Trade Liberalization and Export Variety: A Comparison of China and Mexico

Transcription

1 Trade Liberalizaion and Expor Variey: A Comparison of China and Mexio by Rober Feensra Deparmen of Eonomis Universiy of California, Davis and NBER Hiau Looi Kee The World Bank Marh 2005 * Researh funding from he World Bank is ordially aknowledge. The findings, inerpreaions, and onlusions expressed in his paper are enirely hose of he auhors, and do no neessarily represen he view of he World Bank, is Exeuive Direors, or he ounries hey represen.

2 2 1. Inroduion The hallmark of he endogenous growh models (Romer 1990, Grossman and Helpman, 1991) is heir fous on he reaion of new or higher qualiy produs, and heir effes on produiviy and eonomi growh. Opening a ounry o rade opporuniies will ypially inrease he produ variey of impors available, and may also inrease he variey of expors, boh of whih onribue o growh. Despie he miroeonomi fous of hese model, he link beween rade and growh is usually assessed a a more aggregae level, in whih ase he ausaliy beween he wo is unlear (Frankel and Romer, 1999, Dollar and Kraay, 2001, Rodriguez and Rodrik, 2000). To move beyond hese aggregae saisis, we need more deailed informaion on he produ variey of raded goods, and one he link beween produ variey and produiviy. Exising mehods of measuring produiviy growh makes an aemp o deal wih qualiy hange in inpus and oupus by disinguishing faors by heir skill haraerisis, suh as eduaion of workers, or he speed of ompuers. Bu he issue of inpu or oupu variey has reeived very lile aenion due o is inheren diffiuly. In he language of index numbers, an expansion in he range of inpus or oupus is a new goods problem: an good ha is newly available will have an observed prie and quaniy, bu no orresponding prie or quaniy he year before. The availabiliy of his new good will allow he firm o produe a leas as muh oupu a he same os, and aordingly, here is a produiviy gain. The goal of his paper is o show how hanges in expor variey an be measured, and illusrae he resuls obained for China and Mexio. The appliaion o China and Mexio is moivaed by he hanges in rade poliy faing hose ounries in reen years. Mexio joined he Norh Ameria Free Trade Area in 1994,

3 3 whih subsanially lowered i ariffs o he U.S. and Canadian markes. Wha has happened o Mexio s expor variey sine ha ime? Based on ross ounry evidene, Kehoe and Ruhl (2002) argue ha goods ha were raded he leas before ariff liberalizaion aoun for a disproporionae share in rade following he reduion of rade barriers. China was aeped ino he WTO in 2000, bu was implemening ariffs reduions of is own before ha ime, as well as benefiing from low ariffs abroad. We will invesigae expor variey in Mexio over ompares o ha of China. Afer briefly reviewing he lieraure on he new goods problem in seion 2, we presen ou resuls for CES produion and uni-os funion in seion 3. In seions 4 and 5 we disuss he empirial appliaions o expor variey growh in China and Mexio, and onlusions are given in seion Lieraure Review The issue of ompuing produiviy gains for a firm wih new inpus is quie similar o ha of ompuing welfare gains for a onsumer due o new good. Hik s (1940) reommended a mehod o ahieve his: a newly available good should be evaluaed a is reservaion prie when i is no available, where demand is zero. When he new good beomes available hen demand is posiive and so is prie is lower han he reservaion prie. Thus, he fall in pries an be ompued as he differene beween he reservaion and observed pries, and inegraing he demand urve beween hese pries is a measure of he onsumer welfare gain due o he new good. Examples of where his approah has been applied empirially inlude Grilihes and Cokburn (1994) and Bernd, e al (2002) for generi drugs, and Hausman (1997, 1999) for breakfas ereals and ellular elephones.

4 4 The produiviy gain from a new inpus for a firm is illusraed in Figure 1. Given oupu Q = Q, he inpus would like along an iso-quan like ha illusraed. If only inpu 1 is available, hen he oss of produing Q would be minimized a poin A, wih he budge line AB. Bu if inpu 2 is also available, hen he oss are insead minimized a poin C, wih a fall in oss. This illusraes he benefis of inpu variey. For a firm or an eonomy we an also measure he benefis from oupu variey. Suppose ha he se of feasible varieies in a ounry will lie along a srily onave ransformaion urve, as shown in Figure 2, where we draw he ransformaion fronier beween wo produ varieies q 1 and q 2. For a given ransformaion urve, and given pries, an inrease in he number of oupu varieies will raise revenue. For example, if only oupu variey 1 is available, hen he eonomy would be produing a he orner A, wih oupu revenue shown by he line AB. Then if variey 2 beomes available, he new equilibrium will be a poin C, wih an inrease in revenue. This illusraes he benefis of oupu variey. There are several sudies ha measure he benefis of inpu or oupu variey for produiviy. Feensra e al (1999) provide an appliaion of his mehod o indusry produiviy growh in Souh Korea and Taiwan. The daa used o measure variey are he disaggregae expors from hese ounries o he Unied Saes. Those auhors analyze he relaionship beween hanges in expor variey and he growh in TFP aross Souh Korea and Taiwan, in sixeen seors over The resuls lend suppor o he endogenous growh model. They find ha hanges in relaive expor variey (enered as eiher a lag or a lead) have a posiive and signifian effe on TFP in nine of he sixeen seors. Seven of he seors are lassified as seondary indusries, in ha hey rely on as well as produe differeniaed manufaures, and herefore seem o fi he idea of endogenous growh. Among he primary indusries, whih rely

