Survival of the best fit: Exposure to low-wage countries and the (uneven) growth of U.S. manufacturing plants

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Abstract

This paper examines the role of international trade in the reallocation of U.S. manufacturing within and across industries from 1977 to 1997. Motivated by the factor proportions framework, we introduce a new measure of industry exposure to international trade that focuses on where imports originate rather than on their overall level. We find that plant survival and growth are negatively associated with industry exposure to low-wage country imports. Within industries, we show that manufacturing activity is disproportionately reallocated towards capital-intensive plants. Finally, we provide the first evidence that firms adjust their product mix in response to trade pressures. Plants are more likely to switch industries when exposure to low-wage countries is high.

Introduction

The relative importance of U.S. manufacturing declined between 1960 and 2000. Employment fell from 26 percent to 14 percent of the U.S. workforce, while output as a share of GDP shrank from 27 percent to 16 percent. This overall decline, however, masks substantial reallocation of activity across industries within manufacturing, and across plants within industries. This paper finds that these reallocations follow the predictions of endowment-based trade theory. It also provides the first evidence that U.S. firms respond to the pressures of international trade by altering their product mix.

We focus on U.S. trade with low-wage countries. As U.S. trade barriers have fallen in recent years, low-wage countries like China and India have begun exporting to the United States many of the more labor-intensive products formerly produced domestically. This product cycling–where the United States moves out of labor-intensive products like t-shirts and sneakers as lower-cost developing countries move in–is a key feature of endowment-driven trade theory. Given their high relative wages, it is virtually impossible for U.S. firms to earn profits producing labor-intensive goods. As a result, industries like Apparel and Footwear are all but disappearing, while more skill- and capital-intensive sectors such as Instruments and Publishing thrive.

A primary contribution of this paper is the identification of multiple margins of adjustment to low-wage country imports. Our use of plant-level data allows examination of a richer set of U.S. responses to international trade, including exit and product upgrading, than is possible with industry-level data. It also permits analysis of whether reallocation within industries is consistent with U.S. comparative advantage. To the extent that plant input intensity indicates the (unobserved) type of products a plant produces within its industry, labor-intensive plants are relatively more susceptible to low-wage country imports than are capital- and skill-intensive plants in the same industry. As a result, within-industries, activity should shift towards relatively capital- and skill-intensive plants.

A second contribution of the paper is the introduction of a new method for identifying an industry's exposure to international trade. We concentrate on low-wage country import penetration, i.e., import penetration from countries with less than 5 percent of U.S. per capita GDP. This attention to where imports originate is motivated by the factor proportions framework and allows for a cleaner test of the influence of comparative advantage than aggregate import penetration, which treats imports from high- and low-wage countries symmetrically. We demonstrate throughout the analysis that our results are robust to the inclusion of import penetration from other countries.

We find evidence of reallocation in three dimensions. At the industry level, exposure to low-wage country imports is negatively associated with plant survival and employment growth. Within industries, the higher the industry's exposure to low-wage country imports, the bigger is the relative performance difference between capital- and labor-intensive plants. Finally, there is a positive association between exposure to low-wage country imports and industry switching. Plants that switch industries shift into industries with less exposure to low-wage country imports and greater capital- and skill-intensity than the industries left behind. Together, these results support the view that U.S. manufacturing is moving away from comparative-disadvantage activities and towards comparative-advantage industries via exit, growth and industry switching.

This paper builds upon previous industry-level studies of the effect of import competition on U.S. manufacturing employment. While the earliest of these efforts find little or no association between the level of imports and industry employment growth (e.g. Krueger, 1980, Grossman, 1987, Mann, 1988), more recent efforts based on larger sets of industries have established a negative correlation between employment growth and either imports (e.g. Freeman and Katz, 1991, Sachs and Shatz, 1994) or changes in import prices (e.g. Revenga, 1992). Our findings indicate that these negative relationships are driven to a large degree by a combination of plant closure, plant decline and plant product-mix changes in response to low-wage country imports.

The remainder of the paper is organized as follows. Section 2 summarizes the theoretical framework guiding the analysis and outlines testable hypotheses. 3 U.S. exposure to low-wage country imports, 4 U.S. manufacturing plant activity describe the data and the construction of low-wage country import penetration. 5 Empirical results: plant survival and growth, 6 Industry switching present the econometric results and robustness checks. Section 7 concludes.

Section snippets

The factor proportions framework

A key implication of the Heckscher–Ohlin trade model is that the set of industries produced by a country is a function of its relative endowments: in an open world trading system, relatively capital- and skill-abundant countries like the United States are expected to manufacture a more capital- and skill-intensive mix of industries than relatively labor-abundant countries like China.

The standard Lerner (1952) diagram for depicting this free-trade equilibrium is displayed in the left panel of

U.S. exposure to low-wage country imports

We introduce a new measure of import exposure to examine the link between U.S. manufacturing outcomes and international trade. It differs from traditional measures of import competition by focusing on where imports originate as well as their level. This focus is critical because the intra- and inter-industry reallocation implied by the factor proportions framework is a function of trade between countries with very different relative endowments. For the United States, imports from China are

U.S. manufacturing plant activity

Manufacturing plant data are from the Longitudinal Research Database (LRD), developed from the U.S. Census Bureau's Census of Manufactures starting in 1977 and conducted every fifth year through 1997. The sampling unit for the Census is a manufacturing establishment, or plant, and the sampling frame in each Census year includes detailed information on inputs, output, and products on all establishments. Regression analysis covers plant outcomes for four panels: 1977 to 1982, 1982 to 1987, 1987

Empirical results: plant survival and growth

In this section we examine the effects of low-wage country imports on plant survival and employment growth. These outcomes between Census years t and t + 5 are related to a set of year t plant characteristics (Vpt), the average import penetration by low-wage countries across years t  5 to t  1 (LWPENi,t−1), and interactions of plant input intensities and productivity with LWPENi,t−1 (Xipt),Outcomept:t+5=f(Vpt,LWPENi,t1,Xipt).Recognizing the potential endogeneity of industry-level low-wage

Industry switching

In this section, we provide the first evidence that firms systematically adjust their product mix in response to pressure from international trade. Roughly 25,000 U.S. manufacturing plants switch industries in the four panels, an average of 7.8 percent of surviving plants in each 5-year period. Table 5 compares the industry capital intensity, skill intensity and LWPEN across the old and new industries of switching plants. For each switch occurring between years t and t + 5, we compare the year t

Conclusions

Imports from low-income countries were the fastest growing component of U.S. trade from 1972 to 1997, increasing more rapidly than aggregate imports. This paper considers the role of imports from low-wage countries in U.S. manufacturing plant outcomes over time.

Across industries, we find that plant survival and growth are disproportionately lower in industries with higher exposure to imports from low-wage countries. Within industries, the higher the exposure to low-wage countries, the bigger is

Acknowledgement

We thank Bruce Blonigen, Robert Feenstra, Gordon Hanson, Jim Tybout, and two referees for helpful suggestions. Bernard and Schott also thank the National Science Foundation (SES-0241474) for generous financial support. The research in this paper was conducted at the Center for Economic Studies. Results and conclusions are those of the authors and do not necessarily indicate concurrence by the Bureau of the Census or by the NBER. The paper has been screened to insure that no confidential data

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