Input Trade Liberalization and Welfare Loss of Manufacturing Enterprises: Based on the Perspective of Efficient Market Power
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Yifan Liu
Abstract
Considering that upstream monopoly will lead to an exponential increase in the loss of social welfare, this paper investigates the impact of intermediate goods tariff concession on the welfare loss of manufacturing enterprises from the perspective of input trade liberalization and effective market power. It has been discovered that input trade liberalization significantly reduces the welfare loss of manufacturing enterprises. Due to the game condition in which oligopolies check each other and small businesses “gain from fishing”, the inhibitory impact increases as market share decreases. The mechanism test demonstrates that input trade liberalization boosts the effect of technical competition and minimizes welfare loss through promoting market development degree and reducing factor distortion. In addition, this paper also finds that the effect of input trade liberalization on high monopolistic power enterprises is obviously stronger than that of low monopolistic power enterprises. Furthermore, the impact on non-high-tech industries and capital-intensive enterprises is significant, while that on high-tech industries and labor-intensive industries is not. Therefore, the welfare loss should be investigated from the dual perspective of market structure and marker power. Competitiveness has an important effect, while trade liberalization of intermediate inputs has a pivotal effect on promoting market development and improving resource allocation efficiency.
1 Introduction
The scientific estimation of welfare loss and monopoly power is a fundamental issue in the field of industrial organization. Clarifying the “structure-behavior-performance” relationship between market structure, market power, and welfare losses will be conducive to promoting fairness and efficiency. Early research found that cost of entry and elasticity of substitution are important factors influencing competition in the product market, and costs reduction can weaken monopoly power, and there is a U-shaped relationship between enterprise size and elasticity of substitution (Subramanian, 2013); Lu and Yu (2015) further found that trade liberalization reduces welfare losses by reducing the dispersion degree of enterprise markup and weakening the distortion of resource allocation. However, most of the existing studies focus on the final product, ignoring the multiplication effect of intermediates market power on social welfare losses. At present, the downstream market of China’s manufacturing industry has basically realized free competition, but the monopoly power of the upstream market is still strong (Wang and Shi, 2014). From the perspective of the upstream of the industry, it is of great theoretical and practical significance to investigate the impact of input trade liberalization on welfare loss by clarifying the relationship between the structure, behavior and performance of monopoly enterprises.
Liberalization of input trade reflects the reduction of tariffs on intermediate goods. Since China’s accession to the WTO, China’s imports of intermediate goods have increased from US$79.4 billion in 2001 to US$408.4 billion in 2019, and the weighted average of import tariffs on intermediate goods have decreased from 12.66% to 2.94%, decreased by 76.78%. The literature that is highly relevant to this paper is divided into two branches, the first type of literature examines the impact of trade liberalization on enterprise product quality, productivity level, R&D investment, markup and value-added of export products from the perspective of micro-agent behavior and performance (Shi and Zhang 2016; Brandt et al., 2017; Mao and Xu, 2017; Li Jie et al., 2018; Li and Zhang 2021); The second type of literature examines the welfare effects of intermediate trade liberalization, including labor income distribution (Yu and Liang, 2014; Zhou et al., 2022), energy utilization and carbon emissions (Wu et al., 2022), and individual welfare (Qian et al., 2021).
The purpose of this paper is to identify the causal relationship between the liberalization of input trade and the welfare loss of manufacturing firms, while the accurate estimation of welfare loss depends on the effective measurement of market power. The existing measurement methods can be summarized into two categories: the first type is the accounting method (Domowitz et al., 1986), whose major advantage is that the required data is easy to obtain and the method can reflect the heterogeneity between industries. However, it ignores the influence of factors such as economic cycles and external shocks, and leads to one-sided results. The second type is the empirical method of new industrial organization, represented by Hall (1986) and Roeger (1995), which measures market power by estimating the elasticity of demand or output under the framework of market equilibrium analysis with the help of a series of assumptions. De Loecker and Warzynski (2012, hereinafter referred to as DLW) broke away from the assumptions related to market structure, and measured market power only according to the principle of firm minimization, which is a major breakthrough in the empirical method of new industrial organization. Although the method has been widely used in related research (Damoah et al., 2021, Mukherjee and Chanda, 2021), it has practical difficulties due to the unobservable physical amount of output. Deng et al. (2022) constructed the “eff ective market power” index for the first time, and used the stochastic boundary analysis method (SFA) to eliminate the inefficient term to measure the market power of enterprises. But the SFA method also has some drawbacks, such as when there is a complex correlation between the input indicators of the production function, the selection of indicators may affect the accurate estimation of efficiency terms.
