June 2020

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CENTRE FOR
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LIVING
STANDARDS

The Price Effect of Trade: Evidence of
the China Shock and Canadian Consumer
PricesMyeongwan Kim
Prepared for Global Affairs Canada
June 2020

CSLS Research Report 2020-02

The Price Effect of Trade: Evidence from the China Shockand Canadian Consumer Prices

Abstract
The explosive growth in Chinese imports to Canada over the last two decades has had both
negative and positive effects. In this paper, we look at the impact of Chinese imports on the prices
Canadians pay for household consumption goods. We find Canadians have benefited from lower prices
on some goods and lower inflation overall. To quantify the importance of Chinese imports for individual
consumer products and map them to consumer price data, we construct concordance between products inthe consumer price index (CPI) and commodities in the Harmonized Commodity Description and Coding
System. We estimate that over the 2001-2011 period, cumulative inflation would have been 1.17percentage-points higher for the total CPI had there been no change in the Chinese share of total imports
in Canada. This assumes other factors are held constant. The average annual inflation for the total CPI
was 2.1 per cent over the 2001-2011 period, implying that annual inflation would have been about 0.12percentage-points higher if there had not been a surge in imports from China.

IIThe Price Effect of Trade: Evidence from the China Shockand Canadian Consumer Prices
Table of Contents
Abstract ............................................................................................................................................ I
List of Tables and Charts ...............................................................................................................III
Executive Summary ...................................................................................................................... IV
I. Introduction ..................................................................................................................................1
II. Data .............................................................................................................................................5
1. Consumer Prices Data ..............................................................................................................6
2. Trade Data ................................................................................................................................7
3. Input-Output Data ....................................................................................................................7
4. Concordance .............................................................................................................................7
III. Descriptive Statistics: Trade and Consumer Prices Data .........................................................10
IV. Empirical Approach .................................................................................................................14
1. Estimating Equation ...............................................................................................................14
2. Identification Strategy ............................................................................................................15
3. Summary Statistics.................................................................................................................17
V. Results .......................................................................................................................................18
1. Baseline results .......................................................................................................................18
2. Contextualizing the Results ....................................................................................................22
VI. Conclusion ...............................................................................................................................25
References ......................................................................................................................................26
Appendix A ....................................................................................................................................29
Appendix B ....................................................................................................................................32
Appendix C ....................................................................................................................................35

III

The Price Effect of Trade: Evidence from the China Shockand Canadian Consumer Prices
List of Tables
Table 1: Domestically-produced and imported consumer goods, Canada, 2001-2017 .................10
Table 2: Average annual percentage-point change in the Chinese share in total imports andaverage annual inflation (per cent), 2001-2011 .............................................................................13
Table 3: Summary statistics, Stacked sub-periods, 1991-2011 .....................................................17
Table 4: The effect of change in the Chinese share of total imports in Canada on consumer
goods prices, Stacked differences: 1991-2001 and 2001-2017; 1991-2001 and 2001-2007;
1991-2001 and 2001-2011; 1996-2001 and 2001-2011.................................................................19
Table 5: The effect of Chinese imports on Canadian CPI for consumer goods, Robustness
checks, 2001-2011, 2SLS estimates...............................................................................................21
Table 6: Trade-induced annual price changes, per cent, Selected CPI products, 2001-2011,
Canada............................................................................................................................................23
Table 7: Implied effects of Chinese imports, Cumulative over 2001-2011 ...................................24
Table A1: Input-output linkages, Stacked differences: 1991-2001 and 2001-2011, Using importpenetration ratio, 2SLS estimates ..................................................................................................33
Table A2: The effect of Chinese imports on Canadian CPI for consumer goods, Using importpenetration ratio, Stacked differences, 2SLS estimates .................................................................35

List of Charts
Chart 1: Chinese share in total imports by country, 1991-2017 ......................................................2
Chart 2: Chinese share in total imports by CPI product category, per cent, Canada, 1991-2017 ...3
Chart 3: Consumer Price Index by product category (Index=2001), Canada, 1991-2017 ..............4
Chart 4: Chinese share in total imports by detailed product class in CPI, Canada, 1991-2017 ....11
Chart 5: Average annual change in the Chinese share in total imports (and),
Consumer product classes in CPI, Canada and eight other advanced economies, percentage
point, 2001-2011 ............................................................................................................................17
Chart 6: Estimated marginal price effects of Chinese imports, by sub-period, 2SLS estimates,
90% confidence band .....................................................................................................................20
Chart A1: Chinese share in total imports by category, Canada, 2000-2011 ..................................34
Chart A2: Average annual inflation (per cent) and average annual change in the Chinese sharein total imports (percentage point), by product class in CPI, Canada, 2001-2011 ........................35

