[1] Ara, T. and Ghosh, A. (2017): “Tariffs, Vertical Oligopoly and Market Structure.” RIETI Discussion
Paper Series 17-E-025.
[2] Broda, C., Limão, N. and Weinstein, D. (2008): “Optimal Tariffs and Market Power: The Evidence.”
American Economic Review, 98(5), 2032-2065.
[3] Buono, I. and Lalanne, G. (2012): “The Effect of the Uruguay round on the Intensive and Extensive
margins of Trade.” Journal of International Economics, 86(2), 269-283.
[4] Costinot, A. and Rodrı́guez-Clare, A. (2014): “Trade Theory with Numbers: Quantifying the Consequences of Globalization.” In Gopinath, G. Helpman, E. and Rogoff, K. (eds.), Handbook of International Economics, 4, 197-261, Amsterdam: North Holland.
[5] Dai, M., Maitra, M., and Yu, M. (2016): “Unexceptional Exporter Performance in China? The Role ofProcessing Trade.” Journal of Development Economics, 121, 177-189.
[6] Debaere, P. and Mostasharic, S. (2010): “Do Tariffs Matter for the Extensive Margin of International
Trade? An Empirical Analysis.” Journal of International Economics, 81(2), 163-169.
[7] Feng, L., Li, Z. and Swenson, D. L. (2017): “Trade Policy Uncertainty and Exports: Evidence from
China’s WTO Accession.” Journal of International Economics, 106, 20-36.
[8] Freund, C. and Sidhu, D. (2017): “Global Competition and the Rise of China.” Peterson Institute forInternational Economics Working Paper Series 17-3.
[9] Ito, B. (2018): “Trade Exposure and Electoral Protectionism: Evidence from Japanese Politician-level
Data.” RIETI Discussion Paper Series 18-E-034.
[10] Johnson, R. C. and Noguera, G. (2012): “Accounting for Intermediates: Production Sharing andTrade in Value Added.” Journal of International Economics, 86(2), 224-236.
[11] M ELITZ , M. J. AND O TTAVIANO, G. I. P. (2008): “Market Size, Trade, and Productivity.” Review of
Economic Studies 75(1), 295-316.
[12] Soderbery, A. (2018): “Trade Elasticities, Heterogeneity, and Optimal Tariffs.” Journal of International Economics, 114, 44-62.
[13] Yao, M., Song, C. and Song, Z. (2018): “State Ownership, Political Connections and Entry Barriers:
Evidence from China.” Applied Economics Letters, 25(17), 1250-1254.
[14] Yi, K.-M. (2003): “Can Vertical Specialization Explain the Growth of World Trade?” Journal of
Political Economy, 111(1), 52-102.
[15] Yi, K.-M. (2010): “Can Multi-stage Production Explain the Home Bias in Trade?” American Economic
Review, 100(1), 364-393.

16

Appendix A
T ABLE A.1 – Extensive and intensive margins in China’s ordinary total importsln(1 + τjt )W T Ojln(1 + τjt ) ∗ W T Oj

I
ln QjtIIln mjtIIIln qjtIVln QjtVln mjtVIln qjt–0.527∗∗∗(0.054)
1.143∗∗∗(0.118)–0.087∗∗(0.043)–0.231∗∗∗(0.023)0.600∗∗∗(0.048)–0.018(0.018)–0.296∗∗∗(0.041)
0.543∗∗∗(0.093)–0.069∗∗(0.034)–0.127∗∗∗(0.051)
1.718∗∗∗(0.118)–0.010(0.042)–0.083∗∗∗(0.022)0.785∗∗∗(0.048)0.011(0.018)–0.044(0.040)0.933∗∗∗(0.093)–0.021(0.033)Yes
No
42,966
0.871

Yes
No
42,966
0.940

Yes
No
42,966
0.817

Yes
Yes
42,966
0.886

Yes
Yes
42,966
0.947

Yes
Yes
42,9660.830

Product FE
Year FE
No. of observations
R2(a) Full sample

I

Before WTO
II

III

IV

After WTOV

VI

ln(1 + τjt )–0.617(0.356)–0.107(0.134)–0.510(0.304)–0.154(0.044)–0.043(0.018)–0.111∗∗∗(0.036)

Product FE
Year FE
No. of observations
R2

Yes
Yes
9,325
0.954

Yes
Yes
9,325
0.981

Yes
Yes
9,325
0.928

Yes
Yes
33,641
0.905

Yes
Yes
33,641
0.961

Yes
Yes
33,641
0.855

∗

∗

∗∗∗

∗∗

(b) Before/after WTO

T ABLE A.2 – Tariffs and market thickness in China’s ordinary total importsln(1 + τjt )

I

II

HHIjt

–0.079∗∗∗(0.023)0.219∗∗∗(0.025)–0.120∗∗∗(0.024)0.180∗∗∗(0.025)

HHIjt ∗ W T Oj
SOEjt
SOEjt ∗ W T Oj

III

IV

0.065∗∗∗(0.019)0.072∗∗∗(0.020)0.031∗(0.019)–0.027(0.020)! jt
HHI! jt ∗ W T Oj
HHI

