Chinese Exports and U.S. Import Prices

paper presents preliminary fi ndings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author and are not necessarily refl ective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author. as well as various conference and seminar participants, provided very helpful comments. The views expressed in this paper are those of the author and do not necessarily refl ect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Abstract This paper develops a technique to decompose price distributions into contributions from markups and marginal cost. The estimators are then used as a laboratory to measure the relationship between increasing Chinese competition and the components of U.S. import prices. The estimates suggest that the intensifi cation of Chinese exports in the 2000s corresponded to substantial changes in the distributions of both the markups and marginal cost of U.S. imports. The entry of a Chinese exporter in an industry corresponded to rest-of-world exporters shrinking their markup (lowering prices by up to 30 percent) and increasing their marginal cost (raising prices by up to 50 percent). The fact that marginal cost increased as competition stiffened strongly suggests that the composition of non-Chinese exports shifted toward higher-quality varieties. The estimates also imply a pattern in the acquisition of market share by Chinese exporters: They enter at relatively low cost/quality and then subsequently undertake quality improvements and markup reductions. These results provide some of the fi rst measures of the dual nature of trade's procompetitive effects; exporters respond to tougher competition by simultaneously adjusting both markups and quality. 1 One of the most remarkable changes in US international trade over the past two decades has been the increase in imports from China. China accounted for only 6 percent of total imports in the year 1995, increasing to 18 percent in 2011. This rise is equally impressive when looking at the intensive margin of trade, in which market share increased in the vast majority of products that China already exported at the beginning of the 2000s, or the extensive margin of trade, in which China increased the number of detailed product types it exported to the US by about 2,000 over the same period. China's export …