The pro‐competitive effects of indirect export exposures: Evidence from China

Abstract Using China's accession to WTO in 2001 as an episode for trade liberalisation, this paper empirically investigates whether export expansions affect firms' markup adjustments through local production networks. Following Helm (2020), we construct an indirect local export exposure measure to capture the degree to which firms in each prefecture‐industry cell are indirectly affected by export expansions of other local industries. To analyse the role played by local production networks, we further decompose indirect export shocks into upstream and downstream shocks. Combining this with markups estimated following De Loecker et al. (2016), our empirical results suggest that the average level of indirect export shocks would lead to a 0.363 decrease in markups. This magnitude accounts for 6.862% of overall markup changes during 2000–2007. In particular, the baseline results are driven by local indirect shocks from downstream industries. Further empirical analysis shows that reductions in firms' markups are induced by increased competition, which can be summarised as the “indirect pro‐competitive effects”. Further analysis at the prefecture‐industry level reveals that the impact mainly exists at the within‐firm margin, not at the between‐firm, or entry/exit margin.