5 5 more heavily on naural resoures, he auhors find mixed evidene: he orrelaion beween expor variey and produiviy an be posiive, negaive, or insignifian. In addiion, he auhors also find evidene of a posiive and signifian orrelaion beween upsream expor variey and produiviy in six seors, five of whih are seondary indusries. Funke and Ruhwedel (2001) have applied he same measure of produ variey o analyze eonomi growh aross he OECD ounries. Using a panel daase of 19 ounries over , hey find ha a ounry s expor variey relaive o he U.S. is a signifian deerminan of is GDP per-apia. Noie ha hese measures of produ variey, whih are onsrued from highly disaggregae rade daa, are unlikely o suffer from he endogeneiy problem ha plagues aggregae rade flows (as addressed by Frankel and Romer, 1999). Therefore, he onsruion of produ variey indexes and heir orrelaion wih TFP offers an alernaive way o assess he imporane of rade in eonomi growh. More reenly, Hummels and Klenow (2004) deompose he growh of world rade ino ha par due o ounries exporing new produs wha hey all he exensive margin and ha par due o ounries exporing more of he same produs he inensive margin. They find ha exensive margin aouns for wo-hirds of he greaer expors of larger eonomies, and one-hird of heir impors. Conversely, Chrisian Broda and David Weinsein (2004) measure he impa on welfare for he imporer. For he Unied Saes, hey find ha upward bias in he onvenional impor prie index (due o ignoring produ variey) is approximaely 1.2 peren per year, implying ha he welfare gains from umulaive variey growh in impors are 2.8 peren of GDP in Finally, Feensra and Kee (2004) esimae he impa of new goods on produiviy growh for a sample of exporers. Our empirial appliaion o China and Mexio will rely on heir resuls.

6 6 3. Measuring Produ Variey Le us begin wih he CES produion or ransformaion funion, y! /(!( 1) ' (!( 1) /! $ = f (x,i ) = %* ai (xi ) ",! > 1, (1) % & i) I "# where a i > 0 are parameers and I denoes he se of inpus available in periods =0,1, a he pries p i. For σ>1 hen (1) is a onave produion funion, as in Figure 1, whereas for σ<0 hen (1) is a ransformaion funion beween oupus endowmen y. The CES os/revenue funion dual o (1) is, x i, as in Figure 2, given some resoure (p, I ) ) = ' * b ' ( i# Ii i 1 ( p ) i "! & $ $ % 1/ ( 1"! ),!! > b i " ai 1,. (2) For σ>1 hen (2) is a uni-os funion, and he inpu demands are ompued from (2) as x i! i = y (! / p ), =0,1. Bu for σ<0 hen (2) shows he revenue ha an be obained along a i! given ransformaion urve, and he oupu supply funions are ompued as x = y (! / p ), =0,1. Noie ha he parameers a i > 0 and b! a " 0 allow he i i > whih is essenial for modeling aual demands or supplies. i x i o differ aross goods, We are ineresed in deermining how muh oss are redued or revenue is inreased when he se of produ varieies expands. To his end, le us firs onsider he ase where I 0 = I 1 = I, so here is no hange in he se of goods. In ha ase, he raio of oss/revenues beween wo periods an be measured by he prie index due o Sao (1976) and Varia (1976): 1 1 The proofs of all heorems an be found in he soures ied.

