Import License, Misallocation, and Aggregate Total Factor Productivity in the Chinese Steel Industry*

Abstract

This paper examines how import license restriction‐induced resource misallocation affects industry aggregate total factor productivity (TFP). We apply a recently proposed consistent estimator to micro‐level data from the Chinese steel industry, considering material price heterogeneity. We back out the potential extent of misallocation, finding the importers' TFP is not significantly higher than that of the nonimporters, and resource misallocation caused by the iron‐ore import license lowers aggregate productivity. Our analysis indicates that removing the trade barrier counterfactually would increase the industrial TFP by 76.8%, on average.