1

The Price Effect of Trade: Evidence from the China Shockand Canadian Consumer Prices
Executive Summary
Over the last 20 years Chinese-made goods have occupied more and more space in the
shopping baskets of Canadians. This has costs and benefits. There is no shortage of research on
the costs, which include job losses in manufacturing. This study is the first to take a detailed lookat the benefits, which include lower prices for some products and lower inflation overall.
China became an exporting powerhouse after it joined the World Trade Organization(WTO) in 2001. Much of this export surge, commonly called the China Shock, stemmed frominternal factors in China, such as urbanization, the rising competitiveness of Chinese
manufacturing and the Chinese government’s decision to abide by the rules of global trade.
China wanted to sell its goods to the world and consumers in other countries were happy to buy
them. The expansion of superstores like Wal-Mart, which focussed on high-volume, low-margin
sales, boosted the spread of Chinese products.
We focus on goods in this paper. In 2000, consumer goods from China accounted for 5
per cent of all imported consumer goods in the basket of goods and services that Statistics
Canada uses to calculate the consumer price index (CPI). A decade later they accounted for 14
per cent. The increase varied depending on the product category.
Canadians experienced particularly-rapid, trade-induced price declines in consumer
products related to textiles, clothing, furniture, and electronics. It is worth noting thattechnological progress, which may be interrelated with rising Chinese imports, may also havedepressed prices. Increasing imports from China could have induced domestic firms to adopt
advanced technologies to become more competitive or because trade with China made thosetechnologies more available.
We estimate that, on average, a 1-percentage-point increase in the Chinese share in total
imports of a given product leads to a 0.221-percentage-point decrease per year in its consumer
price. We also find that, over the 2001-2011 period, the cumulative inflation for all consumer
goods in the consumer price index would have been higher by 2.41 percentage points had there
been no change in the Chinese share of total imports in Canada. In other words, the cumulative
inflation for all consumer goods over this period would have been 20.01 per cent instead of 17.60
per cent.
For the total consumer price index, which includes services as well as goods, cumulative
inflation would have been higher by 1.17 percentage points in 2011 had the Chinese share in
total imports in Canada remained at the 2001 level. The average annual inflation for the total CPI
was 2.1 per cent over the 2001-2011 period, implying that the annual inflation would have been
about 6 per cent higher (or 0.12 percentage-points) without the increase in imports from China.

2How do these benefits stack up against the costs associated with the large increase inimported goods from China? A 2018 study by Myeongwan Kim estimated that the loss of
113,500 manufacturing jobs between 2001 and 2011 could be associated with the rise in importsof Chinese goods. The average annual wage for a manufacturing worker during the period was$42,868 (in 2002 dollars).
This current study implies that lower inflation rates over this period translate into a
cumulative gain of $546 per Canadian worker or $76,996 (in 2002 dollars) for every job lost. If
this amount of money were given to the workers who lost their jobs it would be sufficient tocompensate for lost earnings or training or other financial costs associated with finding a new job.
It is worth noting that the costs of the China Shock are borne by a small group or workers andfirms whereas the benefits are widely spread across Canada. Our findings provide support forcompensation programs and other policies that redistribute the gains from trade
We suggest more research is needed to identify true trade shocks and to determine
whether the benefits of lower prices are distributed equally among income groups.

The Technical Details
In this report, we estimate the overall price effect of increasing imports from China on
consumer goods in Canada. To our knowledge, there is only one study (Morel, 2007) on thisissue using Canadian data. There is no study analyzing the issue in Canada at a detailed productlevel, relying on econometrics. One potential reason is that the information researchers can use to
map Canadian price data to trade data at a detailed product level is not readily available. There
has been no attempt in the literature to map detailed product classes in official Canadian CPI datato commodities in the Harmonized Commodity Description and Coding System (HS).
To map import exposure measures to price data for a given consumer product, weconstruct concordance between basic product classes (the most detailed level available to the
public) in the CPI published by Statistics Canada and HS commodities in the United Nations
Comtrade database. We carry out concordance between an expenditure-based classification
system (CPI) and an output-based system (HS) by using the Classification of Individual
Consumption According to Purpose (COICOP) and the Central Product Classification (CPC) as
bridges since the United Nations Statistics Division publishes official concordance tables for
COICOP-CPC and CPC-HS codes. Note that COICOP is expenditure-based and CPC is outputbased. After mapping CPI products to HS commodities, we construct a measure of Chinese
import exposure for each CPI product.
An instrumental variable strategy is employed to identify trade shocks related to rising
Chinese exporting capacity. We exploit the fact that growth in Chinese imports to developed
economies like Canada since the early 2000s mostly stemmed from factors internal to China(urbanization, rising competitiveness in manufacturing, and accession to the WTO) rather thanfrom positive demand shocks within developed economies. Thus, following Autor, Dorn, andHanson (2013), we instrument for changes in the Chinese share of total imports in Canada using
the changes in the Chinese share of total imports in eight high-income economies (Australia,
Denmark, Finland, Germany, Japan, New Zealand, Spain and Switzerland).
3

