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Abstract:

CEP discussion paper
Import liberalization as export destruction? Evidence from the United States
Holger Breinlich, Elsa Leromain, Dennis Novy and Thomas Sampson June 2021
Paper No' CEPDP1779:
Full Paper (pdf)

Tags: trade policy; import liberalization; comparative advantage; scale economies; china shock

How does import protection affect export performance? In trade models with scale economies, import liberalization can reduce an industry's exports by cutting domestic production. We find this export destruction mechanism reduced US export growth following the 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.