622/2022 - Holger Breinlich, Elsa Leromain, Dennis Novy & Thomas Sampson

How does import protection affect export performance? In trade models with scale economies, import liberalization can reduce industry-level exports by cutting domestic production. We show that this export destruction mechanism reduced US export growth following the permanent normalization of trade relations with China (PNTR). But there was also an offsetting boost to exports from lower input costs. We use our empirical results to calibrate the strength of scale economies in a quantitative trade model. Counterfactual analysis implies that while PNTR increased aggregate US exports relative to GDP, exports declined in the most exposed industries because of the export destruction effect. On aggregate, the US and China both gain from PNTR, but the gains are larger for China.