Working Paper: CEPR ID: DP17031
Authors: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
Abstract: How does import protection affect export performance? In trade models with scale economies, import liberalization can reduce industry-level exports by cutting domestic production. We show that this export destruction mechanism reduced US export growth following the permanent normalization of trade relations with China (PNTR). But there was also an offsetting boost to exports from lower input costs. We use our empirical results to calibrate the strength of scale economies in a quantitative trade model. Counterfactual analysis implies that while PNTR increased aggregate US exports relative to GDP, exports declined in the most exposed industries because of the export destruction effect. On aggregate, the US and China both gain from PNTR, but the gains are larger for China.
Keywords: trade policy; import liberalization; comparative advantage; scale economies; China shock
JEL Codes: F12; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Import liberalization (F69) | Export destruction (F18) |
| Increase in import competition from China (F69) | Reduction in domestic real market potential (F61) |
| Reduction in domestic real market potential (F61) | Decline in domestic output (E23) |
| Decline in domestic output (E23) | Lower industry-level productivity (L69) |
| Lower industry-level productivity (L69) | Decline in exports (F14) |
| PNTR (F13) | Increase in aggregate U.S. exports relative to GDP (F10) |
| PNTR (F13) | Decline in exports in industries with higher exposure to Chinese imports (F14) |
| Lower output due to increased competition (L19) | Negative impact on export growth (F69) |
| Lower input costs (Q12) | Promotion of exports (F10) |