The existing research has laid a solid foundation for us to understand the relationship between the trade liberalization of inputs and the enterprise behavior and performance. At present, although China’s upstream industry is mainly dominated by the natural monopoly of the state-owned economy, there is still a loss of resource allocation efficiency caused by price distortion. Since upstream monopolies can lead to an exponential increase in the loss of social welfare (Browning, 1997), the question that needs to be considered is: Could the trade liberalization of inputs restrain the continuous expansion of welfare losses? Is there a simple linear relationship among market structure, market power and enterprise welfare? What role does market structure, as a portrayal of the market environment, play in the process of the impact of input trade liberalization on welfare losses? Therefore, based on the perspective of trade liberalization of intermediate goods, this paper identifies the impact and internal mechanism of intermediate goods trade liberalization on the welfare loss of manufacturing enterprises by constructing an effective market power index. The marginal contribution of this paper is that: AThis paper summarizes the shortcomings of the current welfare loss estimation method, and draws on the effective market power index proposed by Deng et al. (2022). The two-step method of the DLW model was used to estimate the markup rate to calculate the effective market power, and the welfare loss was measured with the help of the Harberger triangle. To a certain extent, the estimation method of welfare loss at the enterprise level is enriched. BDue to the exponential amplification effect of intermediate market power on welfare loss, this paper identifies the inhibiting effect of trade liberalization on welfare loss from the dimension of intermediate goods, and deeply explores the moderating role of market structure in it, which is a useful supplement to the research on microeconomic activities (such as pricing behavior, performance, welfare) and other related studies from the perspective of intermediate goods. CThis paper divides the actual monopoly power of enterprises into two categories: high monopoly and low monopoly, and explores heterogeneity from multiple dimensions of industry and factor intensity, which is rarely covered in previous studies.
2 Theoretical Hypothesis and Mechanism Analysis
2.1 Measure of Welfare Loss from the Perspective of Effective Market Power
The welfare loss is calculated by calculating the area of the triangle of deadweight losses caused by market forces. And there are three shortcomings in measuring market power based on the traditional “Structure-Conduct-Performance” (SCP) paradigm: First, the marginal price or marginal costs obtained from the accounting data is unreliable; Second, the cross-sectional changes of the industrial structure can actually be captured; Third, empirical studies based on the S-C-P paradigm aim to estimate the simplified relationship between structure and performance (Bresnahan, 1989). The previous two deficiencies can be overcome by the two-step approach proposed by De Loecker and Warzynski (2012). The third shortcoming points out that the existing research simply boils dowm monopoly power to market structure or market power, which is obviously not scientific enough. In fact, monopoly power in economics is a portrayal of the monopoly power of enterprises, but the market share indicates the market structure of the incumbent. The Lerner index, a classic measure of market power, reflects enterprises’ behavior in pricing beyond marginal cost. Therefore, regardless of the causal relationship between structure and behavior, this paper argues that the two should be combined to examine market power. The steps for specific estimation are as follows:
1. Suppose the production function of enterprise i in period t is
Among them, V is a variable input. The output of a firm depends on the input of variable factors
Among them,
Among them,
2. The market power of enterprises originate from Lerner (1934)’s the depiction of the marginal monopoly profit based on the price elevation degree of the monopoly market. This method is based on the traditional S-C-P paradigm, which believes that there is a “linear” logical relationship between the market share and market power of enterprises. However, the positive influence of the market share on the competitiveness of the manufacturers is ignored from the simple perspective of the enterprise pricing, and enterprises with large market share may not adopt monopolistic behavior. Therefore, this paper combines market power and market share to construct an effective market power indicator( ϖ ). The market share (s) is expressed as the proportion of the sales revenue of i enterprises’ j products in the total sales revenue of j products. The specific calculation formula is as follows:
3. The Harberger triangle outlines the loss of welfare caused by the market power of enterprises, which is the area of the triangle ABC in Figure 1. It is calculated as follows:
Harberger Triangle of Welfare Loss
Among them,
Among them, PitQit represents the sales revenue of monopoly enterprises, and PjtQjt represents the total industry revenue.