7 7 Theorem 1 (Sao, 1976; Varia, 1976) If he se of inpus available is fixed a I 0 = I 1 = I, hen: 1 (p,i) = P 0 (p,i) SV (p 0,p 1,x 0 w (I) 1 i p,x 1 (,I) i % )!& #, (3) 0 i" I p ' i $ i i i! i" I where he weighs w i (I) are onsrued from he expendiure shares s ( I) # p x / p x, i i =0,1,as, 0 ( I) ) si ( I) 0 ( I) ) lns ( I) 0 ( I) ) si ( I) 0 ( I) ) lns ( I) ( 1 % ( 1 % ( ) & s * i #!& s w i # i I. (4) 1 1 ' lns i i $ i" I' lns i i $ To inerpre his resul, he numeraor on he righ of (4) is a logarihmi mean of he expendiure shares si 0 (I) and (I) s 1 i, and lies beween hese wo values. The denominaor ensures ha he weighs w i (I) sum o uniy, so ha he Sao-Varia index P SV defined on he righ of (3) 1 0 is simply a geomeri mean of he prie raios (p i / p ). The heorem saes ha his index exaly equals he raio of he CES os/revenue funions. 2 Now onsider he ase where he se of goods is hanging over ime, bu some of he 0 # I 1 goods are available in boh periods, so ha I "!. We again le (p,i) denoe he os/revenue funion defined over he produs wihin he se I. Then he raio of oss/revenues (p 1,I)/(p 0,I), evaluaed wih he ommon se of goods I, is measured by he Sao-Varia index in Theorem 1. Our ineres is in he raio (p 1,I 1 )/(p 0,I 0 ), whih an be measured as follows: i 2 This resuls relies on our assumpion ha he observed inpu quaniies (for σ > 1) used o onsru he weighs in (4) are os minimizing, or ha he observed oupu quaniies (for σ < 0) are revenue maximizing.

8 8 Theorem 2 (Feensra, 1994) 0 1 Assume ha I $ I # I "!, and ha he inpus are os-minimizing. Then for σ > 1: ( ) w ( I) / $# 1 1 i (p, I ) * + ( I) ' * p ' i = ( %, 0 0 0!( % 0 (p, I ) ( I) i" I p (5) ) + & ) i & i i i! i" I where he weighs w i (I) are onsrued from he expendiure shares s ( I) p x / p x, as in (4), and he values λ (I) are onsrued as: i i # =0,1, ) ) & # & # $ p i* I i x i! $ p i* I,i+ I i x i! ( ( I) = $! = 1' $!, = 0,1. (6) % ) p * " % ) i I i x i p i* I i x i " To inerpre his resul, he produ on he far righ of (5) is he Sao-Varia index, onsrued over he se of produs I ha are ommon o boh periods. This measures he raio of oss/revenues (p 1,I)/(p 0,I), for he goods available in boh periods. The firs raio of he righ of (5) shows how he Sao-Varia index mus be adjused o aoun for he new goods (in he se I 1 bu no I) or disappearing inpus (in he se I 0 bu no I). From (6), eah of he erms λ (I) > 1 an be inerpreed as he period expendiure on he goods in he se I relaive o oal expendiure in period. Alernaively, his an be inerpreed as one minus he share of period expendiure on new goods (no in he se I). When here is a greaer number of new goods in period, his will lower he value of λ (I). Noie ha he raio [λ 1 (I)/ λ 0 (I)] on he righ of (5) is raised o he power 1/(σ-1) > 0, so wih σ > 1 ha a lower value of λ (I) due o new inpus will redue he raio of os funion in (5). by an amoun depending on he elasiiy of subsiuion.

9 9 Conversely, wih σ < 0 ha a lower value of λ (I) due o new oupus will raise raio of revenue funions in (5), by an amoun ha depends on he elasiiy of ransformaion. 4. Appliaion o Expor Variey Our resul above have been saed in erms of hanges in produ variey over ime. Bu he same resuls apply o a omparison of wo ounries a a poin in ime. In ha ase, he relevan measure of produ variey is a b! /!, where:! p q! p q i i i i ( I) i" I i" I 1,i# I = = $,! p q p q i i! i" I i" I i i % for = a,b. (7) To inerpre (7), noie ha " (I) 1 due o he differing summaions in he numeraor and! denominaor. This erm will be srily less han one if here are goods in he se I ha are no found in he ommon se I. In oher words, if ounry a is selling some goods in period ha a < are no sold by ounry b, his will make! (I) 1. In praie, we will measure he raio a b! /! using expors of ounries o he Unied Saes. While i would be preferable o use heir worldwide expors, our daa for he U.S. is more disaggregae, and allows for a finer measuremen of unique produs sold by one ounry and no anoher. Speifially, for we will use he 7-digi Tariff Shedule of he U.S. Annoaed (TSUSA) lassifiaion of U.S. impors, and for we shall use he 10-digi Harmonized Sysem (HS) lassifiaion of impors. To measure he raio a b! /!, we need o deide on a onsisen omparison ounry. For his purpose, we shall use he worldwide expors from all ounries o he U.S. as he