V

VI

–0.141∗∗∗(0.026)
0.267∗∗∗(0.027)–0.181∗∗∗(0.026)0.235∗∗∗(0.026)

!jt
SOE

VII

VIII

0.038∗∗∗(0.017)–0.021(0.014)–0.547∗∗∗(0.009)Yes
Yes
42,966
0.882

W T Oj–0.541∗∗∗(0.013)–0.611∗∗∗(0.014)–0.488∗∗∗(0.010)–0.546∗∗∗(0.011)–0.548∗∗∗(0.012)–0.618∗∗∗(0.012)0.085∗∗∗(0.017)0.081∗∗∗(0.015)–0.490∗∗∗(0.009)Product FE
Year FE
No. of observations
R2

Yes
No
42,966
0.869

Yes
Yes
42,966
0.883

Yes
No
42,966
0.869

Yes
Yes
42,966
0.882

Yes
No
42,966
0.869

Yes
Yes
42,966
0.883

Yes
No
42,9660.869!jt ∗ W T Oj
SOE17

T ABLE A.3 – Extensive and intensive margins in China’s processing input importsln(1 + τjt )W T Ojln(1 + τjt ) ∗ W T Oj
Product FE
Year FE
No. of observations
R2I
ln QjtIIln mjtIIIln qjtIVln QjtVln mjtVIln qjt–0.033(0.070)1.211∗∗∗(0.142)–0.314∗∗∗(0.054)–0.098∗∗∗(0.027)0.175∗∗∗(0.049)–0.039∗∗(0.019)0.065(0.056)1.036∗∗∗(0.120)–0.275∗∗∗(0.046)

0.262∗∗∗(0.073)
1.719∗∗∗(0.144)–0.237∗∗∗(0.053)–0.009(0.027)0.449∗∗∗(0.052)–0.011(0.019)0.271∗∗∗(0.060)1.269∗∗∗(0.123)–0.226∗∗∗(0.045)

Yes
No
25,547
0.848

Yes
No
25,547
0.936

Yes
No
25,547
0.742

Yes
Yes
25,547
0.859

Yes
Yes
25,547
0.942

Yes
Yes
25,5470.751(a) Full sample

I

Before WTO
II

III

IV

After WTO
V

VI

0.060
(0.277)∗∗∗0.215(0.068)∗ln(1 + τjt )0.113(0.305)0.053(0.102)0.083(0.026)0.132∗∗(0.058)

Product FE
Year FE
No. of observations
R2

Yes
Yes
5,659
0.965

Yes
Yes
5,659
0.991

Yes
Yes
5,659
0.928

Yes
Yes
19,888
0.876

Yes
Yes
19,888
0.948

Yes
Yes
19,8880.782(b) Before/after WTO

T ABLE A.4 – Tariffs and market thickness in China’s processing input importsln(1 + τjt )

I

II

HHIjt

–0.173∗∗∗(0.030)0.250∗∗∗(0.030)–0.189∗∗∗(0.030)0.235∗∗∗(0.030)

HHIjt ∗ W T Oj
SOEjt
SOEjt ∗ W T Oj

III

IV

0.000
(0.000)0.000∗∗∗(0.000)0.000(0.000)0.000∗(0.000)! jt
HHI! jt ∗ W T Oj
HHI

V

VI

–0.202∗∗∗(0.035)0.294∗∗∗(0.037)–0.231∗∗∗(0.034)0.267∗∗∗(0.037)

!jt
SOE

VII

VIII

–0.082∗∗∗(0.031)
0.093∗∗∗(0.030)–0.533∗∗∗(0.013)
Yes
Yes
25,5470.894

W T Oj–0.525∗∗∗(0.013)–0.589∗∗∗(0.015)–0.458∗∗∗(0.010)–0.522∗∗∗(0.012)–0.510∗∗∗(0.013)–0.573∗∗∗(0.014)–0.032(0.031)0.181∗∗∗(0.030)–0.476∗∗∗(0.011)

Product FE
Year FE
No. of observations
R2

Yes
No
25,547
0.884

Yes
Yes
25,547
0.895

Yes
No
25,547
0.883

Yes
Yes
25,547
0.894

Yes
No
25,547
0.884

Yes
Yes
25,547
0.895

Yes
No
25,5470.883!jt ∗ W T Oj
SOE18

T ABLE A.5 – Extensive and intensive margins in Japan’s input importsln(1 + τjt )W T Ojln(1 + τjt ) ∗ W T Oj
Product FE
Year FE
No. of observations
R2I
ln QjtIIln mjtIIIln qjtIVln mtjtVln mdjt

0.193(0.432)0.484∗∗∗(0.117)–0.275∗∗∗(0.120)0.024(0.085)0.132∗∗∗(0.031)–0.095∗∗∗(0.025)0.169(0.385)0.352∗∗∗(0.103)–0.181∗(0.100)–0.045(0.041)–0.022(0.025)–0.014(0.011)–0.119∗∗(0.060)–0.062∗(0.036)0.000(0.015)

