The Impact of Chinese Competition along the Quality Ladder

We investigate the impact of Chinese competition faced by French exporters in their destination markets. We document that French firms with low prices are significantly more affected by the rise of China in international markets. To rationalize this finding, we propose a random coefficient, discrete choice model of demand in which consumers have heterogeneous preferences regarding product characteristics and prices. This heterogeneity in preferences implies more realistic substitution patterns across producers relative to existing trade models. In particular, it allows for French varieties located at the bottom of the price distribution to be closer substitutes to Chinese goods, due to their proximity in the product space. Using firm-level trade data, we estimate the model and quantify the unequal effect of China across French exporters in the footwear industry, between 1997 and 2010. We find substantial differences across firms: the rise in Chinese exports implied losses in market shares five times larger at the bottom of the price distribution relative to the top. Moreover, we show that allowing French firms to adjust their product quality does little to help them escape Chinese competition.