2.2 Trade Liberalization of Intermediate Goods and Welfare Losses: An Analysis of Direct Effects and Mechanisms
Mechanism Framework Diagram of Input Trade Liberalization Affecting the Welfare Loss of Manufacturing Enterprises
Hypothesis 1: Input trade liberalization can help reduce the social welfare losses caused by manufacturing monopolies.
The factors leading to welfare loss are diversified. For China’s manufacturing industry, the monopoly power of the upstream intermediate goods industry is an important factor in generating welfare costs. Bjertnæs (2007) found that intermediate market power exposes the final goods market to additional social welfare losses, which are even 40 times the welfare costs of a single final goods market monopoly. Therefore, weakening the market power of intermediate goods, reducing the upstream monopoly of manufacturing industry, and enhancing the availability of intermediate goods for small-and medium-sized enterprises are important ways to restrain the expansion of social welfare losses. At present, the upstream industry of China’s manufacturing industry mainly presents the characteristics of natural monopoly, which is caused by differences in technology and productivity (Huang and Ping, 2020). The input trade liberalization weakens the access restriction by reducing the import tariff of intermediate goods, which will enrich the types and quantity of intermediate goods in the domestic market, strengthen the quality of intermediate goods. All these eventually spread to the whole industry through the spillover effect of technology. The more manufacturing enterprises have profited from this, the larger the inhibition effect on welfare losses caused by upstream monopoly.
Hypothesis 2: Market structure plays a role as a moderating mechanism in the process of the impact of input trade liberalization on welfare losses.
The distribution of benefits of trade liberalization is heterogeneous and affected by factors such as market environment and institutional quality (Pavcnik, 2017). Considering that the market structure is a description of the market environment, and the market share reflects the market structure of the incumbent, this paper argues that the inhibitory effect of input trade liberalization on welfare losses will change with the change of market structure. Given that there is no linear logical relationship between market structure and market power, a larger market share does not necessarily lead to a stronger market power. It is more likely that oligopolies will compete with each other and small enterprises will profit from it, namely it may be easier to form a Cournot equilibrium between large enterprises, while small firms tend to implement a leader-follower game and adopt pricing strategies after observing the decisions of large firms (Deng et al., 2022). At this time, although large enterprises have a certain market share, their actual pricing power is limited, while small enterprises have strong independent pricing power. Therefore, for firms with large market shares, although input trade liberalization can affect market power through cost-saving effects (Mukherjee and Chanda, 2021), its intervention ability is limited under the established game model. Thus, the larger the market share, the less inhibiting effect on the welfare loss of input trade liberalization will be. For enterprises with a small market share, potential competitors that cannot be ignored are key to curbing welfare losses (Baumol, 1982). After input trade liberalization, factors such as technology spillovers, cost savings, and profit motives attract the entry of enterprises in the periphery of the industrial chain. The most vulnerable to potential entrants are the internal small and medium-sized enterprises. Therefore, the smaller the market share, the greater the inhibitory effect of intermediate trade liberalization on welfare losses.
Hypothesis 3: The liberalization of input trade inhibits welfare losses by optimizing market development and resource allocation efficiency to strengthen the competitive effect.
Porter (1990) analyzes that national economic development needs to go through four stages: production factor driven, investment driven, innovation driven and wealth driven, among which the first three stages are the main sources of national competitiveness. Reduced tariffs on intermediate goods can help create strong technology spillovers, enhance enterprises’ innovation capabilities, and broaden their product range (Goldberg et al., 2010).Therefore, this paper argues that the liberalization of input trade can reduce the welfare losses caused by monopoly power by expanding market abundance to strengthen market development [1], alleviating factor distortions to enhance the availability of production factors, and relaxing technological restrictions to strengthen technological competition and cost-saving ability among enterprises. On the one hand, the abundant intermediate varieties can help enterprises break through the technical threshold. The improvement of enterprises’ innovation ability enhances the heterogeneity of their own products, and promotes enterprises to get rid of the suppression of rent-seeking monopoly forces under the effect of technological competition, thereby reducing welfare losses. On the other hand, the liberalization of input trade has broken down the barriers on the flow of domestic intermediate goods market. As a result, the production cost of the enterprise is reduced. The overall productivity level of the industry has improved. The misallocation of factor resources and the spatial distribution of productivity were optimized. The monopoly power of oligopolies over the industry has plummeted (Fiorini et al., 2021). Eventually, the loss of benefits is inhibited.
