Chapter 1 examines how trade liberalization affects unit value export prices via firms’' import decisions on input quality and the number of imported varieties. In this chapter, we extend Melitz'’s (2003) model of trade with heterogeneous firms by introducing endogenous quality and endogenous number of imported varieties. The key predictions are as follows. First, an increase in productivity or a reduction in import tariff induces …firms to spend more on each import variety, tend to choose higher-quality imported inputs (called the quality effect), and tend to import more varieties (called the variety effect). Second, more importantly, due to the quality effect and the variety effect, there is a clear pattern of quality ladders: …firms importing more varieties or with higher prod...[ Read more ]

Chapter 1 examines how trade liberalization affects unit value export prices via firms’' import decisions on input quality and the number of imported varieties. In this chapter, we extend Melitz'’s (2003) model of trade with heterogeneous firms by introducing endogenous quality and endogenous number of imported varieties. The key predictions are as follows. First, an increase in productivity or a reduction in import tariff induces …firms to spend more on each import variety, tend to choose higher-quality imported inputs (called the quality effect), and tend to import more varieties (called the variety effect). Second, more importantly, due to the quality effect and the variety effect, there is a clear pattern of quality ladders: …firms importing more varieties or with higher productivity set higher export prices; trade liberalization further raises export prices set by …firms. However, if one adopts the alternative assumption that quality is exogenous across firms, then completely opposite results would be expected: import tariff reduction would decrease export prices, and firms importing more varieties or with higher productivity set lower export prices. We test two competing theories using the merged Chinese …firm-product trade data and the tariff data at the HS8 level by computing …firm specific tariff. My empirical results strongly support all the predictions of the endogenous-quality model, validate the mechanisms of the quality effect and the variety effect, and therefore con…firm the pattern of the “"quality ladder”". Moreover, we …find evidence to support the exogenous-quality model using quality-adjusted price estimates and the subsample of the goods with more homogeneity of quality.

Chapter 2 examines how credit constraints affect the relationship between export prices and …firm productivity. The model extends Melitz (2003) by introducing endogenous quality of variety, credit constraints and marketing costs to a heterogeneous-fi…rm trade model. It predicts a U-shaped relationship between …firm productivity and export prices: the optimal prices set by …firms decrease with fi…rm productivity if the productivity is lower than the threshold; the optimal prices set by firms increase with …firm productivity if the productivity is higher than the threshold. Credit constraints decrease the prices set by the firms with the productivity higher than the productivity threshold, but do not affect the prices set by the firms with lower productivity. Furthermore, the productivity threshold, which demarcates the switching of the relationship between prices and productivity, increases as more severe credit constraints are faced by firms. The empirical application to Chinese bank loans data, Chinese …firm-level data from National Bureau of Statistics of China (NBSC), and Chinese Customs data strongly supports these theoretical predictions, and we …find a signifi…cant impact of credit constraints on the relationship between export prices and fi…rm productivity.

Chapter 3 modi…fies the models of Eaton-Kortum (2002) and Melitz (2003) by introducing multiple sectors, tradable intermediate goods and non-tradable sector and applies them to evaluate of the global welfare impacts of China’'s trade liberalization occasioned by its accession to the WTO. We …find that all countries or regions will gain during China’'s accession to WTO if …firm numbers are assumed to be fixed in these models. Introducing endogenous fi…rm entry and exit affects the aggregate price indexes and Chinese government’s tariff revenue. Consequently, these adjustments magnify the changes in the welfare of each country/region in such a way that some countries gained more, and some actually lost as a result of China’'s trade liberalization. One notable example is that the adjustment to allow for entry and exit of firms increases China’'s estimated welfare gains from 3.788% to 7.159%.