Abstract

This paper presents theory and evidence from disaggregated Chinese data that tariff reductions induce a country’s producers to upgrade the quality of their exports. We first document stylized facts regarding the effect of trade liberalization on export prices. Next, we develop an analytic framework that relates a firm’s choice of quality to its access to imported intermediates. In the model, a reduction in import tariffs induces a firm to increase export quality and raise its export price in industries where the scope for quality differentiation is large and lower its export price in industries where the scope is small. The predictions are consistent with the stylized facts and are highly robust econometrically.

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