3 Study Design and Data Description
3.1 Empirical Research Strategies
This paper takes manufacturing enterprises as the research object, examining the causal relationship between the liberalization of input trade and the economic activities of firms. China joined the WTO in 2001 and has faced extensive tariff concessions since then. In order to avoid estimation bias due to the time lag of policy measures, this paper lags the intermediate goods trade liberalization variable by one period. Based on the research of Zhu et al. (2018), this paper establishes the following basic model:
Among them, lflssijt is the logarithm of the welfare loss of manufacturing enterprises, i, j, and t refer to the company, industry, and year, respectively.
Among them, sijt represents the market share of enterprises used to depict the market structure.
3.2 Indicator Measurement
3.2.1 The Welfare Loss of Manufacturing Enterprises
Harberger (1954) first established the social cost model to measure the degree of market monopoly. This model describes the welfare loss caused by market forces with the welfare dynamic change caused by the pricing of monopoly manufacturers higher than the marginal cost. Many scholars believe that this algorithm may underestimate the welfare loss caused by monopolies. The reasons include the application of local equilibrium, the emergence of non-price competition, the assumption of unit price elasticity and the calculation of excess profit (Hu and Chen, 2014). This paper argues that the accurate estimation of welfare losses should first clarify the “nonlinear” relationship between market share and market power. Therefore, based on the Harberg triangle, this paper constructs a welfare loss measurement model of China’s manufacturing enterprises on effective market power.
3.2.2 Liberalization of Trade in Intermediate Goods
Based on the research of Wang and Li (2021), this paper measures the import tariff of industry intermediate goods. The specific calculation formula is as follows:
Among them, ϑ jk represents the proportion of input from industry k in industry j, which is calculated from the China Input-Output Table in 2002;
3.2.3 Other Variables
Enterprise level: (1) Total factor productivity of enterprises(tfp). In this paper, based on the study of Head and Ries (2003), the formula tfp=ln (y/n)-s*ln(k/n) is used to calculate the total factor productivity of enterprises. Among them, y is measured by the gross industrial output value, k is the fixed asset, n is the number of employees, and s is the capital contribution in the production function, which is 1/3 (Hall and Jones, 1999). (2) The size of the enterprise (lsize), which is measured as the logarithm of the number of employees employed by the enterprise. (3) The age of the enterprise (lage), which refers to the logarithm of the number of opening years of the enterprise at the sample year. (4) Capital intensity of the enterprise (lkl), which is the logarithm of the ratio of net fixed assets to the number of employees. (5) Enterprise operating profit (lpro), which is measured by the logarithm of the proportion of total profit in the total output value of the period. (6) Corporate finance constraints, including internal financing constraints (lin_fin) and external financing constraints (lex_fin). Internal Financing Constraint = ln[(Current Assets - Current Liabilities)/Net Fixed Assets of the Enterprise], reflecting the accumulation of the enterprises’ own funds and funds in the course of operations. The smaller the value, the greater the internal financing constraints. External financing constraint = ln(accounts payable/sales of the main business of the enterprise), reflecting the level of bank loans and commercial credit financing. The smaller the value, the greater the external financing constraint.
Industry level: (1) Import tariffs on final goods (lout) under four-digit-code industries. Controlling changes in the tariff level of final goods has led to increased competition among manufacturing enterprises from foreign manufacturers. (2) Degree of agglomeration in four-digit-code industries (EG), measured by the EG index, which reflects the barriers to entry for companies entering the industry during the sample period.
3.3 Data Description and Processing
The measures of welfare loss mainly use the data of manufacturing enterprises in China from 2000 to 2014 and the China Statistical Yearbook from 2001 to 2015. In this paper, we first refer to the practice of Huang and Wu (2013) to deflator the monetary variables; Then, the years with serious data missing in the industrial and enterprise database were deleted, and the research of Xie et al. (2008) was used to correct them. Finally, the national economic industry code is unified into GB/T 4754–2002 standard.