The Price Effect of Trade: Evidence from the China Shockand Canadian Consumer Prices 1
I. Introduction
A growing literature on the China Shock focuses on the effect trade with China has on
labour markets. There are a number of empirical studies relying on reduced-form methods thatquantify the loss of manufacturing jobs due to China.2 Some studies have explored the effect oftrade on wages in different sectors.3
To promote a more balanced assessment of trade, researchers should also pay attention to
all potential gains from trade. The impact of trade on consumer prices is likely to be an important
gain. Canadians may have benefited if Chinese exports to Canada reduced domestic consumer
prices. This is known as the Wal-Mart effect. It describes what happens when consumers
substitute cheaper foreign goods for their normal purchases.4 But it can also occur whendomestic producers lower their prices in response to competition from Chinese goods.5
Empirical evidence on the effect of trade on consumer prices is relatively limited andtends to focus on the United States.6 Previous studies that used scanner-level price data foundthat increasing Chinese import competition had a negative impact on consumer prices in the US.7
A study of Mexico that used micro data8 found that increasing trade driven by Mexico’s
accession to the North American Free Trade Agreement (NAFTA) reduced consumer prices.

1

This report was written by Myeongwan Kim for Global Affairs Canada when he worked as an economist at theCentre for the Study of Living Standards (CSLS). The author thanks the United Nations Statistics Division forproviding useful information on concordance tables. The author also thanks Andrew Sharpe at CSLS and Audrey
Bélanger Baur, Hossein Rostami, and Colin Scarffe at Global Affairs Canada for helpful comments. The Centre for
the Study of Living Standards would like to thank Global Affairs Canada for financial support for this research. This
report was prepared for the Office of the Chief Economist at Global Affairs Canada. However, the opinions in thisreport are those of the author. An earlier version of the report was presented at the CSLS session on "The Impact ofChina on the Canadian Economy" at the annual meeting of the Canadian Economic Association held in Banff,
Alberta, June 1st 2019. Email: myeongwan.kim@mail.utoronto.ca
2
Some key examples are Autor, Dorn, Hanson (2013) and Acemoglu, Autor, Dorn, Hanson, and Price (2016) for theUnited States; Balsvik, Jensen, and Salvanes (2015) for Norway; and Murray (2017) and Kim (2018a, b) for Canada.
3
Examples are Cravino and Sotelo (2017) and Burstein and Vogel (2017)4
As suggested by the trade models introduced in Arkolakis, Costinot, and Rodriguez-Clare (2012). Examples areAnderson (1979), Eaton and Kortum (2002), Krugman (1980), and Melitz (2003).
5
Jaravel and Sager (2018) find empirical evidence that a fall in prices in the United States is also stemmed from an
endogenous response of domestic producers. Domestic producers could lower their markups or improve productivity
due to the threat of Chinese competition.
6
Some examples are Broda and Romalis (2008), Bai and Stumpner (2017) and Jaravel and Sager (2018).
7
For example, Bai and Stumpner (2017) find that, over the 2004-2012 period, the cumulative inflation would havebeen 2.27 percentage points higher had there been no change in the Chinese import penetration for the United States.
8
Faber (2014)4

To our knowledge, there is only one empirical study on this issue using Canadian data.9 It
was written by Louis Morel for the Bank of Canada in 2007. The author calculates the overall
weight of China in the Canadian total CPI, based on the share of imports in total Canadiandemand and the Chinese share in total imported goods in Canada. He focusses on three broad
product categories: clothing, furniture, and appliances and audiovisual. Using the Chinese weightin the total CPI and the Chinese export prices for those product categories (relative to Canada
and other countries exporting to Canada), the author estimates that the impact of rising Chinese
imports in Canada on the total CPI is -0.01 percentage point per year over the 2001-2006 period.
Our study is different from the Morel paper in that we quantify the Chinese share in total imports
in Canada at a detailed product level and rely on econometrics to estimate the effect of rising
Chinese imports on the Canadian CPI over the 2001-2011 period.10
China provides researchers with a rare opportunity to study the causal impact of tradewith developing countries on developed countries like Canada. Chinese exports have been
increasing rapidly from the early 2000s. Such rapid increases in exports appear to be driven bypositive supply shocks within China, such as rapid urbanization, rising competitiveness in
manufacturing and the country’s accession to WTO in 2001, rather than by demand shocks
experienced by some large economies. Researchers can rely on this exogenous increase in
Chinese exports to estimate the impact of the country’s rising exporting capacity on a wide rangeof economic outcome variables in developed economies.11
Chart 1: Chinese share in total imports by country, 1991-201725%
2017=21.9%
2010=19.5%

20%

2017=13.5%

15%

2010=12.9%

10%

2000=8.2%

2010=11.0%

2017=12.6%

2000=6.8%

5%2000=3.2%

0%1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
CanadaU.S.