Yes
Yes
459
0.945

Yes
Yes
459
0.984

Yes
Yes
459
0.923

Yes
Yes
459
0.991

Yes
Yes
459
0.985

T ABLE A.6 – Tariffs and market thickness in Japan’s input importsln(1 + τjt )

I

II

HHIjt

0.127
(0.131)0.508(0.282)–0.409∗(0.239)0.014(0.023)0.501∗(0.277)–0.404∗(0.238)–0.019(0.030)

Yes
Yes
459
0.990

Yes
Yes
459
0.990

Yes
Yes
459
0.990

HHIjt ∗ W T Oj
W T OjProduct FE
Year FE
No. of observations
R2

III
∗

Note: Standard errors in brackets (∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01)
mtjt denotes the total number of Japanese firms
mdjt denotes the number of Japanese firms that are purely domestic

19

T ABLE A.7 – Industry share in China’s imports from the ROW, 2005
HS2 code

Industry

Intermediate inputs

Final goods

01–05
06–15
16–24
25–27
28–38
39–40
41–43
44–49
50–63
64–67
68–71
72–83
84–85
86–89
90–98

Animal products
Vegetable products
Food and beverage
MineralChemical products
Plastic and rubber products
Leather products
Wood and pulp products
TextilesFootwear and Headgear
Stone
Base metals
Machinery
VehiclesMiscellaneous

1.1%
4.9%
1.6%
4.3%
23.1%
6.1%
1.7%
6.3%
16.9%
0.3%
5.0%
15.9%
8.2%
1.4%
3.2%

6.9%
6.7%
7.0%
0.0%
2.9%
1.2%
1.2%
1.9%
17.0%
2.5%
1.4%
4.4%
28.8%
3.4%
14.7%

Total

100%

100%

20

T ABLE B.1 – Structural change in China’s ordinary input imports
Coef.

ln Qjt
S.D.

t

Coef.

ln(1 + τjt )W T Oj(1 + τjt ) ∗ W T Oj
Constant–0.981∗∗∗

0.050
0.126
0.058
0.105

–19.71
11.18
–4.06
80.94

–0.264∗∗∗

No. of Obs. before WTO
No. of Obs. after WTO
Chow test
p-value

5,739
20,2395,739
20,239756.850.000

5,739
20,2395,739
20,2391.405∗∗∗–0.236∗∗∗8.522∗∗∗

0.859∗∗∗
0.073∗∗∗
3.394∗∗∗

ln mjtS.D.

ln qjt
S.D.

t

–8.94
11.51
2.12
54.29

–0.717∗∗∗

0.033
0.084
0.039
0.070

–21.57
6.51
–7.96
72.93

5,739
20,2395,739
20,2395,739
20,2391062.32
0.000

5,739
20,239

t

Coef.

0.030
0.075
0.034
0.063
5,739
20,239510.7
0.000

0.546∗∗∗–0.309∗∗∗5.127∗∗∗

Note: ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01

Appendix B
In this Appendix, we examine whether China’s accession into the WTO caused a structural breakin the time series of intermediate imports, with a simple Chow test. In particular, we estimate
the following regression:ln Yjt = α0 + α1 ln(1 + τjt ) + α2 W T Oj + α3 (1 + τjt ) ∗ W T Oj + ϵjt ,where Yjt is either China’s total imports, extensive margin or intensive margin. As in the main
analysis, τjt is the effectively applied tariff, W T Oj is a dummy variable, and ϵjt is the error term.
To conduct the Chow test, we need to resort to time series analysis, rather than panel analysis
used in the main text.
Table B.1 reports the estimation result of this test. The coefficients on the WTO dummy andthe interaction term between the tariff variable and the WTO dummy are statistically significant
at the 1% level. The t-tests on these two coefficients suggest that the WTO accession caused asignificant structural change to the relationship between import tariffs and imports, especiallytotal imports and the intensive margin. For total imports, the elasticity of tariffs is −0.980 before
China’s WTO accession, and −1.215(= −0.980 + (−0.235)) after the WTO accession. At the sametime, the estimates of the constant term increased from 8.521 to 9.926(= 8.521 + 1.405). With
regard to the intensive margin, the elasticity of tariffs is −0.716 before and −1.024(= −0.716 +(−0.308)) after the WTO accession, and the corresponding value of the constant term is 5.127
before and 5.673(= 5.127 + 0.546) after the WTO accession. The steeper slope and the greaterintercept show that a structural change occurred after China’s WTO accession. We also find that
the Chow test rejects the null hypothesis of no structural change. Compared with the intensive
margin, the structural change of the extensive margin is relatively weak. The elasticity of tariffs
on the margin is −0.264 before and −0.192(= −0.264 + (0.072)) after the WTO accession, which isconsistent with the finding in Table 5 that tariffs have a smaller impact on the extensive margin

than the intensive margin. These results provide a clear evidence of a structural break in inputs
imports and intensive margin, occurred after China’s accession into the WTO.
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