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

43 Pages Posted: 12 Jun 2008

See all articles by Raphael Auer

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

Andreas M. Fischer

Swiss National Bank; Centre for Economic Policy Research (CEPR)

Date Written: May 2008

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.

Keywords: comparative advantage, globalization, low-wage country import competition

JEL Classification: F14, F15, F16

Suggested Citation

Auer, Raphael and Fischer, Andreas M., The Effect of Trade with Low-Income Countries on U.S. Industry (May 2008). CEPR Discussion Paper No. DP6819, Available at SSRN: https://ssrn.com/abstract=1143182

Raphael Auer (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Andreas M. Fischer

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland
+41 1 631 3294 (Phone)
+41 1 631 3901 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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