International trade and household debt: How import competition from China helped fuel the credit bubble of the 2000s – Jean-Noël Barrot, Erik Loualiche, Matthew Plosser, Julien Sauvagnat

MIT Sloan Assistant Professor Jean-Noël Barrot

MIT Sloan Asst. Prof. Jean-Noël Barrot

MIT Sloan Assistant Professor Erik Loualiche

MIT Sloan Asst. Prof. Erik Loualiche

From Vox

In the years preceding the Great Recession, there was a dramatic rise in household debt (e.g. Mian and Sufi 2009) and an unprecedented increase in import competition. This competition was triggered by the expansion of China and other low-wage countries in global markets, and had substantial labour market consequences (Autor et al. 2013, Autor et al. 2014, Pierce and Schott, 2016). There is a striking break and a dramatic acceleration of both trends at the turn of the century.

We hypothesise that these two phenomena were intimately linked, and that the impact of import competition on labour markets affected household debt expansion from 2000 to 2007.

More precisely, we argue that the displacement of domestic production by imports fuelled demand for credit in impacted areas.

We examine this hypothesis using a large, nationally representative panel dataset of anonymous consumer credit records, the Federal Reserve Bank of New York’s Consumer Credit Panel/Equifax Data (CCP), HMDA as well as a longitudinal survey, the PSID. We exploit cross-regional variation in exposure to import competition to study the impact of import penetration on household liabilities.

More precisely, we use variation in exposure to international trade driven by historical industry composition at the commuting-zone level. To capture exposure to import competition, we build on prior work (Barrot et al. 2016) and use industry-level shipping costs (SC), obtained from import data and computed as the mark-up of Cost-Insurance-Freight over the price paid by the importer. We find shipping costs to be a strong predictor of the increase in import penetration. In Figure 1 we decompose Chinese import penetration to the US into high, medium, and low shipping cost industries. Most of the dramatic increase in Chinese import penetration in the 2000s is concentrated in low-shipping-cost industries.

Read the full post at Vox.

Jean-Noël Barrot is the Alfred Henry and Jean Morrison Hayes Career Development Professor and an Assistant Professor of Finance at the MIT Sloan School of Management.

Erik Loualiche is an Assistant Professor of Finance at the MIT Sloan School of Management.

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