Trade as an engine of creative destruction: Mexican experience with Chinese competition**The authors are grateful to Gerardo Leyva and Abigail Duran for granting us access to INEGI data at the offices of INEGI in Aguascalientes under the commitment of complying with the confidentiality requirements set by the Mexican Laws. Special thanks go to all INEGI employees who provided assistance and answered our questions. in particular to Gabriel Romero, Alejandro cano. Araceli Martinez, Armando Arellanes, Ramon Sanchez, Otoniel Soto, candida Aguilar. and Adriana Ramirez. We also thank Christian Hansen for his help with the implementation of the quantile IV regressions and Philippe Aghion, Tibor Besedes, Chad Bown. Ana Cusolito, Judith Dean, Aaditya Mattoo. Guy Michaels, Emanuel Ornelas, Stephen Redding, Daniel Sturm as well as the participants at the seminars ofETSG, USITC, Penn State, Boston University, University of Vienna, london School of Economics, St Andrews University, FREIT, the World Bank trade seminar. the Econometric Society World Congress and the University of Kent for helpful comments. The views contained in this paper are of the authors and not necessarily those of the World Bank. The financial support of the World Bank's Research Support Budget is gratefully acknowledged

This paper exploits the surge in Chinese exports from 1994 to 2004 to evaluate the effects of a competition shock from a low wage competitor for producers in an important middle-income country, Mexico. We find that this shock causes selection and reallocation at both firm and product levels and that its impact is highly heterogeneous at the intens ive and extensive margins. Sales of smaller plants and more marginal products are compressed and are more likely to cease, whereas those of larger plants and core products seem relatively impervious to the shock. This implies a reallocation in terms of market shares within firms and between firms. We also show that the impact of expanded access to cheaper Chinese intermediate inputs has a similar effect, with larger plants benefiting more from the availability of cheaper imported inputs.