Markups, import competition and exporting

• Date: 01 May 2020
• Author: Mauro Caselli,Stefano Schiavo
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/twec.12935

World Econ. 2020;43:1309–1326. wileyonlinelibrary.com/journal/twec

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1309

© 2020 John Wiley & Sons Ltd

Received: 12 December 2019

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Accepted: 2 January 2020

DOI: 10.1111/twec.12935

SPECIAL ISSUE ARTICLE

Markups, import competition and exporting

MauroCaselli1,2

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StefanoSchiavo1,2,3

1School of International Studies, University of Trento, Trento, Italy

2Department of Economics and Management, University of Trento, Trento, Italy

3DRIC, OFCE-SciencesPo, Sophia Antipolis, France

KEYWORDS

China, exporting, France, import competition, markups

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INTRODUCTION

The integration of low-wage countries, and China in particular, into world trade has raised serious con-

cerns in many advanced economies, and its effects have been intensively debated both within and outside

academia for several years. It is not uncommon to read about firms closing their factory gates in Western

Europe or Northern America and blaming rising competitive pressures from low-wage countries as the

likely culprit. In response to this threat, there has been an increasing demand for protectionism. Indeed, the

recent tariff war between the United States and China is just one of the political answers to such demands.

However, this is not the full story. Proponents of free trade have always advocated it on the basis

that, while some firms and workers may lose, other firms and workers will benefit. In particular, the

gains from trade come from new export opportunities, the availability of cheaper and more diversified

imports that make consumers and firms better off, and the potential innovation and quality upgrading

firms may engage in. Thus, protectionism is not the only way forward as it may lead to trade wars and

may impede the gains from trade to be exploited.

This paper contributes to this debate by focusing on exporting as an escape strategy from the com-

petitive pressures coming from a surge in imports, in particular from China. Thus, it looks at the rela-

tionship between markups, Chinese import competition and exporting at the firm level using a large

sample of French manufacturing firms for the period 1995–2007. In the first place, we study the effect

of increasing international competition from China, in particular following its access into the World

Trade Organization (WTO) in 2001, on firms' price–cost margins. Unlike other contributions in the

literature, we are able to calculate a firm-level measure of Chinese import competition by combining

information on Chinese imports at the 4-digit industry level and firm-level weights in each industry.

Then, we look at the role of exporting as a potential way to escape these competitive pressures. Indeed,

we study how being an exporter is related to Chinese import competition. Moreover, we include in our

analysis firms' choices over imports of Chinese intermediates and high-technology activities and how

they affect the above relationships.

We thank Lionel Nesta, participants at the Fukushima Economics Workshop 2019, the 2019 APTS Conference (Tokyo), the

2018 ISGEP Workshop (Ljubljana) and two anonymous referees for their invaluable comments. All remaining errors are

ours.

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CASELLI Et AL.

Our empirical methodology takes into account that Chinese import penetration, our preferred mea-

sure of Chinese competition, may be endogenous. Thus, we use the instrumental variable approach put

forth in Autor, Dorn, and Hanson (2013), but we apply it at the firm level.

The results show that, indeed, firms in more direct competition with Chinese imports decrease their

markups. However, when firms manage to become exporters, they face a smaller reduction in their

markups. Consistent with these findings, the results also show that firms facing tougher competition

from China are more likely to export to avoid such competitive pressures. On the other hand, the analysis

shows no evidence regarding the effect of importing materials from China and technology on markups.

The paper is linked to several strands of the industrial organisation and international trade literature.

Since the seminal works by De Loecker (2011) and De Loecker and Warzynski (2012), several papers have

estimated markups at the firm level and have studied their relationship with productivity, quality, export-

ing status and other relevant variables (Bellone, Musso, Nesta, & Warzynski, 2016; Caselli, Chatterjee,

& Woodland, 2017; Collard-Wexler & De Loecker, 2015; De Loecker & Goldberg, 2014; De Loecker,

Goldberg, Khandelwal, & Pavcnik, 2016). Our estimation of markups is taken from Caselli, Schiavo, and

Nesta (2018), in which the same sample of French manufacturing firms is used to analyse the high inci-

dence of firms displaying markups lower than unity for protracted periods of time. This paper shows that

a potential reason why markups may fall, even below unity, is tougher competition from abroad.

Several papers build models with endogenous variable markups and firm heterogeneity that pre-

dict lower markups due to increasing product market competition (Atkeson & Burstein, 2008; Mayer,

Melitz, & Ottaviano, 2014, 2016; Melitz & Ottaviano, 2008). These papers can be included into the

growing literature studying the pro-competitive effects of international trade (Arkolakis, Costinot,

Donaldson, & Rodríguez-Clare, 2019; Edmond, Midrigan, & Xu, 2015). Our paper provides empirical

evidence in favour of imports leading to greater competition and lower markups.

The rise of China in international markets and global value chains following its access into the

WTO in 2001 is one of the most prominent examples of a trade shock that increases competition.

Therefore, several papers have used this event to study the effects of trade on different aggregate

outcomes, such as employment and wages (Autor et al., 2013; Dippel, Gold, Heblich, & Pinto, 2017;

Feenstra, Ma, & Xu, 2019; Feenstra & Sasahara, 2017) or voting patterns (Autor, Dorn, Hanson, &

Majlesi, 2016; Caselli, Fracasso, & Traverso, 2020; Colantone & Stanig, 2018; Dippel et al., 2017).

While all the previous papers look at the effects of rising Chinese competition on aggregate patterns,

several contributions investigate the consequences of Chinese import competition on firms. These are,

therefore, more related to the present work. Iacovone, Rauch, and Winters (2013) analyse the intensive

and extensive margin of adjustment by Mexican plants following the increase in imports from China.

The authors find that sales of smaller plants and more marginal products lose, while larger plants and

core products seem to be more impervious to the shock. Dhyne, Petrin, Smeets, and Warzynski (2017)

look at the technical efficiency of Belgian firms and find that productivity increases with import pen-

etration from China and that the productivity gains are higher for core products. Similar effects on

productivity, product churning and within-firm factor reallocation are reported by Chakraborty and

Henry (2019) for Indian firms and Gampfer and Geishecker (2019) in the case of Danish manufacturers.

A few studies have looked specifically at the effect of Chinese competition on prices and markups,

finding that it exerts a negative effect on inflation and price–cost margins, both in the United States

and elsewhere. Chen, Imbs, and Scott (2009) provide evidence for European countries using indus-

try-level data, whereas Abraham, Konings, and Vanormelingen (2009) and Altomonte and Barattieri

(2015) link import competition to lower markups, respectively, in Belgium and Italy. The effect of

Chinese competition on Italian firms is also the focus of the work by Bugamelli, Fabiani, and Sette

(2015), who find that a 0.1 percentage point increase in import penetration reduces price growth

by 0.17 percentage points, and exerts a negative effect on employment, sales and markups as well.