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

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Author Info
Raphael Auer
Andreas M. Fischer

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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 advantage-induced 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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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. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December. [Downloadable!] (restricted)
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  4. Gordon H. Hanson, 2003. "What Has Happened to Wages in Mexico since NAFTA?," NBER Working Papers 9563, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2009. "The dynamics of trade and competition," Journal of International Economics, Elsevier, vol. 77(1), pages 50-62, February. [Downloadable!] (restricted)
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  6. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September. [Downloadable!]
  7. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD, Economics Department. [Downloadable!]
  8. David Weinstein & Christian Broda, 2008. "Exporting Deflation? Chinese Exports and Japanese Prices," NBER Working Papers 13942, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. 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)
  10. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2006-2), pages 61-102. [Downloadable!]
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  11. 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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  12. Assaf Razin, 2004. "Globalization and Disinflation: A Note," NBER Working Papers 10954, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May. [Downloadable!] (restricted)
  14. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March. [Downloadable!]
  15. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December. [Downloadable!] (restricted)
  16. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September. [Downloadable!]
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  17. Donald R. Davis & David E. Weinstein, 2001. "An Account of Global Factor Trade," American Economic Review, American Economic Association, vol. 91(5), pages 1423-1453, December. [Downloadable!] (restricted)
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  18. Gordon H. Hanson & Raymond Robertson, 2008. "China and the Manufacturing Exports of Other Developing Countries," NBER Working Papers 14497, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. 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 U.S. Manufacturing Plants," CEP Discussion Papers dp0584, Centre for Economic Performance, LSE. [Downloadable!]
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  20. Barry Bosworth & Susan M. Collins, 2007. "Accounting for Growth: Comparing China and India," NBER Working Papers 12943, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(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!]
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  2. Matteo Bugamelli & Fabiano Schivardi & Roberta Zizza, 2008. "The Euro and Firm Restructuring," NBER Working Papers 14454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. José De Gregorio, 2008. "The Tensions of the World Economy," Economic Policy Papers Central Bank of Chile 27, Central Bank of Chile. [Downloadable!]
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