10 10 omparison. Denoe his omparison ounry by *, so ha he se * C 1 I = U = I is he omplee se of varieies impored by he Unied Saes in year, and * * i q i p is he oal value of impors for good i. Then omparing ounry o ounry * in year, i is immediae ha he ommon se of goods expored is I! I = I, or simply he se of goods expored by ounry. Therefore, from * ( = (7) we have ha! I ) 1, and: * *! i" I p q * % & % (I ) = = 1 $. (8) * * * * p q p q! * i" I * i i * i i! * pi i" I,i# I! * i" I i q * i i Noing from (5) ha produ variey in ounry relaive o he omparison is measured *! as! (I ) / (I ), bu his has a negaive oeffiien when σ < 0, le us insead inver i and * *! measure produ variey of ounry relaive o he world by! (I ) /! (I ) = (I ), whih eners (5) wih a posiive oeffiien 1/(1 σ). For breviy we denoe his by *! in (8). I is inerpreed as he share of oal U.S. impors from produs ha are expored by ounry. Equivalenly, i is one minus he share of oal U.S. impors from produs ha are no expored by ounry. Noe ha his measure depends on he se of expors by ounry, value of expors, exep insofar as hey affe he value of worldwide expors. I, bu no on is 5. Mexio's Expor Variey: 1990 vs We breakdown he aggregae expors of Mexio o US ino seven major groups and onsru he expor variey indexes of hese seven indusries aording o (8). Table 1 presens he indexes of hese indusries in 1990 and 2001 o illusrae he variaions aross indusries and years.

11 11 In 1990, Mexio expored 60 peren of produ variey in US agriulure impor, and he share inreased o 71 peren in This indiaes an annual average growh rae of 1.5 peren. During he same period, he expor variey of Mexio in exiles and garmens indusry inreases by 1.1 peren annually, from overing 83 peren of produ variey in US exiles and garmens impor in 1990, o 94 peren in The highes growh rae of variey is in he wood and paper indusry, where in 1990, only 63% of US impor were from produs expored by Mexio, and in 2001, i is 84%. This represens an average annual growh rae of 2.6 peren. On he oher hand, wih annual growh raes of 0.3 peren, he slowes growh of expor variey is observed in he peroleum and plasi indusry as well as he mahinery and ranspor equipmen indusry. For he peroleum and plasi indusry, in 1990, 78 peren of US impor were from produs ha Mexio expored, and i inreased o 81 peren in 2001, while for he mahinery and ranspor indusry, he index inreased from 84 peren o 86 peren. Expor variey in he eleronis indusry of Mexio is he highes among all indusries in boh years. In 1990, 88% of US impor were from produs expored by Mexio, and in 2001, i furher inreased o 95%. On he oher hand, expor variey in he mining and basi meals indusry is he lowes among all non-agriulure indusries in boh years. I expors overed 64% of he variey in US impors in 1990, and he share inreased o 73% in In summary, over he pas deade, Mexio has expanded is expor produ variey aross differen indusries. Overall, more han 87% of US impors in 2001 are from produs whih Mexio expors. I was 79% in 1990.

12 12 Effes of NAFTA on Expor Variey Could rade liberalizaion explain he expansions in expor variey of Mexio over his sample period? Given ha Mexio joined he Norh Ameria Free Trade Area in 1994, we an ompare he average variey wihin eah indusry before and afer 1994 o idenify he NAFTA effe on expor variey. Figure 3 presens he average variey indexes pre and pos 1994 in eah of he seven indusries. A he indusry level, he inrease range from 4.3 perenage poin in he Eleronis indusry o 11.2 perenage poin in he Wood & Papers indusry. Overall, expor variey of Mexio has inreased by 6.5 perenage poin sine 1994, whih is equivalen o 8.6 peren growh. The effe is saisially signifian and robus o indusry fixed effes. We will formally es for he effes in a laer seion. Table 1b presens he ariff liberalizaions in Mexio a he indusry level in he pre and pos 1994 eras wih respe o produs from he U.S.. In 1990, he impor weighed average ariff levied on U.S. produs enering Mexio was abou 12 peren, in 2001, he figure dropped o abou 1 peren, whih represens an average annual reduion of 22 peren. The mos dramai reduions an be found in he exiles and garmens indusry and he eleronis indusry, whih saw nearly 30 peren reduion in ariff annually. Indusry ha has he leas reduion is in he agriulure indusry, whih sill regisered an average reduion of 12 peren per year for he 11 year period. Thus, Mexio wen hrough some very dramai deline in ariffs wih respe o goods from he U.S.. Table 1 furher presens he ariff liberalizaions in he U.S. a he indusry level in he pre and pos 1994 eras wih respe o Mexio s expors. The piure is equally dramai. In

