Trade with China and skill upgrading: Evidence from Belgium Firm-Level Data G. Mion, H. Vandenbussche, L. Zhu

Outline Motivation Stylized facts Research questions Literature Data Results:  Trade and employment change  Trade and skill upgrading  Trade and firm death Conclusions

Motivation The possibility that trade with low-wage countries may reduce the demand for unskilled workers in developed countries has raised concern both in the public and in the acdecmic. Yet the results in the literature are still inconclusive The special characteristics of Chinese exports are noticed by many economicsts (e.g., Schott, 2008), but almost nothing is known about whether Chinese exports also have special effects on firms and workers in developed countries Most of the research only used industry-level data. We use both industry- and firm-level trade data to study their impacts on firm-level skill upgrading and employment change

Stylized facts: (1) Declining manufacturing employment

Stylized facts: (2) Increasing share of non- production workers

Stylized facts: (3) More skilled labour force in manufacturing

Stylized facts: (4) Rising manufacturing imports from China and other low-wage countries

Research questions Are those employment declining and skill upgrading in Belgian manufacturing (partly) driven by increased imports from China and other low-wage countries? What are the different effects of industry-level import competition and firm-level outsourcing on firm outcomes? Dose Chinese imports affect firms differently from imports from other low-wage countries?

Literature: (1) Trade and employment Bernard et al. (2006), Biscourp&Kramarz(2007), Gorg et al.(2008), Helpman et al. (2008), Revenga (1992) etc. Most works found a negative effect of imports on employment While distinction between imports from low-wage and non-low-wage countries is made by a few papers, the distinction between imports from China and other low-wage countries are almost never made Biscourp and Kramarz (2007) is the paper that is closest to ours in terms of the firm-level trade data used, but their paper is more of a descriptive one

Literature: (2)Trade and skill upgrading Berman et al. (1994), Wood(1994), Feenstra&Hanson(1999), Bernard & Jensen(1997), Biscourp&Kramarz(2007), Schott (2007), Falvay(2008) etc. Most works found trade and technology to be both responsible for skill upgrading, but technology-based explanation is more favoured Monfort et al.(2008): China entering WTO and skill upgrading in Belgian textiles

Literature: (3)Chinese exports Schott (2008) showed that China’s export similarity with OECD countries is higher than that of other non-OECD countries and this similarity is growing much faster than any other countries. This finding highlights that firms in developed countries are much likely to face competition from Chinese exports rather than that from other low-wage countries' exports, since the later have much less similarity with their productions.

Our contributions Both industry- and firm-level trade data are used. Skill upgrading is also measured at firm-level, so we can focus on within firm skill upgrading The first time in the literature to instrument firm-level outsourcing We find Chinese imports to be much more important than other low- wage countries imports More recent data: Education as measure for skill

Data: sources Firm-level data: Balance Sheet Data from National Bank of Belgium Industry-level : ComExt Intra- and Extra-European Trade data by Eurostat Instrumental variables: - Exchange rate: IFS database from IMF - Ad valorem tariff: TARIC database from EU Commission

Data: main variables Trade: - Industry-levl import share - Firm-level outsourcing of finished goods - Firm-level outsourcing of intermediate goods (similarly defined) Firm characteristics: -Size (log empl.) -Average wage (wage bill/empl.) -Labor productivity(value added/empl.) -Capital intensity (tfa/empl.) -Intangible capital intensity (itfa/empl.)

Import penetation. 1995Import penetration 2004 Employment changeDifferent measures of skill upgrading: vs Nace Industry ChinaAll LWChinaAll LW Measure1Measur2Measure3 15 Food Tobacco Textile Apparel Leather product&footwear Wood products Paper Publishing Chemical Rubber&plastic Non-metallic mineral Basic metal Fabricated metal Machinery&equipment Office machinery&computers Electrical machinery Radio, TV&Comm. Equip Medical&optical instr Motor vehicles Other transp. Equip Furniture Table 1: Import penetration, employment change and skill upgrading in Belgium manufacturing industries Measure1=skilled_enters/unskilled_enters; Measure2=(skilled_enters/skilled_quiters)/(unskilled_enters/unskilled_quiters); measure3=skilled_enters/total_enters

Trade and employment change (BJS, 2006) Econometric model: =firm characteristics: size, labor productivity, capital intensity, intangible capital intensity and average wage =industry-level import share of different country groups =firm-level outsourcing to different country groups (finished and intermediate) =time fixed effects =firm fixed effects

Table 2: trade and employment

Trade and skill upgrading The model: is the share of skilled workers in total employment, which is unobservable in our data set, but Where skill is the number of skilled workers in the total employment and is the net inflow (i.e., inflow minus outflow) of skilled workers between year 0 and year t. The only thing that is unobservable in our data is, which is the initial number of skilled workers in firm i. We used the initial number of non-production workers as a proxy for it.

Table 3: trade and share of production workers

Table 4: trade and skilled workers

How much can Chinese imports explain skill upgrading? Take the estimates from column 3-6 of table 4, the average marginal effect of Chinese imports is 1.68 Chinese (average) import share increased from 0.75 percent to 2.13 percent from 1996 to 2006 The average skill upgrading in Belgian manufacturing is 7.4 percentage points 1.68*( )/7.4=0.313 So Chinese imports alone can explain around 30% of the total skill upgrading in Belgian manufacturing during the period of

Trade and firm death We estimate a linear probability model: Whear Death is a dummy variable denoting firm death. We defined a firm as dead if it disappears from the data set in the next year or for the next two years.

Table 5: Trade and firm death (1)

Table 6: Trade and firm death (2)

Conclusions We find that trade with low-wage countries is important in explaining within firm employment structure change in Belgian manufacturing, with imports from China playing a much more important role than that from other low- wage countries. Firm-level outsourcing to China will lead firms to upgrade their occupational composition of employment, although it will not affect the level of employment significantly. Import competition from low-wage countries only has weak impact on firm death Overall, the results of this paper are consistent with the 'moving up the quality ladder' story of Schott (2008), which said that manufacturing firms in developed countries can manage to survive by specializing in producing high quality goods.