Trade Liberalization and Third-Market Effects

We study how the end of the quota system for textiles and clothing products in the EU, the US and Canada–a large, pre-determined policy shock–affected exports from China to countries other than those liberalizing trade (ROW). That is, we study how changes in the trade policy of a group of countries affected the trade flows among other countries, where policy did not change. We employ a difference-in-differences approach relying on the fact that the end of the quota system affected some but not other, similar products in the same industries. We find no meaningful price or intensive margin effects among Chinese exporters to ROW, but we find large extensive margin effects: the growth in the number of firms exporting to ROW increased significantly as a result of the end of quotas in the EU, the US and Canada. The results suggest that the policy shock turned China into a better export base for previously restricted products, encouraging entry in the industry.