Import tariff data are derived from the WITS database. First, this paper harmonizes the product codes of import tariff s into the HS2002 version based on the product-level conversion table provided by the United Nations Statistics Division; Then, drawing on the practice of Brandt et al. (2017), this paper unifies the tariff data under the national economic industrial classification and calculates the simple average import tariff of the final goods; Finally, with the help of China’s Input-Output Table in 2002, the intermediate goods input coefficient calculated, and multiplied and summed with the final product tariff to obtain China’s intermediate goods import tariff from 2000 to 2015.
4 Input Trade Liberalization and Changes in Welfare Losses of Manufacturing Enterprises: Identification of Actual Effects and Mechanisms
4.1 Exploration on the Relationship Between Input Trade Liberalization and the Change of the Welfare Loss of Manufacturing Enterprises
4.1.1 Basic Model of the Actual Effects
This paper mainly focuses on the changes in the welfare loss of manufacturing enterprises under effective market power. As shown in the estimates in columns (1) and (2) of Table 1, the reduction of tariff s on intermediate goods can directly reduce the welfare losses caused by monopolies, regardless of whether control variables are introduced. In order to clarify whether the market structure of enterprises in the context of effective market power has a moderate effect in the process of reducing welfare losses caused by tariff cuts on intermediate goods, this paper introduces market share on the basis of the benchmark model. The regression results are shown in column (3) of Table 1, the interaction coefficient between tariff s and market share is significantly negative. The results show that the impact of input trade liberalization on the change of welfare loss is significantly affected by the market share of enterprises. Due to the existence of a game situation in which oligopolies contain each other and the independent pricing power of small enterprises increases, the inhibition effect increases with the decrease of market share.
Microeconomic Effects of Trade Liberalization in Intermediate Goods
| Explanatory variables:lflss | |||
|---|---|---|---|
| (1) | (2) | (3) | |
| lag_ltariff | 0.0153*** (7.32) | 0.0109*** (4.85) | 0.0105*** (5.23) |
| s | 10.5028*** (38.92) | ||
| lag_ltariff *s | −0.0870*** (−3.09) | ||
| Control variables | No | Yes | Yes |
| Time fixation effect | Yes | Yes | Yes |
| Enterprise fixed effect | Yes | Yes | Yes |
| Constant | 10.2505*** (581.67) | −18.3880*** (−179.32) | −16.5962*** (−177.47) |
| Observations | 249,551 | 151,665 | 151,665 |
| R2 | 0.4238 | 0.7627 | 0.8098 |
Note: The values in parentheses are t-statistics under the enterprise-level clustered standard error, ***,**, and * represent 1%, 5%, and 10% significant levels, respectively. The following tables are the same.。
4.1.2 Robustness and Endogeneity Test
(1) Variable Stability Test
Explanatory variables: In order to exclude the instability caused by different production functions, this paper uses two methods to modify the measurement method of welfare loss variables. First, the output variable in the production function is indicated by the total output of the enterprise, rather than the original value-added of the enterprise (lflss_new); Second, the trans-log function used in the estimation of market power is replaced by the Lagrangian function (lflss_fuction). Explanatory variables: The two and three period lagged term of intermediate tariff s were introduced to test the robustness and the time continuity of trade policies. The regression results show that the inhibitory effect of the decline of intermediate tariff s on welfare loss is robust and time-sustainable.
(2) Sample Bias Handling
The sample in this paper is selected from the China Industrial Enterprise Database from 2000 to 2015, which defines enterprises as all state-owned enterprises and non-state-owned enterprises above designated size. Before 2011, the standard of “above designated size” was sales greater than 5 million yuan, but after 2011, it was changed to sales greater than 20 million yuan. Therefore, in order to maintain the consistency of the sample, this paper deletes the sample of enterprises with sales less than 20 million yuan to correct the sample bias and then investigate the robustness of the basic conclusions.
(3) Data Extremum Processing
In this paper, the explanatory variables and the core explanatory variables are winsorized by 1% on both sides to verify the stability of the sample data and exclude the interference of extreme values. The results are shown in columns (1) and (2) of Table 2, and there is a significant positive correlation between intermediate tariff s and welfare losses, which is consistent with the basic regression results.
