Trade liberalisation and the extensive margin of differentiated goods: Evidence from China

We exploit tariff reductions associated with China's entry into the WTO to evaluate whether the response of trade flows at the extensive margin depends on the degree of product differentiation. We adopt a 4-way difference-in-differences approach to identify the effects as cleanly as possible by comparing market entry of products from each WTO member into China with entry into India and Indonesia. The absolute tariff elasticities are estimated to be relatively large, compared to existing estimates. This is especially true for differentiated goods, for goods with low Chinese demand elasticity and for exports from OECD countries. We provide both new evidence and a theoretical justification for the heterogeneity of these effects across products and countries.