Value Added Exports and U.S. Local Labor Markets: Does China Really Matter?

Abstract

Measuring the effects of international trade on labor market outcomes has never been more important given the increasing interconnections among economies around the globe. However, using measures of exposure to trade flows based on gross exports may lead to a misleading picture given that production processes have essentially become globalized, allowing firms to have access to imported inputs as an example. We consider the effects of international trade by building a model with firm heterogeneity where firms have the ability to offshore the production of inputs. Our model highlights that international trade offers an opportunity for firms to become more productive by engaging in off-shoring activities while they face competition from imports of final goods in the domestic market. We then construct a measure of U.S. exposure to Chinese goods using value added trade to analyze its effects on U.S. local labor markets. Using value added trade, we find that continuously rising exports from China to the U.S. do not have significant effects on employment and wages. We further decompose the measure of exposure into value added trade in intermediate and in final goods. In line with the theoretical framework, we find that an increase in value added exports from China in final goods leads to a decrease in employment across U.S. local labor markets, while the effects from a change in the exposure to trade in intermediate goods are not significant.

Keywords: Value added exports, employment, wages

JEL Classification: F13