Trade induced technical change? The impact of Chinese imports on innovation and Information Technology

Abstract

There is a popular belief that Chinese imports have devastated US and European manufacturing and contributed to rising inequality. Somewhat paradoxically, the consensus amongst empirical economists is that trade has not been a major cause of rising wage inequality (although this is largely based on datasets predating China’s rise). We argue that both views have underestimated the positive impact of Chinese trade on technical change. We examine the impact of the growth of Chinese imports innovation and IT diffusion using a panel of over 23,000 European establishments through 2007. We correct for endogeneity using natural experiments such as China’s entry into the World Trade Organization. We find that Chinese import competition led to both within firm technology upgrading, and between firm reallocation of employment towards more technologically intensive plants. These effects are growing over time as Chinese trade volumes rise, accounting for up to 38% of technology upgrading in the most recent years. These results suggest that trade with low wage countries appear to have potentially large beneficial impacts on technical change as recent theories suggest.

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