Working Paper: CEPR ID: DP8231
Authors: Julien Martin; Isabelle Mjean
Abstract: What is the impact of low-wage countries' competition on the quality of high-wage countries' exports? To answer this question, we develop a new method that uses firm-level data to measure quality changes in sectoral exports. Over 1995-2005, we measure a 11% increase in the mean quality of France's aggregate exports, driven by a reallocation of demand in favor of higher quality producers. The phenomenon is significantly more pronounced in markets where the penetration of developing countries has increased while it is negative where firms face increased competitive pressures from high-wage countries. These results are consistent with within-product specialization along the vertical dimension. They suggest that, over the period, France has specialized in the production of higher quality goods. In our data, around one fifth of the measured quality improvement in France's aggregate exports is attributable to low-wage countries' competition. In turn, its increasing specialization in higher quality goods has limited France's market share loss over the period.
Keywords: firm-level data; low-wage countries competition; quality heterogeneity; within-product specialization
JEL Codes: F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition from low-wage countries (particularly China) (F66) | quality upgrading in French exports (L15) |
| competition from other high-wage countries (F29) | decline in mean quality of French exports (L15) |
| increased competition from low-wage countries (F66) | reallocation of demand toward higher quality producers in high-wage countries (F16) |
| reallocation of market demand (R22) | 11% increase in mean quality of France's aggregate exports (F10) |
| low-wage country competition (F66) | quality of French exports (L15) |