“Trade Liberalization, Profits and Wages in China: Are Processing Firms Different?” by Professor Robert Elliott
Professor Robert Elliott
The Department of Economics
University of Birmingham
Since joining the WTO in 2002 China’s economy has experienced lower tariff barriers and a massive increase in exports to the rest of the world. An important but little understood dimension of China’s exports led growth is the role of processing firms that process imported intermediates within China for future export. In this paper we examine the relationship between tariff reductions and wages for Chinese firms, paying attention to the special tariff treatment given to processing firms often located in China’s numerous special economic zones (SEZs). Matching manufacturing data with custom trade data for the period 2000- 2006 we find a reduction in output tariffs increases the wages of workers in processing firms relative to nonprocessing firms, an impact that is greater, the greater a firm’s intensity in the use of intermediate imports. For input tariffs we find that wages increase for workers in the more traditional non-processing firms only. However, the impact of tariff reductions on firm profits is more complex. Output tariff reductions are found to decrease firm profits for non-processing firms.