The Pro-Competitive Effect of Imports from China: An Analysis of Firm-Level Price Data

Abstract

It is a widespread idea that the entry of China into world markets has been one of the strongest recent shocks to advanced countries’ industrial sectors. This is particularly true for countries like Italy where labor intensive, low-technology productions represent a large share of output. Using Italian manufacturing firm-level data on output prices over the period 1990-2004, we test whether increased import competition from China has affected firm’s pricing strategies causing a reduction in prices and markups. After controlling for other price determinants (demand and cost changes, domestic competition and import penetration), we find that this is indeed the case. Instrumenting China’s share over Italian total imports with China’s world export market share proves the found relationship is of a causal nature. Inspired by andin line with recent advances in international trade theory, we also show that the price effects of Chinese competitive pressure are stronger in less technologically advanced sectors and, within these sectors, for less productive firms.