13 , he impor weighed average ariff imposed by he U.S. on Mexio s produ was abou 3.2 peren, and in 2001, i is less han 0.2 peren, an average annual reduion of abou 25 peren. In erms of absolue hanges, he mos larges fall in ariff is in he exiles and garmens indusry, where he average ariff dropped from 13 peren o 0.4 peren. Oher indusries ha wen hrough more han 30 peren reduion in ariff annually inlude he wood and paper produ indusry, he mahinery and ranspor equipmen indusry and he eleronis indusry. To he exen ha NAFTA ompromises ariff reduions in boh Mexio and he U.S., we would like o sudy he parial effes of hese reduions on he expor variey of Mexio. 6. China s Expor Variey: 1990 vs Table 2a presens he expor variey of China in 1990 and The shares of he variey of produs impored by he U.S. ha are also expored by China range from 38.6 peren in agriulural indusry o 93.5 peren in he exiles and garmen indusry in 1990, while in 2001, he range is beween 48.3 peren and 98.5 peren. Over he same period, he fases growh in expor produ variey is in he mahinery and ranspor equipmen indusry, whih has an average annual growh rae of 6 peren. Comparing o Mexio, in 1990, China was leading in erms of expor variey in he exiles and garmens indusry (10.2%), and he wood and paper produs indusry (12.6%). On he oher hand, Mexio was ahead in he mahinery and ranspor equipmen indusry (45.8%), he agriulural indusry (21.5%), he peroleum and plasi indusry (20.5%), he mining and basi meals indusry (16.6%), and he eleronis indusry (8.6%). By 2001, he advanages of China over Mexio in he exiles and garmens indusry and he wood and paper produs indusry have redued o 4.9 peren and 2.8 peren respeively. Thus o he exen ha NAFTA auses an expansions in produ raded, he mos dramai effes are in hese wo

14 14 indusries. However, despie he expansion in Mexian expor varieies aross all indusries, China is ahing up in hose indusries ha Mexio was ahead in In fa for he eleronis indusry and he mining and basi meals indusry, expor varieies of China have exeeded ha of Mexio by 2.8 perenage poin and 0.4 perenage poin respeively, while he gaps in he peroleum and plasis indusry and he mahinery and ranspor equipmen indusry have redued o 3.9 perenage poin and 13 perenage poin respeively. Overall here are some ineresing indusry variaions in he hange in expor produ variey in he period of 1990 o Comparing China o Mexio allows us o onrol for he ommon produiviy inrease wihin he indusries, as well as he ompeiion effes China s expors on Mexio s produs for he U.S. marke. Table 2b presens he impor weighed average ariffs a he indusry level of China for produs from he U.S.. I is eviden ha while Mexio was liberalizing is ariffs due o NAFTA, China was unilaerally reduing is ariffs oo. The average ariff of China on U.S. produs drops from 22.9 peren in 1992, he firs year ariff daa is available, o 18.1 in The bigges reduions are in mos proeed indusries, whih are he exiles and garmens indusry and he mahinery and ranspor equipmen indusry, wih an average annual derease of 12.1 peren. For he res of he indusries wih he exepion of agriulure, he average annual derease in ariffs is abou 5 peren, and he ariff level is abou 10 peren in Agriulure indusry of China is proeed by non-ariff barriers (NTBs) suh as impor liensing and quoas, in addiion o he high ariffs. Many of he NTBs were binding. In he 1990s, China made subsanial progress in reduing he NTBs in agriulure, whih resuled in inreases in impor volume of goods in hose binding produs. Suh inrease has pushed up he impor weighed average ariff in agriulure from 14 peren o nearly 70 peren. This do no refle an inrease

15 15 in proeion, sine he unweighed average ariff in his indusry has dropped from 48 peren o 27 peren (see Bhaashli e al 2004 for a disussion). Table 2 shows he impor weighed average ariffs of he U.S. on China s expors a he indusry level. Given ha U.S. does no have any rade agreemen wih China, hese ariffs refle he Mos Favorie Naions (MFN) ariffs and he impor bundle of U.S. for produs from China. Overall, he impor weighed average ariff on China s produ was 8.4 peren in 1990, and i dropped o 3.8 peren in Indusries ha have he larges reduions are he wood and paper produs indusry (15%) and he eleronis indusry (13%). The mining and basi meals indusry and he mahinery and ranspor equipmen indusry have an average annual reduion in ariffs of 4.1 o 4.8 peren. Finally, ariffs of agriulural produs and peroleum and plasi produs have inreased from 1990 o 2001 a a rae of 1.5 peren per year. 7. Empirial Resuls We sudy he effes of rade liberalizaion on expor produ variey fousing on he ase of Mexio due o NAFTA. Table 4 presens he regression resuls. In all speifiaions we pool all observaions aross indusries and years. There are seven indusries and 12 years, whih forms a balaned sample of 84 observaions. In olumn (1), we regress he log of expor variey of he indusries on he NAFTA dummy variable, whih se o one for years equal or greaer han 1994, and zero oherwise. Conrolling for indusry fixed effes, he NAFTA dummy is saisially signifian, whih indiaes an inrease in expor produ variey. The esimaed oeffiien is 0.082, whih suggess an 8.6 peren inrease in produ variey due o NAFTA. Given ha NAFTA omprises of he bilaeral ariff reduions in boh Mexio and he U.S., we sudy he parial effes of he reduions in olumn (2). More imporanly, he NAFTA