Other advanced economies

Note: Other advanced economies include: Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain and
Switzerland. Source: The author’s calculations based on the United Nations Comtrade database.
9

Morel (2007)
Despite the difference in the sample period and the empirical approach, their estimated effect of -0.10 percentage
point per year is very close to our estimate of -0.12 percentage point per year (see footnote 64).
11
One example is R&D spending. Motivated by a substantial decline in R&D intensity in Canadian manufacturing
since the early 2000s, CSLS is also examining the impact of the China shock on R&D spending and TFP growth in
Canadian manufacturing using firm-level data – Kim (forthcoming). Also see Autor, Dorn, and Hansen, 2016 formore details.
105China’s share in total imports increased in advanced economies around the world. Chart 1
presents time series for the Chinese share of total imports in various countries between 1991 and2017. In 2000, China accounted for 3.2 per cent of total imports to Canada, less than its share of
8.2 per cent in the US or 6.8 per cent in eight selected advanced economies. By 2010, China
accounted for 11.0 per cent of Canada's total imports, an increase of 7.9 percentage points from2000.12 That is larger than the increase observed in the selected advanced economies (6.1
percentage points) but smaller than the increase observed in the United States (10.2 percentage
points).13 The Chinese share of total imports started to decline or stabilize in 2010 in all threeseries.

Chart 2: Chinese share in total imports by product category in CPI, Canada, per cent, 1991-2017
55
50
45
40
35
30
25
20
15
10
5
0

2010=48%

2010=31%
2000=22%
2000=12%

2010=21%
2000=6%

2010=14%

2000=5%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Clothing and footwear

Recreation, education and reading

Household operations, furnishings and equipment

All goods

Source: Author's calculation based on the United Nations Comtrade database after mapping CPI products to HS
commodities. Services are excluded from the calculations. All goods include the CPI products included in our
sample. See section II for more details.

Within Canada, the increase in the Chinese share of total imports varied across productcategories in the CPI. The share increase tended to be large for clothing and footwear, recreation
and reading materials (which include toys, home entertainment equipment, and computers), andhousehold operations, furnishing, and equipment (see Chart 2).14 The Chinese share in total
imports for each of those three product categories remained relatively stable during the 1990s but
12

In this overview of the trends, we choose 2000 as the starting point since it is the year from which the Chinese
share in total imports started to grow at a notably faster rate. In our estimation, we choose 2001 as our starting point
so that we can contextualize our results using the results from the previous CSLS research reports on the China
Shock – their sample periods start from 2001 since they rely on census data. See Murray (2017) and Kim (2018a, b).
13
It is interesting to note that the Chinese share in total imports in the United States is much higher than the share in
Canada over the sample period. Moreover, the change in the share is also larger for the United States. It would be
worthwhile to explore potential reasons for these observations.
14
This is consistent with the findings in Morel (2007) – see Chart 5 in the paper.

6

started to increase substantially in the early 2000s. For example, in 2010, Chinese imports
accounted for nearly half of the total imported clothing and footwear in Canada, compared to 22
per cent in 2000. The remaining product categories we examine are: alcoholic beverages andtobacco products, food, health and personal care, and transportation.15 These last four productcategories are relatively less important in terms of an increasing Chinese presence. The Chinese
share in each remained below 5% over the 1991-2017 period. Their time series are omitted from
Chart 2.
Across product categories, we observe an important relationship between the Chinese
share in each category and consumer price indices for these categories. Chart 3 presents theconsumer price indices for the seven product categories discussed above. Over the 2000-2017
period, Canadian consumers experienced either relatively slow growth or even a decline in prices
for the three product categories in which the Chinese import share increased the most. The
consumer price for clothing and footwear fell by 5.7 per cent between 2000 and 2017. Prices forhousehold operations, furnishing and equipment rose 27 per cent and those for recreation andreading materials rose 17.5 per cent in the same period. However, these increases are smaller
than the average increase of 54.9 per cent for the remaining four categories.
Chart 3: Consumer Price Index by product category (2000=100), Canada, 1991-2017
230
210
190
170
150
130
110
90
70
50
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Alcoholic beverages and tobacco products
Transportation
Household operations, furnishings and equipment
Clothing and footwear

Food
Health and personal care
Recreation, education and reading

Source: Statistics Canada Table 18-10-0005-01.

In this report, we estimate the overall price effect of increased trade with China on
consumer goods in Canada after identifying exogenous trade shocks due to China. To ourknowledge, no study has examined the issue in Canada at a detailed product level, relying on
econometrics. This is presumably because of the lack of information for concordance between
price and trade data. We construct concordance between basic product classes (the most detailed
level available to the public) in the consumer price index data published by Statistics Canada and15

Shelter is omitted as the underlying products are mainly services.

