| Abstract | The paper discusses how import liberalization of final goods will affect domestic import-competing firms’ profitability. In the short run, import liberalization of final goods allows more foreign firms to export to the domestic market, which intensifies competition of domestic market and thus reduces profitability of import-competing firms. However, in the long run, because firms can choose whether to enter or exit the market, some domestic reigning firms will choose to exit, leaving the firms remaining in the market enjoy a higher profitability in equilibrium. We first illustrate the idea through a theoretical model, then we use Chinese firm-level data from 2000-2007 to provide some empirical evidence. The empirical results show that although import tariff reduction of final goods lowers domestic import-competing firms’ profitability in the short run, it indeed increases the profitability of firms that remain in the market in the long run. Our model and empirical results also show that a firm with higher productivity will have higher profitability. |