Local Protectionism, Market Structure, and Social Welfare: China’s Automobile Market Panle Jia Barwick Shengmao Cao Shanjun Li Cornell University June 2016 (Cornell) Local Protectionism June 2016 1 / 50
China’s Economic Growth Remarkable growth during its transformation to a market economy GDP growth in 2015 was 6.9%, the lowest in 20 years (Cornell) Local Protectionism June 2016 2 / 50
Economic Growth and Market Frictions Export has been an important driver of economic growth Recent discussions on strengthening domestic demand as the engine for future growth Examine domestic market frictions that could hinder efficient resource allocation and growth: ◮ Intra-country trade barriers ◮ policies and practices that protect local firms against competition from non-local firms (Cornell) Local Protectionism June 2016 3 / 50
Local vs. National Market Shares: Automobiles Local market shares National market shares 35% 30% 25% 20% 15% 10% 5% 0% The first five are state-owned enterprises (SOE), next five are joint ventures (JV), and last two are private automakers ‘Local market shares’ refer to shares in their respective headquarter provinces (Cornell) Local Protectionism June 2016 4 / 50
Local vs. National Market Shares: Cigarettes Market Share of Cigarette Products from Major Manufacturers (2007 - 2013) Local Market Share vs. National Market Share .8 .6 .4 .2 0 Anhui Chongqing Fujian Guangdong Guangxi Guizhou Hebei Henan Hubei Hunan Jiangsu Jiangxi Shaanxi Shandong Shanghai Sichuan Yunnan Zhejiang Local Market Share National Market Share (Cornell) Local Protectionism June 2016 5 / 50
Factors that Contribute to Home Bias Transportation costs: ◮ About 1-2% of vehicle prices. Controlled using distance Dealer network: ◮ Local brands might have more dealers in the region ◮ Control the number of dealers, though it is affected by policies Local preference: ◮ Consumers prefer local brands (information and reputation) Local protectionism: ◮ Policies that protect local firms against competition from nonlocal firms (Cornell) Local Protectionism June 2016 6 / 50
Local Protectionism: the Auto Industry Trade war between Shanghai and Hubei province in the 1990s Changchun, Jilin province: ◮ First Auto Works (FAW) is a SOE headquartered in Changchun,Jilin ◮ Local governments in Jilin heavily promote FAW brands ◮ From 2009-2010 – ⋆ Require government procurement to give priority to FAW group ⋆ Waive all fees (including registration fees and tolls) for individual purchase of FAW brands ◮ From 2012-2013 – ⋆ Subsidize FAW indigenous brands (not JV brands) by 3500-7000 Yuan Guangxi province (2015): ◮ Subsidy up to 2000 Yuan for local brands (Cornell) Local Protectionism June 2016 7 / 50
Local Protectionism: Institution China’s political personnel system is top-down: ◮ Local officials are evaluated and promoted based on GDP growth ◮ SOEs are important for local GDP and fiscal revenue Management: ◮ Top executives of SOEs and JVs (their domestic partner) are appointed and their management decisions influenced by the government Rent-seeking: ◮ SOEs often provide private benefits for local government officials Lack of federal regulations: ◮ No effective central policies that prohibit interregional trade barriers ◮ U.S. Constitution’s Commerce Clause prohibits state regulations that interfere with or discriminate against interstate commerce (Cornell) Local Protectionism June 2016 8 / 50
Research Questions This paper focuses on: ◮ To what extent are the differences between local and national shares driven by local protectionism? ◮ How does local protectionism affect prices and demand? ◮ What is the welfare impact? Questions to explore in future research: ◮ The impacts on firm entry and exit, market structure, and capacity utilization ◮ The impacts on resource allocation across regions and their welfare consequences (Cornell) Local Protectionism June 2016 9 / 50
Literature Existing literature that examines intra-national trade barriers in China: ◮ Young (2000), Bai et al. (2004), Holz (2009), Eberhardt et al. (2015) ◮ They identify protectionism by looking for changes in industry specialization and price convergence at the aggregate level ◮ We use disaggregate data for one industry that covers all products in all regions ◮ Ours is the first study to quantify the welfare impacts Literature on resource allocation and TFP growth: ◮ Hsieh and Klenow (2009) examines misallocation of inputs ◮ We focus on the misallocation in the product market, which could lead to misallocation of inputs (Cornell) Local Protectionism June 2016 10 / 50