7

commodities in the Harmonized Commodity Description and Coding System (HS) in trade data
available from the United Nations Comtrade database. We then construct a measure of China
import exposure for each CPI product. Exploiting across-product variations in Chinese import
exposure and price change, we estimate the marginal effect of trade with China on consumer
prices.
We find that increasing trade with China is associated with a fall in consumer prices in
Canada. With a sample of 79 consumer goods covering 85 per cent of total household
expenditure on goods, we estimate that, on average, a 1-percentage-point increase in the Chinese
share in total imports of a given product leads to a 0.221-percentage-point decrease per year in
its consumer price.16 A negative price response is found to be robust to different samples andmodel specifications and remains in the range of -0.2 and -0.3, which are consistent with theestimates found in the literature on quantitative trade models. We find evidence that theincreasing Chinese presence in intermediates to produce final consumptions goods also
negatively affects consumer prices. That effect is estimated to be quite small. It is not included
in our baseline estimate of -0.221 percentage point.
Over the 2001-2011 period, our estimates imply that the cumulative inflation for all
consumer goods in the CPI would have been 2.41-percentage-points higher had there been nochange in the Chinese share of total imports in Canada, assuming other factors are held constant.
In other words, the cumulative inflation for consumer goods over this period would have been
20.01 per cent instead of 17.60 per cent had the Chinese share in total imports remained at the2001 level. For the total CPI, we find that the cumulative inflation over the 2001-2011 period
would have been 26.85 per cent instead of 25.68 per cent (1.17-percentage-points higher) had
there been no change in the Chinese share of total imports in Canada.17 The average annual
inflation for the total CPI was 2.1 per cent over the 2001-2011 period, implying that annual
inflation would have been about 6 per cent higher (or 0.12 percentage-points) without the impactof China. This implies a cumulative gain of $546 per worker or $76,996 for each of the 113,500
jobs lost in manufacturing due to China over this period.18
In the following section, we describe our data and the concordance we construct to map
CPI products to HS commodities and to input-output (I-O) commodities. In section III, we
discuss key preliminary statistics to motivate our empirical analysis. Our empirical models andidentification strategy are described in section IV which is followed by empirical results in
section V. Section VI has our conclusions.

II. Data
Our main data sources are CPI data and input-output tables, both published by Statistics
Canada, and trade data from the United Nations Comtrade database. We choose the period 199116

Our sample consists of consumer goods that have positive imports from China and exist in the consumption basket
over the 1991-2011 period. The product level in our analysis is defined as the basic product class. Note that there are
118 basic product classes for goods in the CPI published by Statistics Canada.
17
The effect on the total CPI is computed by scaling the effect on consumer goods by their expenditure share. See
section V for more details.
18
See Kim (2018a) for the estimate of trade-induced job loss in manufacturing over the 2001-2011 period.

8

2011 as our main sample period so that we can contextualize our results using those from Murray(2017) and Kim (2018a,b). Their sample period is 1991-2011, as they rely on census data. We
also extend our sample period to 2017 to cover all data currently available to the public. We do
not have complete price data for some product classes because they did not exist in the
consumption basket in the past. If we start from 1996, we can construct a complete CPI series formost of the CPI products. Therefore, we also carry out analyses based on the 1996-2011 period.
Estimation will also be carried out by sub-period as well: 1991-2001; 2001-2007 (to exclude theperiod after the financial crisis); 2001-2011; and 2001-2017.

1. Consumer Prices Data
The product classification in the CPI published by Statistics Canada is a hierarchy ofroughly 695 elementary product classes. There are several intermediate aggregation stages thatare relevant for different levels of analysis, such as the eight major aggregates (food; shelter;household operations and furnishing; clothing and footwear; transportation; health and personalcare; recreation, education, reading; and alcoholic beverages and tobacco products). We rely on
the most detailed data available to the public for our analysis.
The most detailed product level in the CPI is called the basic product class. Statistics
Canada publishes price indices for 175 basic product classes (118 classes for goods and 57 forservices) which are based on roughly 695 elementary aggregates, the lowest level to which
expenditure weights are assigned.19 Elementary products under a basic product class either havea common end-use or are considered substitutes for each other. These elementary products arejoined together to form a hierarchy. For example, toothpaste is an elementary aggregate that
constitutes the basic product class, oral-hygiene, which is classified under the higher productlevel, personal care.
Among these basic product classes, we focus only on non-durable, semi-durable anddurable goods and exclude services such as rent, childcare services and personal care services.20
This leaves us with 118 basic product classes. We aggregate some of these product classes into ahigher-level class for which Statistics Canada publishes price indices because it is not possible tomap them to trade and I-O commodities at the basic product class level.21 We aggregate 23 basic
product classes to 8 product classes at the next higher level. There are 10 basic product classes
for which we could not carry out concordance with satisfactory quality. Hence, we dropped those
10 product classes.22 This procedure leaves us with the total of 93 product classes. (See thesubsection on concordance for more details.)23
19

Note that expenditure weights are fixed for the basic classes for the duration of a basket while the elementary
aggregates below a given basic class may have flexible weights over time.
20
In 2001, the expenditure weight for goods was 48.8 per cent. The average weight was 48.4 per cent over the 20012011 period.
21
Relevant issues are discussed in detail in the following subsection on concordance.
22
They are: 'Pre-cooked frozen food preparations', 'All other food preparations', 'Other horticultural goods', 'Other
household supplies', 'Other household furnishings and equipment', 'Purchase of digital media', 'Fuel, parts andaccessories for recreational vehicles', 'School textbooks and supplies', 'Other reading materials' and 'Other alcoholic
beverages purchased in stores'. They account for roughly 4.0 per cent of the total household expenditure.
23
Note that the expenditure weight for these 93 products was 44.8 per cent of the total CPI in 2001 or 91.8 per centof the total expenditure on goods – the weight for total goods in CPI was 48.8 per cent in 2001 (see footnote 19).

