Import competition from and offshoring to low-income countries: Implications for employment and wages at U.S. domestic manufacturers

Abstract

Using confidential linked firm-level trade transactions and census data between 1997 and 2012, we provide new evidence on how American firms without foreign affiliates adjust employment and wages as they adapt to import competition from low-income countries. We provide stylized facts on the input sourcing strategies of these domestic firms, contrasting them with multinationals operating in the same industry. We then investigate how changes in firm input purchases from low-income countries as well as domestic market import penetration from these sources are correlated with changes in employment and wages at surviving domestic firms. Greater offshoring by domestic firms from low-income countries correlates with larger declines in manufacturing employment and in the average production workers' wage. Given the negative association, however, the estimated magnitudes are small, even for a narrow measure of offshoring that includes only intermediate goods. Import penetration of U.S. markets from these sources is associated with relatively larger changes in employment for arm's length importing firms, but has no significant correlation with employment changes at firms that do not trade. Given differences in the degree of both offshoring and import penetration, we find substantial variation across industries in the magnitude of changes associated with low-income country imports.

The Impact of Offshoring on Employment: A Meta-analysis

“…Falk & Wolfmay (2008), Michel & Rycx (2012) and Bramucci et al (2021) examine the offshoring effects across different sectors, finding a negative effect on employment in both services and manufacturing sectors. Kamal & Lovely (2017) show that when offshoring comes from low-income countries, there is a reduction in the employment of the manufacturing sector, but when Narrow Offshoring is considered such effect ceases to exist.…”

Import competition and sustainable development of global value chains: Evidence from China

“…There are two main methods to measure import competition. One is to directly use the import penetration ratio, defined as the ratio of imports to domestic outputs across industries that the firm belongs to (Bloom et al, 2016; Kamal & Lovely, 2017). Novy (2013) points out that import competition is mainly affected by import cost changes, which include tariff and non‐tariff barriers.…”

“…According to the corollary above, import competition will decrease firm‐level DVAR. In the benchmark empirical model, following the commonly‐used method from the literature (Bloom et al, 2016; Darko et al, 2021; Kamal & Lovely, 2017), we use the import penetration ratio as the measure of import competition with OLS estimates. First, this ratio captures the effect of both tariff and non‐tariff barriers.…”

“…Fourth, we use OLS estimates in the basic regression and also use China's entry into the WTO as a quasi‐natural experiment for import competition to further solve potential endogeneity issues with the DID method. Some studies only use the OLS method (Darko et al, 2021; Kamal & Lovely, 2017). Although OLS is intuitive and flexible, it may have estimation bias due to endogeneity problems (Krueger & Lewis‐Beck, 2008).…”