Overview 1 Introduction 2 Theory 3 Industry Background and Data 4 Empirical Strategy and Results 5 Simulations and Welfare Analysis 6 Conclusion (Cornell) Local Protectionism June 2016 11 / 50
Hotelling Model A linear city from interval [0,1], uniform distribution of consumers. Consumers have unit demand Two firms: one local (A), one non-local (B). Locating at two extremes and selling identical goods Marginal cost of production: 2cq Transportation cost: td 2 where d is the distance u − P j − td 2 Consumer surplus (consumer i choosing j): u ij = ¯ ij (Cornell) Local Protectionism June 2016 12 / 50
Hotelling Model At point x ∗ = 1 2 : CS and MC from two choices equalized Equilibrium prices: P A =P B =t(1+2c) (Cornell) Local Protectionism June 2016 13 / 50
Hotelling with Subsidy to Local Firm Consumers who buy from local firm (A) receive subsidy S DWL: distortions in consumer choices and production (Cornell) Local Protectionism June 2016 14 / 50
Overview 1 Introduction 2 Theory 3 Industry Background and Data 4 Empirical Strategy and Results 5 Simulations and Welfare Analysis 6 Conclusion (Cornell) Local Protectionism June 2016 15 / 50
China’s Auto Market: Growth and Size China overtook the U.S. as the world’s largest auto market in 2009 (Cornell) Local Protectionism June 2016 16 / 50
Industry Background Market shares for different types of firms: ◮ Joint ventures (JVs, 71%), State owned enterprises (SOEs, 12%), ◮ domestic private firms (10%), and imports (7%) All major international automakers are present in China as JVs: ◮ By law, foreign automakers cannot have their own production ◮ VW and GM have the largest presence in China The auto industry is targeted by many government policies: ◮ Important for GDP, employment, and spillovers to other industries ◮ Strategic industry in 26 provinces (out of 31) from 2005 to 2010 Fragmented industry with production capacity in 26 provinces (Cornell) Local Protectionism June 2016 17 / 50
U.S. and Chinese Auto Markets U.S. and Chinese Auto Markets in 2015 U.S. China PV Sales in 2015 (million) 17.5 21.1 Number of Firms 15 60 Capacity Utilization (%) 90 65 Top 6 Market Share (%) 77 46 Top 12 Market Share (%) 94 68 Top 20 Market Share (%) 100 85 (Cornell) Local Protectionism June 2016 18 / 50
Production Capacity in China in 2013 All except five provinces have auto production Average annual capacity is 980,000 per province in 2013 (Cornell) Local Protectionism June 2016 19 / 50
Production Capacity in the US in 2013 14 states have production Among them, average annual capacity one million per state (Cornell) Local Protectionism June 2016 20 / 50
Data Registration data at the individual vehicle level from 2009 to 2011: ◮ About 30 million observations ◮ Vehicles purchased by individuals: 90% ◮ Vehicles purchased by governments and commercial entities: 10% Registration county, model name, engine size, vehicle type: ◮ Aggregate to province, model, year: 19624 observations Other data sets: ◮ Demographic information (income distribution) from 2005 Census ◮ Prices and attributes from Polk and other sources ◮ Auxiliary data sets for gasoline prices, dealership network, etc (Cornell) Local Protectionism June 2016 21 / 50
Summary Statistics Excluding small and very expensive models, 286 models in 31 provinces during 2009-2011 Summary Statistics of Key Attributes Variable Mean Std. Dev. Min Max Sales 1250.9 2258.0 1 60612 Real price (1000 Yuan) 186.2 145.9 27.5 798.7 Fuel cost (Yuan/100km) 50.2 10.0 24.9 101.2 Engine size (liter) 1.8 0.5 0.8 4.0 Vehicle size(m 2 ) 7.7 0.9 4.2 10.3 Auto transimission 0.5 0.5 0 1 SUV 0.2 0.4 0 1 Minivan 0.1 0.2 0 1 Number of dealers 19.4 23.3 0 137 Distance to headquarter (1000km) 2.1 1.4 0 5.2 Number of observations: 19624 (Cornell) Local Protectionism June 2016 22 / 50
Higher Income HH More Likely to Buy Cars Fraction of Households by Monthly Income (Yuan) ≤ 4k ≥ 12k Year 4k-8k 8k-12k Among All Households 2009 0.69 0.23 0.05 0.03 2010 0.63 0.27 0.06 0.04 2011 0.55 0.33 0.08 0.04 Among Vehicle Buyers 2009 0.16 0.34 0.32 0.19 2010 0.11 0.27 0.32 0.3 2011 0.09 0.26 0.34 0.31 Source: Ford Automobile Buyer Survey 2009-2011 and Annual Statistical Yearbook 2009-2011. Segments: mini/small sedan, compact sedan, medium/large sedan, SUV, MPV Household income distribution for each segment ⇒ micro moments (Cornell) Local Protectionism June 2016 23 / 50
Overview 2 Introduction 3 Theory 4 Industry Background and Data 5 Estimation and Results 6 Simulations and Welfare Analysis 7 Conclusion (Cornell) Local Protectionism June 2016 24 / 50
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