9

The CPI is based on the fixed-basket concept. Changes in the index over time reflect only
pure price change. They do not reflect any change in the consumption pattern of Canadian
consumers. As a result, we do not capture the effect of the China Shock on the overall cost ofliving for consumers (i.e. the one includes the effect on consumption patterns).24 Specifically, wemeasure the effect of China on the purchasing power of Canadians in maintaining a given basketof goods.

2. Trade Data
Trade data are required to construct a measure of Chinese import competition at a productlevel and its instruments. We use the United Nations Comtrade database. For Canada and theeight high-income countries we choose for our identification strategy, we extract data on nominal
values of total imports from China at the 6-digit HS commodity level.25 The trade data are thenmapped to CPI data following the procedure we describe in the subsection for concordance.

3. Input-Output Data
We rely on the 1997 input-output table (aggregation level W) to construct the importpenetration ratio as in equation (2) and the ratio reflecting I-O linkages as in equation (11a) and(11a’) in Appendix B. There are two main reasons for choosing the 1997 I-O table. First, it
predates the China Shock, reflecting I-O relationships that are likely to be exogenous to thesubsequent trade shocks in Canada. Second, it is the earliest, publicly available I-O table at avery detailed industry level that allows us to match input-output industry codes (IOIC) to fourdigit NAICS one-to-one.26 If an I-O table prior to 1997 is used, we would have to aggregate 86
four-digit NAICS manufacturing industries to 42 I-O industries. We prefer not to aggregate
industries because aggregation may lead to attenuation bias. Also, we lose efficiency in ourestimation with a lower number of observations.

4. Concordance27
There is no official concordance available for CPI-HS. Also, to our knowledge, there has
been no attempt in the literature to map detailed product classes in official CPI data to trade datain HS. We implement our own concordance between the two classification systems, using theLater, some of these 93 products are dropped in our regression sample since they do not have a complete CPI series
or any positive imports from China, leaving us with 79 products for the 2001-2011 sample. In 2001, these 79
products were responsible for 41.5 per cent of the total household expenditure or 85.0 per cent of the total
expenditure on goods.
24
When relative prices of consumption goods change due to rising import competition from China, Canadian
consumers could also switch between products. The consumption basket is updated regularly (bi-annually since2011) based on a new Survey of Household Spending and other data sources. When the basket is updated, however,indices based on different baskets are chained so that we can have a continuous time series for CPI without any
break. Hence, a change in the chain-linked index from one period to another reflects only the change in prices.
However, we think that changes in the consumption pattern are very small at the basic product class level.
25
The eight countries include: Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain and Switzerland.
26
One exception is IOIC 333X00 (Industrial, commercial and service industry machinery manufacturing) which isthe aggregate of NAICS 3332 (Industrial industry machinery manufacturing) and 3333 (Commercial and service
industry machinery manufacturing).
27
The concordance table for CPI-HS is available in the online Appendix of this paper.

10Classification of Individual Consumption According to Purpose (COICOP) and the Central
Product Classification (COP) as bridges.28 We first map the basic product classes (excluding
services) in CPI to the product classes in COICOP. The United Nations statistics divisionpublishes official concordance tables for COICOP-CPC and CPC-HS codes. We subsequently
carry out mappings between COICOP and CPC and then between CPC and HS codes.29 Finally,
we would have trade data available for each CPI product.
COICOP and CPC are useful tools to carry out mappings of CPI products to HS
commodities. First, COICOP is constructed based on the classifications of consumer
expenditures and is often used for consumer price indices, household budget surveys andinternational comparisons of consumer expenditures. COICOP consists of three productstructures: consumption by households, non-profit institutions serving households, and general
government, respectively. We focus on products for households. CPI and COICOP products areclosely related, so in theory COICOP is appropriate to be mapped to any CPI classification
system.30
Second, the construction of CPC was motivated by initiatives in the early 1970s toharmonize international classifications. The classification system intends to cover all goods andservices that are produced within or traded between economies. Hence, it is broad enough to bemapped to HS commodities. Also, the classification is based on industrial origins, the physicalproperties and the intrinsic nature of the products which are similar to the characteristics of HS.
Moreover, efforts are made to define each subclass in the largest levels of aggregation in CPC as
the equivalent of one heading or subheading or the aggregation of several headings or
subheadings of the HS system. Therefore, the mapping between CPC and HS is relatively
straightforward.
Nevertheless, the concordance for CPI-COICOP-CPC is not perfect. First, in the
COICOP-CPC concordance, there are CPC subclasses assigned to each COICOP class. Some
CPC subclasses have to be split when only some of the products covered by the subclass are to
be assigned to a given COICOP class or when a CPC subclass comprises products that belong tomore than one COICOP class. However, the split is not feasible since there is no further
disaggregation of CPC subclasses.31 To improve the concordance, we identify these CPC
subclasses in the CPC-HS concordance. HS commodities at the 6-digit level tend to be moredisaggregated than the CPC subclasses in the COICOP-CPC concordance. We carry out the
splits in the CPC-HS concordance when possible.

