Trade liberalization, credit constraints, and export quality upgrading

This paper provides evidence that external financial status is an important determinant of firms’ responses to trade liberalization. Based on the difference-in-differences (DID) estimation strategy and data from Chinese firms, we find that input tariff reduction has a significantly positive effect on export quality for firms with high credit constraints but has no significant impact on firms with low credit constraints. This finding suggests that trade liberalization leads to the upgrading of export quality by firms that face binding credit constraints. We also find that the quality upgrading of intermediate inputs and the enhancement of productivity can plausibly explain the upgrading of export quality by firms with high credit constraints. Our paper has some important implications for trade and financial policies.