Robustness Tests for Sample Changes and Estimation Method Changes
| Deviation correction | Extremum processing | Reform of the exchange system | Difference-in-diff erences | |
|---|---|---|---|---|
| (1) | (2) | (3) | (4) | |
| lag_ltariff | 0.0110*** (4.82) | 0.0094*** (4.22) | 0.0109*** (4.85) | |
| did | −0.1552*** (−71.97) | |||
| Control variables | Yes | Yes | Yes | Yes |
| Time fixation effect | Yes | Yes | Yes | Yes |
| Enterprise fixed effect | Yes | Yes | Yes | Yes |
| Constant | −18.3695*** (−173.94) | −18.2677*** (−177.63) | −18.3880*** (−179.32) | −16.5751*** (−146.08) |
| Observations | 146,443 | 151,665 | 151,665 | 132,258 |
| R2 | 0.7603 | 0.7587 | 0.7627 | 0.7902 |
(4) Revision of the Factors of Change in the Exchange Rate System
Aghion et al. (2009) argue that exchange rate institutional flexibility can have a negative impact on a country’s productivity; Wang et al. (2020) further found that the difference in the expected output growth rate of enterprises under the two exchange rate regimes is realized through productivity progress. And the greater the exchange rate fluctuation, the slower the output growth rate of enterprises in the next period. Considering the major reform of the RMB exchange rate mechanism in 2005, this paper performs regression analysis after excluding the data from 2005 to 2006, and finds that the impact of intermediate trade liberalization on the change of welfare loss is basically consistent with the basic regression conclusion.
(5) Endogeneity and Optimization of Measurement Methods
The mainstream method to solve endogeneity is to find instrumental variables to perform two-stage least squares estimation of the model. Admittedly, for the purposes of this paper, it is difficult to find a suitable tool variable. Fuchs-Schündeln and Hassan (2015) state that natural experiments can describe causality and solve endogeneity problems. Scholars such as Lu and Yu (2015) and Wang and Li (2021) examine the economic effects of intermediate trade liberalization by using China’s accession to the WTO as a quasi-natural experiment. Based on the above research, in order to further verify the robustness of the core conclusions, eliminate endogenous problem, and optimize the measurement method, we extend the sample year to 1997 and use 2001 as the time point of policy shock, and use the difference-in-difference method for robustness analysis. The treatment effect model was constructed as follows:
Among them,
(6) Quantile Regression
The basic model mainly uses the mean reversion method to explore the impact of intermediate trade liberalization on the condition expectation of welfare loss. In order to comprehensively investigate the impact of input trade liberalization on the distribution of welfare losses, this paper selects four quantiles of 0.25, 0.5, 0.75 and 0.85, and performs quantile regression. We found that the basic regression conclusions were robust at different quantiles.
4.2 Exploration of Channels for the Liberalization of Input Trade to Affect the Change of Welfare Loss
From hypothesis 3, liberalization of input trade can inhibit the expansion of welfare losses by expanding market abundance to strengthen market development, and optimizing the efficiency of resource allocation to form technological competition and cost saving effects. Since the availability of production factors and the rational allocation of resources are important factors for reducing welfare losses, this paper draws on the research of Jiang (2022) to focus on the identification of the causal relationship of input trade liberalization on mediator. Therefore, this paper constructs the following mediation model:
Among them, d_market represents the reciprocal of the market development index of prefecture-level cities. The data comes from the research of Wang et al. (2016), which uses the statistical bulletin of prefecture-level cities and the statistical yearbooks of each province to calculate the market development score. Tfp_theil represents the efficiency of resource allocation, which is measured by the degree of dispersion of enterprise productivity. In this paper, the degree of productivity imbalance distribution among enterprises is measured by the Theil index. The model regression results are shown in Table 3. Columns (1) is the results of basic regression. Columns (2) and (3) are the effects of input trade liberalization on the mediator. This paper finds that the deeper the degree of trade liberalization of inputs, the higher the market development score, the smaller the degree of unbalanced distribution of productivity, and the higher the efficiency of resource allocation. As a result, the mediating effect is significant.
