Moving Up and Moving Out: US Product-Level Exports and Competition from Low Wage Countries

Product cycle theory has developed countries inventing goods and developing countries copying them. Once copying takes place, developed countries abandon the market – either outright, or through vertical differentiation – because of developing country cost advantages. Matching US imports and exports at the product level, I find evidence of both reactions – moving up and moving out – across manufacturing industries during the 1990s. Three trends stand out. First, US intra-product trade is lower with respect to low-wage trading partners than it is with respect to high-wage trading partners. Second, US export unit values are significantly higher than low-wage country import unit values in products where the US and low-wage countries overlap. Finally, US exports in some industries decline over time as competition from low-wage countries rises. Responses consistent with these trends are noted across US manufacturing industries: increased low wage competition from 1972 to 1996 is associated with declining output and skill and capital deepening.