Import Competition and Export Markups: Evidence from Chinese Multi-Product Exporters

We present evidence using highly disaggregated Chinese firm-product data that increased import competition (resulting from reductions in output tariffs) induces incumbent exporters to increase product markups in export markets. This is driven by the upward markup adjustments of products closer to firms' core competencies, while products farther from core competencies have their markups lowered. We also investigate the underlying mechanisms empirically. Chinese multi-product exporters invest in improving the quality of their core products (which we term "quality-based core competency") and raise the quality more for products closer to their core competencies. This leads to heterogeneity in the responses of prices and markups to import competition. Our findings are robust to using alternative markup and import competition measures and different estimation methods, addressing endogenous issues and controlling for export and input tariffs. This paper contributes to the literature by finding new evidence that import competition can increase the export markups of products closer to firms' core competencies within multi-product exporters.