Estimating U.S. import penetration in sub-national regions

ABSTRACT

We develop an industry-specific model of import demand that takes into account the costs associated with international transport from the exporting country to the port of entry and also the costs associated with domestic transport from the port of entry to the consumer. The costs of domestic transport are usually not included in empirical models of international trade. We estimate these costs using an econometric specification derived from the structural model. We apply the model to 2013–7 import data for the U.S. electrical equipment industry. We use the structural equations and the econometric estimates of the parameter values to impute the flow of imports to U.S. consumers in five regions that cover the lower 48 states, and then we calculate industry-specific import penetration rates for each region. Finally, we simulate the exposure of consumers and industry employment in each region to changes in tariffs on U.S. imports from different countries.

KEYWORDS:

• International trade
• consumer effects
• regional
• econometric analysis

JEL CLASSIFICATIONS:

• F13
• F14
• F6

Acknowledgments

The author is grateful to Samantha Schreiber, Saad Ahmad, and the editor and referees for helpful comments and suggestions. This article represents the opinions and research of the individual author. It does not represent in any way the view of the U.S. International Trade Commission or any of its individual Commissioners.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This is demonstrated at a national level in Amiti, Redding, and Weinstein (2019).

2 For example, Hillberry and Hummels (2008) estimates that U.S. manufacturer's domestic shipments are extremely localized. Ramondo, Rodriguez-Claire, and Saborio-Rodriguez (2016) finds that taking into account domestic trade costs is important for reconciling theories of international trade with scale economies to available data.

3 We focus on this sector to provide a specific context, with descriptive statistics, rather than a general finding. We are not trying to draw conclusions about other sectors, though the methodology could be applied to other sectors.

4 Product differentiation by country or region of origin is the Armington assumption that is common in models of international trade. Additional product differentiation by region of import entry could reflect differences in the products that arrive at the various ports, as well as differences in the convenience of alternative distribution networks. While (1(1) $v_{jec}=Y_c{\left(\frac{p_j{f}_{je}{d}_{ec}}{I_c}\right)}^{1-\sigma }\frac{1}{d_{ec}}$(1) ) assumes that demand has a CES form, this assumption does not require that individual consumers purchase from multiple sources: Anderson, de Palma, and Thisse (1988) show that the CES demand structure can be derived from a specific logit model in which consumers face idiosyncratic extreme value-distributed costs associated with each source of supply and each individual chooses a single, preferred source of supply.

5 Region c may be the same as region e or different.

6 We use a specification of domestic transport costs with indicator variables rather than a continuous measure of distance because the regions in the model are large areas rather than precise locations.

7 Absent log-linearization, the system of non-linear equations will be intractable when there is a large number of source countries and several sub-national regions of entry and consumption.

8 Baier and Bergstrand (2009) is a model of international trade, rather than sub-national trade, so their log-linear expansion is around an equilibrium with symmetric international trade costs, rather than symmetric domestic transport costs.

9 The model does not include Alaska, Hawaii, or the U.S. territories.

10 An import district is an aggregate of neighboring ports of entry.

11 While it would be interesting to fit the model to more finely disaggregated product categories, we apply the model to NAICS three-digit industry to ensure that the state-level data on the shipments of domestic producers are complete in the public datasets that we use.

12 The source for the import data are the U.S. International Trade Commission's Dataweb at https://dataweb.usitc.gov/

13 The source for the expenditure data is the regional private consumption expenditure database published by the Bureau of Economic Analysis at https://www.bea.gov/data/consumer-spending/state Accord to this source, the regional shares of aggregate expenditure range from 21% to 23% each for the North Central, North East, South East and West regions and 11% for the South West region.

14 The value of shipments for each industry comes from the 2016 Annual Survey of Manufactures, at https://www.census.gov/programs-surveys/asm.htm. The free along side value of exports and the landed duty-paid value of imports in the industry comes from the USITC's Dataweb.

