Import liberalization as export destruction? Evidence from the United States

In trade models with scale economies import liberalization reduces exports within industries by shrinking real market potential. We find that this export destruction mechanism reduced US export growth following the permanent normalization of trade relations with China (PNTR). There was also an offsetting boost to exports from lower input costs. We use our estimates to calibrate a quantitative model and show that scale economies are economically important for trade policy analysis. Although PNTR increased aggregate US exports relative to GDP, exports declined in the most exposed industries. US gains from PNTR are positive, but 30 percent smaller than under constant returns.