International Trade and U.S. Productivity: Technical Paper 2003-05

Working Paper
June 2, 2003

Juann Hung, Matt Salomon, Stacia Sowerby

This paper examines the effect of international trade on U.S. productivity. We argue that trade can affect domestic productivity through economies-of-scale effects, competition effects, reallocation effects, and spillover effects. We then estimate the net impact of these effects. The results of both panel and time-series regressions of manufacturing data indicate that (1) a decrease in the import price has a positive competition effect on manufacturing productivity growth after one to two years, and this impact is bigger when import penetration is bigger; and (2) exporting activity by itself does not seem to promote productivity. Our results suggest that the competition effect and/or the reallocation effect are the most powerful among the four channels. The simulation results indicate that import competition accounted for about 32 percent of labor productivity growth in manufacturing during 1996-2001.