Import penetration from China and its effect on manufacturing employment in the OECD countries

Abstract: China has ever since the 1990s emerged as a manufacturing superpower, following its liberalized trade reforms and its entrance to the World Trade Organization. This has caused China to expand their exports substantially, in particular to the OECD countries. This has lead to an increasing debate on whether, or to what extent, increasing manufacturing exports from China to the OECD countries has contributed to the decline in manufacturing employment levels seen in the last 20 years. This study examines if and how China's import penetration has affected the employment of manufacturing workers in the OECD countries. The relationship is analyzed using import penetration and employment data from 26 OECD countries between 1997 and 2011 in a regression model. Two different versions of the model are analyzed, namely, one with dummies only for time, and one with both time-dummies and cross-sectional dummies. The results show that, generally, import exposure is connected to lowered employment levels in the sector, until we control for country-specific effects, when the results are the opposite, as Chinese import penetration then has a strong positive effect. This implies that the conditions of trade and employment within a country is crucial in determining how the sector is affected by trade. Additionally, the results contradicts the popular belief that China’s increasing exports to the OECD countries are harmful to their domestic manufacturing industries.