16 16 dummy may be piking up oher faors ha hange over ime monoonially, whih will bias our esimae. Thus, insead of he NAFTA dummy, we inrodue he log values of Mexio s and U.S. ariffs, and he ineraion erms beween he ariff erms in he regression direly. Conrolling for indusry fixed effes, all he ariff erms are negaive and saisially signifian. This indiaes ha ariff liberalizaions in boh ounries are imporan in inreasing expor produ variey of Mexio. Moreover, he negaive oeffiien on he ineraion erm shows ha parial effe of Mexio s ariff liberalizaion on expor variey depends on he ariff level of he U.S. he higher is he US ariff, he larger is he effe of own ariff liberalizaion on expanding expor variey. Based on his esimaes, and using ha he average annual reduion in Mexio s and he U.S. ariffs of 22.7 peren and 24.5 peren, aording o numbers in Tables 1b and 1, he average annual inrease in expor variey is 1.06 peren, and is saisially signifian. Given ha he average annual inrease in expor variey of he indusries in he sample is abou 1.08 peren he bilaeral ariff reduions almos explain he hanges in variey fully. Finally, if we deompose he oal effe of bilaeral ariff reduions ino he parial effes due o Mexio and US reduions, 18 peren of he hanges an be aribued o he Mexian s liberalizaion, and 78 peren is due o he Amerian s liberalizaion. Resuls of olumns (1) and (2) may be bias if here are omied variables ha are orrelaed wih he NAFTA liberalizaion and he expansion of expor variey. One suh variables is he negaive marke ompeiion effe due o he expansion of oher ounries produ variey. To he exen ha China s unilaeral ariff liberalizaion and he reduion of he U.S. MFN ariff auses he expansion in he presene of China s variey in he U.S., we expe he Mexio s expor o be rowded ou and he indusry expor variey o derease. Given ha he rade liberalizaion of China oinide wih he Mexio s liberalizaion, omiing he

17 17 ompeiion from China may ause a downward bias on he esimaed oeffiien of he Mexio s ariff variable. We onrol for he marke ompeiion effe from China by inluding he indusry expor variey of China as an explanaory variable. Column (3) inlude he expor variey of China wih he NAFTA dummy speifiaion, while olumn (4) inlude he variable in he bilaeral ariff reduion speifiaion. I is lear ha inluding he variable do no hange our previous resuls, and he marginal effes of he expor variey of China are no saisially signifian. The reason why he expor variey of China is no saisially signifian ould be due o he wo underlying fores. As menioned before, inlude he China variey variable may pik up he marke ompeiion effe, whih leads o a negaive effe on he expor variey of Mexio. On he oher hand, he expansion of China indusry expor variey may also be driven by indusry speifi ehnologial progress ha are ommon beween he wo ounries wihin indusry and year. This should have a posiive effe on he expor variey of Mexio. While indusry speifi ehnologial progress is unobservable, he expansion of Chinese expor variey due o China s unilaeral ariff reduions, and he reduion in U.S. MFN ariffs on produs from China an be used o apure he marke ompeiion effe. We sudy his hypohesis by running a sysem of wo equaions, one for he indusry expor variey of Mexio and one for he indusry expor variey of China. In boh equaions, he se up is idenial o ha of Column (4), whih inludes own ariff, ariff of he U.S., he ariffs ineraion erm, and he expor variey of he oher ounry. We furher onrol indusry speifi effes ha are ommon aross he wo equaions. Column (5a) shows he equaion for he Mexio indusry expor variey, and (5b) shows he equaion for he China indusry expor variey. As expeed, he marke ompeiion effes are srong and saisially signifian. Every one peren inrease in he expor variey of China

