Foreign Trade and US Market Performance

Abstract

THE openness of the US economy appears to be secularly increasing. Merchandise exports as a fraction of final goods sales averaged 4 4 % in the early I960s and rose to an average 5.8% in the early I970s. The share of merchandise imports in apparent domestic consumption of final goods rose somewhat more. Yet, only recently have efforts been made to estimate the impact of foreign trade on market performance in the United States. This study surveys recent analyses and offers theoretical discussion and econometric evidence on the effects. If import competition improves performance in otherwise uncompetitive domestic markets, public policy should recognize an additional means by which desired market performance may be achieved. Indeed, import competition potentially substitutes for vigorous antitrust policy, thus resolving to some extent the antitrust dilemma between efficiency and the number or size of domestic competitors. Exporting offers firms one means of expanding the available market. Therefore exporting may affect domestic corporate profitability, even if it has little impact on domestic pricing decisions. The first two sections of this paper survey previous work on the impact of foreign trade on domestic market performance, measured by price-cost margins or profit rates, and present theoretical expectations about the relations between profitability and each of import competition and exporting. The third section briefly discusses the data used in the empirical analysis and the fourth presents results. The empirical presentation extends most previous analyses by explicit consideration of the interactions among producer concentration, domestic barriers to entry, and foreign trade, by utilizing data defined at the SIC 4-digit level, and by utilizing a consistent estimation technique in the presence of simultaneity. The results demonstrate that foreign trade is a significant additional set of influences on performance. Import competition tends to reduce price-cost margins and thus to constrain domestic pricing. This tendency is stronger in less domestically competitive US industries. In contrast, exporting tends to enhance profitability.