Processing Trade, Tariff Reductions, and Firm Productivity: Evidence from
Chinese Firms*

Miaojie Yu**
China Center for Economic Research (CCER)
Peking University

Abstract

This paper explores how reductions in tariffs on imported inputs and final
goods affect the productivity of large Chinese trading firms, with the
special tariff treatment that processing firms receive on imported inputs.
Firm-level input and output tariffs are constructed using highly
disaggregated trade data and firm data from 2000 to 2006. Controlling for
the endogeneity issues of firms' self-selection to processing activities and
of firm-level input and output tariffs, both types of tariff reductions have
positive impacts on productivity that are weaker as firms' share of
processing imports grows. The impact of input tariff reductions on
productivity improvement, overall, is weaker than that of output tariff
reductions, although the opposite is true for non-processing firms only. By
adding firm productivity to economy-wide productivity, both tariff
reductions are found, overall, to contribute to around 42% of firm
productivity growth for firms in the sample and to at least 13.5% of
economy-wide productivity growth during the period.
JEL: F1, L1, 01, 02

Keywords: Processing Trade, Productivity, Trade Liberalization, Firm
Heterogeneity, Chinese Firms

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*I thank Robert Feenstra, Gordon Hanson, Zhiyuan Li, Devashish Mitra, Larry
Qiu, Jose Antonio Rodriguez Lopez, Heiwai Tang, Yang Yao, and Zhihong Yu for
their very helpful comments and constructive suggestions. Financial support
from China's Natural Science Foundation Grant (No. 71003010) is gratefully
acknowledged. I thank the editor, Rachel Griffith, and two anonymous
referees for their very insightful suggestions. All errors are mine.
** China Center for Economic Research (CCER), National School of
Development, Peking University, Beijing 100871, China. Phone:
86-10-6275-3109, Fax: 86-10-6275-1474, E-mail: mjyu@ccer.pku.edu.cn.

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