Mechanism of The Impact of Intermediate Trade Liberalization on Welfare Losses
| Welfare loss | Market development | Productivity dispersion | |
|---|---|---|---|
| (1) | (2) | (3) | |
| lag_ltariff | 0.0109*** (4.85) | 0.0004** (1.98) | 0.0008*** (4.97) |
| Control variables | Yes | Yes | Yes |
| Time fix effect | Yes | Yes | Yes |
| Enterprise fix effect | Yes | Yes | Yes |
| Constant | −18.3880*** (−179.32) | 0.8264*** (88.82) | 0.1025*** (15.20) |
| Observations | 151,665 | 157,922 | 157,233 |
| R2 | 0.7627 | 0.7620 | 0.4238 |
5 Further Exploration: the Heterogeneity of the Impact of Input Trade Liberalization on the Change of Welfare Loss
In order to further explore whether there is heterogeneity in the core conclusions, this part conducts the following detailed research from the perspectives of the actual monopoly ability, industry nature, and factor density of enterprises.
First of all, enterprises that with monopoly power higher than the industry average are classified as high monopoly enterprises, and those below the average are classified as low monopoly enterprises. According to the results listed in columns (1) and (2) of Table 4, it can be seen that the level of effective monopoly power does not affect the inhibitory effect of input trade liberalization on welfare loss, but the impact effect on enterprises with high monopoly power is significantly greater than that of enterprises with low monopoly power. This conclusion excludes the case of “Cournot equilibrium” among oligopolies and echoes the moderating effect. The results show that for enterprises with high effective market power, the inhibitory effect of the liberalization of input trade on welfare loss is significantly greater than that for than enterprises with low effective market power.
Heterogeneity Test of Actual Monopoly Power, Industry Nature, and Factor Intensity
| High monopoly power | Low monopoly power | High technology | Non-high-tech | Labor | Capital | |
|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | |
| lag_ltariff | 0.0245*** (4.35) | 0.00752** (2.42) | 0.0286 (1.56) | 0.00968*** (3.97) | 0.00263 (0.20) | 0.00901*** (3.24) |
| Control variables | Yes | Yes | Yes | Yes | Yes | Yes |
| Time fix effect | Yes | Yes | Yes | Yes | Yes | Yes |
| Enterprise fix effect | Yes | Yes | Yes | Yes | Yes | Yes |
| Constant | −17.79*** (−65.23) | −17.58*** (−108.18) | −18.52*** (−20.37) | −18.53*** (−149.47) | −17.04*** (−25.34) | −18.44*** (−132.36) |
| Observations | 89847 | 141772 | 20415 | 211204 | 31954 | 187070 |
| R2 | 0.576 | 0.624 | 0.655 | 0.589 | 0.630 | 0.584 |
| Test for coefficient differences of lag_ lntariffgroups between [P value] | −0.017*** [0.000] | −0.019*** [0.000] | 0.006* [0.052] | |||
Note: The meaning of the coefficient difference P value between groups is the probability that the difference between the lag_lntariff estimated coefficients in different groups is not equal to 0, which is obtained based on 1000 bootstrap times.
Secondly, according to the classification standard of high-tech industries implemented by the National Bureau of Statistics, this paper divides the samples into two categories : high-tech and non-high-tech [1], based on four-digit industry codes, and examines the effect of technological competition from whether they are in high-tech industries. The results of columns (3) and (4) of Table 4 show that the intermediate goods tariff concession has no significant effect on the welfare loss of enterprises in high-tech industries, but has a significant effect on the inhibition of welfare losses in non-high-tech industries. The reason is that the high-tech industry already has a high barrier to entry, with few potential competitors for the incumbent enterprises, and the intermediate goods used may need to be specially customized, so the impact of the intermediate goods tariff concession on the welfare loss of such enterprises is not significant. However, for non-high-tech industries, the entry threshold is relatively low. The competition between incumbent enterprises or competition from potential entrants leads to a great increase in the level of factor marketization and product marketization, and the efficiency of resource allocation is improved. At the same time, increased competition leads to tariff concessions on intermediate goods, which can significantly reduce welfare losses.
Finally, according to the factor intensity of enterprises, the samples are divided into capital-intensive and labor-intensive enterprises [1]. The results are shown in columns (5) and (6) of Table 4, and the impact of tariff concessions on intermediate goods on the welfare loss of capital-intensive enterprises is significant, but not on labor-intensive enterprises. The reason is that labor-intensive enterprises require a large amount of labor, such as the clothing and textile industry, food processing industry and other industries, which are more sensitive to the cost of labor factors and have less demand for imported intermediate goods. Therefore, the impact of the reduction of tariff s on intermediate goods on the welfare loss of such enterprises is not significant. Capital-intensive industries have higher requirements for capital investment, which also need high-tech import factors (such as advanced technology and equipment). Therefore, the reduction of tariff s on intermediate goods can significantly inhibit the welfare losses caused by the monopoly power of such enterprises.
