The Pro-Competitive Effect of Chinese Imports: Amplification through the Input-Output Network

The share of Chinese manufacturing imports in U.S. consumption has increased eight-fold between 1993 and 2011, from 1 to over 8 percent. While the literature has documented the pro-competitive price effect of the rising Chinese import competition on U.S. industries, I provide new empirical evidence for a quantitatively larger, indirect effect: for the average manufacturing industry, the increase in import exposure of upstream suppliers reduces domestic producer prices by 0.82 percent per year, compared to a reduction of 0.27 percent due to the increase in direct import exposure. Together, the direct and indirect effects imply on average a lower price of more than 1 percent per year. By calibrating a general-equilibrium multi-industry model with input-output linkages, I further show that the net welfare gains from trade with China increase by 60 percent when the production network amplifies the pro-competitive effect. This mechanism also creates a substantially wider dispersion of industries that benefit and lose out from trade.