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The effect of trade with low-income countries on U.S. industry

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  • Raphael Auer
  • Andreas M. Fischer

Abstract

When labor-abundant nations grow, their exports increase more in labor-intensive sectors than in capital-intensive sectors. We utilize this sectoral 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 advantageinduced import growth rates and abstracts from aggregate fluctuations and sector specific trends.> ; In a panel covering 325 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 3.1%, which is nearly fully accounted by a 2.4% increase in productivity and a 0.4% 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 Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 14.

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Date of creation: 2008
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Handle: RePEc:fip:feddgw:14

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Keywords: Globalization ; International trade ; Manufacturing industries ; Prices;

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  1. Natalie Chen & Jean Imbs & Andrew Scott, 2006. "The dynamics of trade and competition," Working Paper Research 91, National Bank of Belgium.
  2. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of US Manufacturing Plants," Working Paper Series WP03-3, Peterson Institute for International Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Imports from Low-Wage Nations and US Inflation
    by Mark Thoma in Economist's View on 2008-06-13 07:24:00
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Cited by:
  1. De Gregorio R., José, 2008. "Las tensiones de la economía mundial," PERFIL DE COYUNTURA ECONÓMICA, UNIVERSIDAD DE ANTIOQUIA - CIE.
  2. Bugamelli, Matteo & Schivardi, Fabiano & Zizza, Roberta, 2010. "The Euro and Firm Restructuring," CEPR Discussion Papers 7623, C.E.P.R. Discussion Papers.
  3. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2009. "Employment and Exchange rates: the Role of Openness and Technology," GEE Papers 0015, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised May 2009.
  4. José De Gregorio, 2008. "The Tensions of the World Economy," Economic Policy Papers Central Bank of Chile 27, Central Bank of Chile.
  5. Matteo Bugamelli & Silvia Fabiani & Enrico Sette, 2010. "The pro-competitive effect of imports from China: an analysis of firm-level price data," Temi di discussione (Economic working papers) 737, Bank of Italy, Economic Research and International Relations Area.
  6. Alexandre, Fernando & Bação, Pedro & Cerejeira, João & Portela, Miguel, 2010. "Manufacturing Employment and Exchange Rates in the Portuguese Economy: The Role of Openness, Technology and Labour Market Rigidity," IZA Discussion Papers 5251, Institute for the Study of Labor (IZA).
  7. Jürgen Janger, 2008. "Supply-Side Triggers for Inflation in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 34–69.
  8. ITO Koji, 2013. "Impact of Growing Imports: A comparison of international and domestic firms in the Japanese manufacturing industry (Japanese)," Discussion Papers (Japanese) 13034, Research Institute of Economy, Trade and Industry (RIETI).
  9. Raphael Anton Auer & Kathrin Degen & Andreas M. Fischer, 2011. "Low-Wage Import Competition, Inflationary Pressure,and Industry Dynamics in Europe," Working Papers 2011-09, Swiss National Bank.

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