Working Paper

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

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.

JEL Classification: F14; F15; F16;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2008

Number: 14

Pages: 41 pages

Note: Published as: Auer, Raphael and Andreas M. Fischer (2010), "The Effect of Low-Wage Import Competition on U.S. Inflationary Pressure," Journal of Monetary Economics 57 (4): 491-503.