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The Effect of Trade with Low-Income Countries on U.S. Industry

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Author Info
Auer, Raphael
Fischer, Andreas M

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Abstract

When labor abundant nations grow, their exports increase more in labor intensive than in capital intensive sectors. We utilize this difference in how exports are affected by growth to identify the causal effect of trade with low-income countries (LICs) on U.S. industry. Our framework relates differences in sectoral inflation rates to differences in comparative advantage-induced import growth rates and abstracts from aggregate fluctuations and sector specific trends. In a panel covering 325 six-digit NAICS manufacturing industries from 1997 to 2006, we find that LIC exports are associated with strong downward pressure on U.S. producer prices and a large effect on productivity. When LIC exporters capture 1% U.S. market share producer prices decrease by 3%, which is nearly fully accounted by a 2.4% increase in productivity and a 0.3% decrease in markups. We also document that while LICs on average find it easier to penetrate sectors with elastic demand, the price and productivity response to import competition is much stronger in industries with inelastic demand. Overall, between 1997 and 2006, the effect of LIC trade on manufacturing PPI inflation was around two percentage points per year, far too large to be neglected in macroeconomic analysis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6819.

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Date of creation: May 2008
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Handle: RePEc:cpr:ceprdp:6819

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Related research
Keywords: comparative advantage; globalization; low-wage country import competition;

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Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade
F15 - International Economics - - Trade - - - Economic Integration
F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May. [Downloadable!] (restricted)
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  15. Jeffrey A. Frankel & David Romer, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexandre, Fernando & Bação, Pedro & Cerejeira, João & Portela, Miguel, 2009. "Employment and Exchange Rates: The Role of Openness and Technology," IZA Discussion Papers 4191, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. José De Gregorio, 2008. "The Tensions of the World Economy," Economic Policy Papers Central Bank of Chile 27, Central Bank of Chile. [Downloadable!]
  3. Matteo Bugamelli & Fabiano Schivardi & Roberta Zizza, 2008. "The Euro and Firm Restructuring," NBER Working Papers 14454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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