28

We adopt these bridge classification systems to minimize the role of subjective judgement in the concordance
between CPI products and HS commodities. The United Nations statistics division has implemented systematicconcordance between COICOP and COP and between COP and HS. So, we rely on them to establish mapping
between CPI and HS.
29
We carry out one-to-one matching for some of the basic product classes but in most cases, the product classes in
CPC and the HS classification system tend to be more disaggregated than the basic product classes in CPI. Therefore,
we allocate a group of products to a given basic product class in CPI.
30
For example, the CPI classification developed by Korea Statistics (KOSTAT) follows COICOP (see Hwang, 2016).
Also, OECD publishes Canadian CPI based on COICOP, which are directly provided by Statistics Canada (at ahigher level of aggregation).
31
This issue is noted in the official concordance developed by the United Nations Statistics Division but not resolved.

11Second, there is no exact correspondence for some of the basic product classes in CPI.
Instead of dropping them from our sample, we aggregate them to the next higher level for which
Statistics Canada publishes a price index.32 We could not apply this solution to all problematic
product classes. There are four basic product classes for which we could not carry out
concordance with satisfactory quality, so we dropped them.33
Third, there are some basic product classes whose descriptions include 'other', such as allother food preparation, other horticultural goods and other recreational equipment.34 Because
there is insufficient information on the exclusive list of elementary aggregates belonging to theseproduct classes, we must rely on our subjective judgment in assigning subclasses in COICOP
and CPC to those basic classes. Of these basic classes, we drop six classes because mappings
cannot be done with acceptable quality.35 The above procedures leave us with 93 product classes
out of the 118 basic product classes, excluding services.
To ensure more precise matching between the basic product classes in CPI and thecommodities in HS codes, we cross-checked with the Schedule B search engine available at the
U.S. Census Bureau36 and the Canadian Importers Database.37 The search engines provide HS
codes assigned to product names entered by the user. This is particularly useful since, unlike
CPI, the product descriptions in HS are technical and specific about characteristics such as a
product’s component materials, its degree of technological complexity, its function, or its form.
For example, for detergents and soaps (other than personal care), which is one of the consumer
products belonging to the household cleaning product category in CPI, the corresponding HS
commodity is described as “organic surface-active agents (other than soap); surface-active
preparations, washing preparations (including auxiliary washing preparations) and cleaning
preparations, whether or not containing soap”. Using the search engine, we identify correct HS
codes for consumer products to ensure precise mappings at a detailed level.
In our empirical analysis, we also estimate whether increasing Chinese imports forintermediates to produce final consumer goods has any effect on consumer prices. To incorporate
input-output linkages in the measure of Chinese import competition, we need to map thecommodities in an input-output table to CPI products. Unlike the concordance between CPI
products and HS commodities, there is no bridge classification systems that could help us
32

For example, we had to aggregate 'Women's clothing', 'Men's clothing', and 'Children's clothing' into 'Clothing' forwhich Statistics Canada publishes a price index. Trade data do not have product classes that match exactly withthose basic product classes. Clothing for children is not separately classified at the 6-digit level in the HSclassification system. We aggregate 23 basic product classes into 8 CPI products at a higher level.
33
They are: 'Pre-cooked frozen food preparations', 'Purchase of digital media', ' Fuel, parts and accessories forrecreational vehicles', and 'School textbooks and supplies'.
34
The components of a basic product class with 'other' are the items 'not elsewhere specified'. However, there is no
information made available by Statistics Canada for us to identify these items. For some basic classes, such as 'Other
fresh fruit' or 'Other processed meat', it is relatively straightforward for us to identify relevant items. However, it isquite problematic for others such as 'Other household supplies' or 'All other food preparations' as the scope of the
product class is much wider.
35
The six product classes are: 'All other food preparations', 'Other horticultural goods', 'Other household supplies','Other household furnishings and equipment', 'Other reading materials', and 'Other alcoholic beverages purchased instores'.
36
https://uscensus.prod.3ceonline.com
37
https://www.ic.gc.ca/app/scr/ic/sbms/cid/searchProduct.html?lang=eng.

12

construct a mapping between I-O commodities and CPI products. However, the mapping isrelatively straightforward as the names of CPI products and I-O commodities are matchedeasily.38 We are able to map 77 CPI products to I-O commodities with an acceptable level ofquality. Since I-O commodities are not as detailed as HS commodities at the 6-digit level,39 wehave to aggregate some basic product classes to the next higher level for which Statistics Canada
publishes CPI data.

