Choi: The Differential Effect of Globalization in China

This paper studies the differential effect of trade liberalization among 26 Chinese provinces during years 2001-2003. During these years, China lowered its tariffs substantially as it joined the World Trade Organization (WTO). The empirical results suggest that consumer welfare gains from trade are not distributed equally. I find that provinces which are more exposed to globalization than other provinces tend to pass through more of the decline in tariff rates to consumer prices. Provinces with higher FDI and imports compared to Regional Domestic Product (RDP) pass through more of the decline in tariffs to consumer prices, and coastal provinces pass through more of the reduction in tariffs than inland provinces. Also, tariff pass-through is lower on average when Chinese state owned enterprises import than when foreign owned enterprises import. I further show that pass-through increases when provinces become more exposed to globalization. This effect is pronounced for Chinese imports through state owned firms.

 

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