15 We pool over the most recent five years for a more precise estimate.

16 The country-year fixed effects include five terms from the right-hand side of Equation (8(8) $\ln v_{jet}=h_{jt}+(1-\sigma )\ln f_{jet}-\sigma \sum _c{\theta }_{ct}(\alpha ad{j}_{ec}+\beta nonad{j}_{ec})+{ϵ}_{jet}$(8) ): the constant γ, the source-specific price term $(1-\sigma )\ln p_{jt}$, the aggregate expenditure term $\sum _c{\theta }_{ct}\ln Y_{ct}$, and the price index term $(\sigma -1)\sum _c{\theta }_{ct}\ln I_{ct}$. This specification is also consistent with an alternative nested CES model with imports from each country within a nest with an elasticity of substitution that is higher than the elasticity of substitution between domestic products and the import nest. With nested CES demand, there would be additional price index terms, but they would also be absorbed in the country-year fixed effects.

17 If all imports were consumed in the same region where they enter the country, then α and β would be prohibitively large. The econometric estimates for the less restricted specification reject that possibility.

18 The F statistic for the hypothesis that $\alpha =\beta$ has a p-value of 0.0000. The F statistic for the hypothesis that all of the country-year fixed effects are jointly zero has a p-value of 0.0000.

19 This is equal to one minus the estimated coefficient on the log of the international trade cost ratio $f_{jet}$.

20 See, for example, Autor, Dorn, and Hanson (2013) and the related studies discussed in the Introduction and Section 7.

21 We calculate ${\varphi }_{jet}$ and ${\theta }_{ct}$ using available data on domestic shipments and the aggregate expenditures. The elasticity of substitution σ and the domestic transport costs between regions $d_{ec}$ are based on the econometric estimates in Table 5.

22 The assumption of fixed total industry expenditures is equivalent to assuming that the industry receives a constant share of aggregate expenditures and aggregate expenditures do not change in response to changes in industry-specific tariffs. These assumptions greatly simplify the partial equilibrium modeling of consumer exposure to the tariff changes, but they do not restrict the econometric model in Section 4 or the calculation of regional import penetration rates in Section 5.

23 The estimated regional import penetration rates could also be incorporated into a more complex, less restricted model to estimate consumer exposure to tariff changes. However, a more complex model requires additional sub-national data and is beyond the scope of this paper.

24 We omit the time subscript again, since we are calculating hypothetical changes.

25 Autor, Dorn, and Hanson (2013) and Hakobyan and McLaren (2016) both recognize that labor markets in the United States are segmented locally, and they find that differences in an industry's share of employment across locations will translate into differences in workers' exposure to imports and, ultimately, in differences in the effects of trade on labor market outcomes in different parts of the country. Autor, Dorn, and Hanson (2013) calculates the exposure of local labor markets to imports from China based on industry shares of local employment and total U.S. imports in each industry, regardless of where the imports from China enter the United States. For example, if local labor markets in California and Massachusetts had the same industry composition of local employment, then the model in Autor, Dorn, and Hanson (2013) views the two local labor markets as equally exposed to imports from China, even though imports from China are more likely to arrive on the West Coast and are costly to transship to the East Coast. Similarly, the measure of the exposure of local labor markets to NAFTA tariff reductions in Hakobyan and McLaren (2016) combines industry-level measures of trade exposure with data on the industry composition of local employment to measure trade exposure: the authors assign imports to local labor markets based on the location's share of national employment in the industry without taking into account where the imports enter the United States. The econometric model of wages in Hakobyan and McLaren (2016) does include a dummy variable for locations that are close to the U.S.-Mexican border, but the measure of distance to the border is not part of the authors' measure of each location's exposure to the NAFTA tariff reductions.

26 Dvorkin and Shell (2016) uses state import data, and Riker (2017) uses the Commodity Flow Survey.

27 Examples of studies that allocate imports to different parts of the United States based on local industry composition include Testa, Klier, and Zelenev (2003) for 1989-99, Partridge et al. (2017) for 1990–2010, and Liang (2017) for 2000–2007.