Abstract
When the removal of trade barriers coincides with the elimination of inefficient institutions created to manage them, the gains from trade increase. We investigate the change in productivity associated with the removal of quotas on Chinese textile and clothing exporters as well as the elimination of the export licensing regime which managed quota allocation. When quotas were removed in 2005, Chinese export value and quantity surged and export prices declined. These responses are due predominantly to the extensive margin: entrants gained market share at the expense of incumbent state-owned enterprises, and they entered with relatively low prices. We show that these reactions are inconsistent with an ex ante assignment of quota licenses on the basis of firm productivity, and estimate that roughly half of the overall productivity gain among China's textile exporters following quota removal is due to the elimination of the quota licensing regime.