Import Competition, Technological Diffusion, Input-Output Networks, and Industry Dynamics : the Case of China's WTO Accession

I study how trade liberalization, or more specifically, WTO accession by China in 2001, affects industry dynamics: entry, exit, and innovation in China. Using various identification strategies (DDD, IV, DD), I find that the trade liberalization has the following causal impacts: (1) in the short run it leads to less entry, more exit, and more innovation in tradable sectors and regions more affected by imports, while (2) in the long run leads to more entry, decreasingly more exit, and increasingly more innovation, and (3) the effects of the trade liberalization diffuse in the input-output network. Evidence suggests that the short-term results can be explained by import competition, while the long-term results can be explained by learning from foreign sellers and technological diffusion. I build and estimate a quantitative industry dynamics model with learning and input-output linkages to rationalize such facts and quantify the importance of different channels. The implications for optimal trade policy design are discussed