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US Policy Spillover (?) -- Chinas Accession to the WTO and Rising Exports to the EU

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Document pages: 43 pages

Abstract: The paper explores the causes of China s rising manufacturing exports to the EU after WTO accession. While the European trade policy environment remained largely unchanged in most sectors, a spillover from a change in US trade policies towards China is emphasized. In the proposed model the transmission occurs through a global component of the fixed costs firms must pay in order to export. If a large fraction of this component can be covered from exporting to one destination, exporters will serve also other markets to maximize their profits. The empirical analysis makes use of the removal of US tariff uncertainty in conjunction with China s WTO accession. It shows that: (i) the structure of China s export boom to the EU conforms to the pattern of US tariff uncertainty; (ii) the adjustment takes place at the extensive margin, (i.e. a good is exported to more destinations); and (iii) the effect phases out after a few years. The results have implications for the scope of international policy negotiations and provide suggestive evidence on the nature of the fixed costs that manufacturing firms in low-wage countries must overcome.

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