18 18 redues he expor variey of Mexio by nearly one peren, and every one peren inreases in he expor variey of Mexio redues he expor variey of China by 0.7 peren. Conrolling for he effe of he expansion in Chinese produs due o ariff reduion in China and he MFN ariff of US, he marginal effes NAFTA bilaeral ariff liberalizaion is larger. Based on he esimaes in Column (5a) and sample averages, bilaeral ariff reduions of Mexio and he U.S. ause he indusry expor variey of Mexio o inrease by 1.33 peren annually, of whih 56 peren an be aribued o Mexio s ariff reduion and he remaining 44 peren is explained by he U.S. ariff reduion. All he ariff effes are saisially signifian. Thus onrolling for he marke ompeiion effe due o he expansion of China s expor variey as a resul of China and US liberalizaion, he esimaed effe of Mexio s ariff reduion on expor variey is larger. We an also perform he similar exerise based on esimaes in Column (5b) o sudy and deompose he effe of China s unilaeral ariff reduion on Chinese expor variey. From he sample period of 1992 o 2001, he average reduion in indusry ariff in China is abou 4.15 peren. A he same ime, he US impor weighed ariff on impor from China dropped by abou 5.05 peren yearly. The overall ariff reduions have inreases expor variey of China by 0.3 peren annually, or 2.9 peren for he whole period, wih 55 peren of he effe an be aouned for by he reduion in China s ariff, and 45 peren due o he US s reduion. These effes are srikingly similar in omposiion ha of he NAFTA liberalizaion on Mexio expors. Overall empirial resuls sugges ha ariff liberalizaions are imporan in expanding indusry expor variey. Own ariff liberalizaion is pariularly imporan if he ariff of he imporing ounry remains high and vie verses. Thus here are saisial evidene linking

19 19 bilaeral ariff liberalizaion of Mexio and he U.S. due o NAFTA o he inreasing in expor variey of Mexio in he pas deade. 8. Conlusions The pas deade has winessed a signifian inrease in Mexio s expor variey, espeially sine NAFTA wen ino effe. There is evidene ha China is ahing up in erms of expor produ variey. Furher ariff liberalizaion may boos expor variey by moving resoures ino he exporing seors. Inreases in expor variey due o ariff reduion may provide addiional shor erm and long erm gains.

20 20 Referenes Bernd, Erns R., Margare K. Kyle, and Davina Ling, 2002, The Long Shadow of Paen Expiraion: Generi Enry and Rx o OTC Swihes, in Rober C. Feensra and Mahew Shapiro, eds., Sanner Daa and Prie Indexes, NBER Sudy in Inome and Wealh, Chiago: Univ. of Chiago, forhoming. Feensra, Rober C., 1994, New Produ Varieies and he Measuremen of Inernaional Pries, Amerian Eonomi Review, 84(A1), Marh, Feensra, Rober C., Dorsai Madani, Tzu-Han Yang and Chi-Yuan Liang, 1999, Tesing Endogenous Growh in Souh Korea and Taiwan, Journal of Developmen Eonomis, 60, Feensra, Rober C. and James R. Markusen, 1995, Aouning for Growh wih New Inermediae Inpus, Inernaional Eonomi Review, 35(A2), May, Feensra, Rober C. and Clinon R. Shiells, 1997, Bias in U.S. Impor Pries and Demand, in Timohy F. Bresnahan and Rober J. Gordon, eds., The Eonomis of New Goods, NBER Sudies in Inome and Wealh, no. 58, Chiago: Univ. of Chiago, Feensra, Rober C. and Hiau Looi Kee (2004a) On he Measuremen of Produ Variey in Trade, Amerian Eonomi Review, 94(2), Feensra, Rober C. and Hiau Looi Kee (2004b) Expor Variey and Counry Produiviy, NBER working paper. Kehoe, Timohy J. and Jim J. Ruhl (2002) How Imporan is he New Goods Margin in Inernaional Trade? Universiy of Minnesoa and Federal Reserve Bank of Minneapolis. Fisher, Irving, 1922, The Making of Index Numbers, Boson: Houghon Mifflin Co. Frankel, Jeffrey A. and David Romer, 1999, Does Trade Cause Growh,? Amerian Eonomi Review, 89(3), Funk, Mark, 2001, Trade and Inernaional R&D Spillovers among OECD Counries, Souhern Eonomi Journal, 67(3), January, Funke, Mihael and Ralf Ruhwedel, 2001, Produ Variey and Eonomi Growh: Empirial Evidene from he OECD Counries, IMF Saff Papers, 48(2), Grilihes, Zvi and Iain M. Cokburn, 1994, Generis and New Goods in Pharmaeuial Pries Indexes, Amerian Eonomi Review, 84(A5), Deember, Grossman, Gene M and Elhanan Helpman, 1991, Innovaion and Growh in he Global Eonomy, Cambridge: MIT Press.

