Tariffs and the organization of trade in China

Abstract

This paper examines the impact of China's falling import tariffs on the organization of its exports between ordinary and processing trade. These trade forms differ in terms of tariff treatment and the ability of firms to sell on the domestic market. At the industry level, we find that falling input tariffs cause the share of ordinary trade in gross exports to increase, with both the intensive and extensive margins playing roles. The choice of trade form is tied to a lesser degree to the size of the domestic market, which processing firms cannot access. Consistent with the literature, we show that changes in the organization of trade linked to input tariff cuts caused the share of Chinese domestic content in gross exports to increase at the industry-province level.