Import Trade Liberalization and Structural Transformation: Evidence from China

As part of the negotiation process to join the WTO, China's average tariff rate on imports decreased from over 40 percent in 1992 to about 15 percent in 2000. I study how the tariff cuts fueled structural transformation leveraging spatial variation in exposure to the tariff cut across Chinese counties due to sectoral variations in the level of tariff cuts and variation in the industrial composition of the counties' economies. Using input-output linkage across industries, I find that tariff cuts in upstream industries significantly reduced measured input costs in counties that specialized in downstream industries. The decreases in measured input costs significantly increased employment in the manufacturing sector and shrunk employment in the agricultural sector between 1990 and 2000. Falsification exercises regressing changes in sectoral shares of employment between 1982 and 1990 on changes in measured input costs between 1990 and 2000 show null effect. I find little evidence of adverse import competition effect from the tariff decreases.