6 Conclusion and Policy Implications
Welfare loss is an important source of inefficient resource allocation. How to reduce the loss of welfare from the perspective of intermediate goods, give full play to the decisive role of the market in the allocation of resources, and enhance the core competitiveness of China’s manufacturing industry is the focus of current social attention. This paper examines the impact of input trade liberaliztion on welfare loss in the manufacturing industry, and finds that: (1) Liberalization of input trade can curb the welfare losses caused by the monopoly of manufacturing enterprises. However, due to the influence of market structure, the inhibition effect will increase with the decrease of market share; (2) Liberalization of input trade reduces welfare losses by strengthening market development and improving the efficiency of resource allocation; (3) According to the heterogeneity analysis of the actual monopoly ability, industry nature and factor intensity of enterprises, it shows that the inhibition effect of input trade liberaliztion on the welfare loss of high-monopoly enterprises is greater than that of low-monopoly enterprises, and the impact on non-high-tech industries and capital-intensive enterprises is significantly positive, but the impact on high-tech industries and labor-intensive enterprises is not significant. Based on the above conclusions, this paper puts forward the following policy implications.
First, we should continue to promote input trade liberalization in an efficient manner, adhere to the strategy of “promoting reform through opening-up”, and guard against the continuous expansion of the monopoly power of enterprises. Government departments should change the import restriction to encourage the import of high-tech, high-quality and low-cost intermediate goods. In particular, import tariffs on high-tech equipment, key components and other factors should be lowered to enhance the availability of production factors for enterprises. We should take the initiative to reduce the trade barriers with other countries through bilateral or multilateral negotiations, and minimize entry barriers for imported intermediate goods. In addition, we should implement the strategy of “multilateralism”, actively establish good trading partner relations with countries in the sub-region, and strengthen bilateral and multilateral competition and cooperation by joining RCEP, CPTPP and other agreements, so as to optimize the living environment of domestic small and medium-sized enterprises.
Second, we should pay attention to the competitive effect caused by imported intermediate goods, encourage enterprises to increase R&D investment, further promote market-oriented reforms, and drive internal and external economic circulations with innovation. This paper finds that input trade liberalization strengthens market development through technological competition, and improves the efficiency of resource allocation through cost saving, and thus inhibits welfare loss. Therefore, the reduction of the industry access threshold requires enterprises to continuously optimize product layout, diversify intermediate varieties and quality, and increase R&D investment, so as to counter monopoly forces by forming effective competitiveness. Government departments should also strengthen R&D subsidies to drive the modernization of the industrial chain with innovation. At the same time, government departments should continue to deepen the reform of the economic system, adhere to the concept of “factor flow” for the “14th Five-Year Plan” period, rely on diversified channels to break the upstream monopoly, and provide a fair playing field for small and medium-sized enterprises.
Third, we should distinguish the actual monopoly power, industry nature, and factor density of enterprises, and then implement differentiated industrial management strategies. Specifically, first, in view of rent-seeking monopolistic behavior, we should actively adopt effective anti-monopoly measures to encourage the innovative behavior of leading enterprises in the industrial chain, so as to promote the development of small and medium-sized enterprises. Second, we should efficiently promote market-oriented reforms and increase R&D subsidies. At the same time, we should regularly review the authenticity and foresight of R&D patents in high-tech industries, and put an end to fraud for subsidies at the root. Third, in the context of the continuous input trade liberalization of trade in intermediate goods, we should formulate fair and effective income redistribution policies and guard against social welfare loss caused by the market power of labor factors.
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Articles in the same Issue
- Minimum Wages, Cost-Price Pass-Through and Real Welfare Effect of Households
- Shock Propagation in Dual-Circulation Production Networks: Characteristics and Simulation
- Study on Causes of Differences in Tax Burden of Value-Added Tax from the Perspective of Industrial Linkage
- Robot Application and Labor Force Employment: Substitution or Complementation? —An Empirical Analysis Based on the Data from 22 Economies
- China’s Economic Growth: The “Two-Dimensional Driving Effect” of Data Factors
- Input Trade Liberalization and Welfare Loss of Manufacturing Enterprises: Based on the Perspective of Efficient Market Power