21 21 Hausman, Jerry A., 1997, Valuaion of New Goods under Perfe and Imperfe Compeiion, in Timohy F. Bresnahan and Rober J. Gordon, eds., The Eonomis of New Goods, NBER Sudies in Inome and Wealh, no. 58, Chiago: Univ. of Chiago, Hausman, Jerry A., 1999, Cellular Telephone, New Produs, and he CPI, Journal of Business and Eonomi Saisis, 17(A2), April, Hiks, John R., 1940, The Valuaion of Soial Inome, Eonomia, 7, Rodriguez, Franiso and Dani Rodrik, 2000, Trade Poliy and Eonomi Growh: A Skpi s Guide o he Cross-Naiona levidene, in Ben S. Gernanke and Kenneh Rogoff, eds., NBER Maroeonomis Annual 2000, Romer, Paul, 1990, Endogenous Tehnial Change, Journal of Poliial Eonomy, 98(5, Par 2), S71-S102. Sao, Kazuo, 1976, The Ideal Log-Change Index Number, Review of Eonomis and Saisis 58(2), May, Törnqvis, L., 1936, The Bank of Finland s Consumpion Prie Index, Bank of Finland Monhly Bullein 10: 1-8. Varia, Yrjo O., 1976, Ideal Log-Change Index Numbers, Sandinavian Journal of Saisis 3(3),

22 22 Table 1a: Mexio s Expor Variey, Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Feensra and Kee (2004). noe: All figures are in perenage. Table 1b: Mexio s Tariffs on Impors from U.S., Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Auhors alulaion based on daa from WITS, he World Bank. noe: All figures are in perenage. Table 1: U.S. Tariffs on Impors from Mexio, Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Auhors alulaion based on daa from WITS, he World Bank. noe: All figures are in perenage.

23 23 Table 2a: China s Expor Variey, Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Feensra and Kee (2004). noe: All figures are in perenage. Table 2b: China s Tariffs on Impors from U.S., Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Auhors alulaion based on daa from WITS, he World Bank. noe: All figures are in perenage. Table 2: U.S. Tariffs on Impors from China, Agriulure Texiles & Garmens Wood & Paper Peroleum & Plasis Mining & Basi Meals Mahinery & Transpors Eleronis growh rae soure: Auhors alulaion based on daa from WITS, he World Bank. noe: All figures are in perenage.

24 24 Table 3 Tariff Sysems of China and oher Large Developing Counries Counry Year Unweighed Weighed Sandard Duies WTO Average Average Deviaion Colleed Member Tariff Tariff (% Impors) sine Argenina /1/95 b Brazil /1/95 China na 7.4 a na na Columbia /30/95 Egyp na /3095 Hungary na /1/95 India /1/95 Kenya na /1/95 Pakisan /1/95 Soures: China: Foreign Trade Reform, The World Bank, 1994, Table 3.3, p. 56. More reen figures for China are from China 2020: China Engaged, The World Bank, 1997, pp Daa on WTO membership is aken from ww.wo.org. Noes: a. This inludes olleion of usoms duies and he VAT on impors; he VAT is normally 17% on impors and domesially produed good (bu 13% on seleed ommodiies). b. Those ounries shown as WTO members sine 1/1/95 belonged o he GATT before ha dae.

25 25 Table 4: Dependen Variable Log of Indusry Expor Variey Index (1) (2) (3) (4) (5a) (5b) OLS OLS OLS OLS 3SLS 3SLS NAFTA 0.082*** 0.081*** (0.011) (0.015) log of own ariff ** ** ** ** (0.029) (0.029) (0.051) (0.129) log of US ariff *** *** ** ** (0.019) (0.019) (0.032) (0.063) log of own ariff * *** *** ** * log if US ariff (0.003) (0.003) (0.009) (0.037) Expor Variey of China *** (0.035) (0.037) (0.070) Expor Variey of Mexio *** (0.144) Consan *** *** *** *** *** *** (0.017) (0.053) (0.039) (0.061) (0.180) (0.240) Indusry fixed effes Yes Yes Yes Yes Yes Yes Number of Observaions R-squared Chi-squares Noe: Whie-robus sandard errors are in parenheses. *, **, and *** indiae signifiane a 90%, 95%, and 99% onfidene levels respeively. Dependen variables are he log of expor variey indexes of Mexio in olumns (1)-5(a), and he log of expor variey indexes of China in olumn 5(b). Columns (5a) and (5b) are esimaed joinly as a sysem wih ommon indusry fixed effes. Samples over 1990 o 2001 in olumns (1) o (4), and 1992 o 2001 in olumns (5a) and (5b). There are seven indusries inluded, as shown in Table 1.

26 26 q 2 B C A q 1 Figure 1: Inpu Varieies q 2 B C A q 1 Figure 2: Oupu Varieies

27 27 Expor Variey Index (%) Pre NAFTA NAFTA Agriulure Eleronis Wood & Paper Texiles & Garmens Mahinery & Transpors Mining & Basi Meals Peroleum & Plasis Figure 3: NAFTA and Expor Variey