Trade as an engine of creative destruction: Mexican experience with Chinese competition

This paper exploits the surge in Chinese exports from 1994 to 2004 as a natural experiment to evaluate the effects of a unilateral low wage trade and competition shock to producers in Mexico. We find that this shock causes selection at both firm and product levels as its impact is highly heterogeneous both on the intensive and extensive margins. Sales of smaller plants and more marginal products are compressed and are more likely to cease, while larger plants and products exhibit an opposite response. Similar results hold both for the domestic market and for competition facing Mexican exporters in a third market (i.e. the United States).