The impact of services trade liberalization on the productivity of manufacturing firms

Abstract This paper examines the impact of services trade liberalization on the productivity of manufacturing firms in China. Using a shift‐share approach, we construct a city‐level measure of services trade restrictiveness to capture regional variation in exposure to liberalization. To address potential endogeneity, we employ an instrumental variable strategy that draws on services trade policy trends in other countries. Our empirical findings show that liberalization significantly enhances manufacturing firm productivity, with stronger effects in industries that rely more heavily on service inputs. Mechanism analysis suggests that liberalization improves firms' access to more efficient service providers, resulting in cost savings and productivity gains. Sectoral heterogeneity analysis reveals that these effects are especially pronounced when trade barriers are reduced in courier and transport services, financial services, professional services, and telecommunications and computer services. Among various policy dimensions, restrictions on labor mobility, discriminatory regulations, and barriers to competition emerge as the most influential. These findings offer valuable policy insights into the economic benefits of services liberalization and underscore the importance of such reforms in supporting industrial upgrading in emerging markets.