Industrial Development and Trade Policy Uncertainty: Evidence from China's WTO Accession

This paper studies how the reduction in trade policy uncertainty (TPU) associated with the US granting of Permanent Normal Trade Relations (PNTR) to China affects the development of Chinese manufacturing industries. We find that eliminating TPU causes industries' employment expansion yet has a negligible effect on the capital stock. Heterogeneous analyses reveal that the employment effect is more pronounced in labor-intensive industries---echoing Heckscher–Ohlin theorem on comparative advantage, and regions with low shipping costs and industry agglomeration. We decompose the industry's employment response and find that the extensive margin---the number of firms mainly drives the pattern. The unequal effects on employment and capital further depress capital intensity and thus labor productivity. We also explore firm-level responses for mechanism discussion.