III. Descriptive Statistics: Trade and Consumer Prices Data
Table 1: Domestically-produced and imported consumer goods, Canada, 2001-2017
Panel A: Domestically-produced and imported consumer goods, in millions of 2002 CAD(1) Household expenditure on domesticallyproduced consumer goods(2) Total imported consumer goods(3) Imported consumer goods from China

2001

296,228

58,983

7,437

2006

344,956

69,331

14,078

2011

380,554

76,696

16,5792017

445,843

93,191Panel B: Shares, per cent

17,588

Share of imports in total consumer goods:(2) / (1) + (2)Share of imports from China intotal imported consumer goods:(3) / (2)Share of imports from China in total
consumer goods:(3) / (1) + (2)

2001

16.6

12.6

2.1

2006

16.7

20.3

3.4

2011

16.8

21.6

3.6

2017
17.3
18.9
3.3
Note: Nominal values are deflated by the CPI for household consumption goods. The import data follow the Broad Economic
Categories (BEC). Consumer goods in BEC include: food and beverages (primary and processed for household consumption),transport equipment (non-industrial), and consumer goods not elsewhere specified. Note that the total imported consumer goods
represent, on average, roughly 24 per cent of the total imports in Canada over the 2001-2017 period. The rest is accounted for by
the imports of intermediates and capital goods.
Source: Statistics Canada Table 12-10-0090-01 and 36-10-0222-01.

We first note that the share of imported consumer goods from China in the household
expenditure on total consumer goods increased while the share of total imports in the household
expenditure on total consumer goods remained stable over time. Column 1 in Panel B of Table 1
shows that in 2001 total imported consumer goods accounted for 16.6 per cent of the household
expenditure on total consumer goods. The share hardly changed over time, reaching 16.8 percent in 2011, a 0.2 percentage-point increase. Meanwhile, imports of consumer goods from
China increased both in absolute terms (Column 3 in Panel A) and as a share of total imported
consumer goods (Column 2 in Panel B). Between 2001 and 2011 the share of imported consumer
goods from China in total imported consumer goods increased from 12.6 per cent to 21.6 percent.40 As a result, the share of consumer goods imported from China in household expenditure38

Note that we did not have to map most of the intermediate goods in an IO table to CPI products which are final
consumption goods.
39
There are 701 I-O commodities in the 1997 I-O table at the aggregate level W, compared to roughly 5,300
commodities in HS at the 6-digit level.
40Note that most of the increase in the Chinese share occurred between 2001 and 2006. See Chart 7 for a complete
time series for the Chinese share in total imported consumer goods in Canada for the 2000-2011 period.

13

on total consumer goods increased from 2.1 per cent to 3.6 per cent between 2001 and 2011, a
1.5 percentage-point increase. This implies that the importance of imported goods from the restof the world in household expenditure on total consumer goods declined over time.
Chart 4 presents time series for the Chinese share of total imports in a given productcategory in CPI. There was a particularly large increase in the Chinese share in three productcategories: recreation and reading materials; household operations, furnishings, and equipment;
and clothing and footwear.
Chart 4: Chinese share in total imports by product category in CPI, Canada, 1991-2017
Panel A: Recreation and reading materials

Panel B: Household operations, furnishing, equipment

Source: Author's calculation based on the United Nations Comtrade database after mapping CPI products to HS
commodities. Services are excluded from the calculations.

A further breakdown reveals that the large increase in the Chinese share of imports in therecreation and reading materials category was driven by electronics used for recreational
purposes, such as digital computing equipment and devices, and home entertainment equipment
14

and parts, such as audio and video equipment. (See Panel A in Chart 4.) These two productclasses had the highest share of Chinese imports in the recreation and reading materials productcategory between 1991 and 2017.
In the household operations, furnishing and equipment category, the increase in the
Chinese share of imports was driven by furniture and household textiles, and by household
equipment, such as appliances. (See Panel B in Chart 4.) The increases in the Chinese share overthe sample period are much larger than those observed in other product categories. Amongproduct categories, household operations, furnishing and equipment had the highest share ofChinese imports over the 1991-2017 period.
A breakdown of clothing and footwear, a category that also includes accessories, jewelry,clothing materials and notions, reveals that clothing and footwear exhibit the largest increases.
The Chinese share in total imports of other products in this category remained relatively stable
and low over the 1991-2017 period.
Our data indicate that rising Chinese imports tend to concentrate in product categories
related to electronics, textiles and clothing. This observation is consistent with the data presented
in Murray (2017), who showed that three, 4-digit NAICS industries had the most rapid increasein Chinese import penetration over the 2001-2011 period: computer and peripheral equipment
manufacturing; audio and video equipment manufacturing; and clothing knitting mills.
Increasing competition from China may have induced labour-intensive and low-labour
productivity industries, such as those producing textile products and clothing or assembling
electronics, to move abroad or exit domestic product markets. Domestic electronics producers
may have shut down assembly lines and expanded non-manufacturing activities, such as
intellectual services, in the domestic economy.41 That would result in products that are developedin Canada, but assembled in China and imported back to Canada. Some firms might provide
professional services related to products but would not own an assembly line abroad. IBM is an
American example. It provides data solution services rather than manufacturing personal
computers.42 Another well-known example is Apple, which offshores assembly but designs its
products and produce related services in the United States.
To motivate an empirical analysis, we establish a relationship between growth in Chinese
imports and change in consumer prices at the detailed product level we adopt as our unit ofanalysis. Table 2 shows the ten largest and ten smallest product classes in the CPI (out of 79
product classes in our sample) in terms of the absolute, percentage-point change in Chinese
import exposure, measured as the Chinese share in total imports (ΔVSH). Even at a moredetailed product level, we observe a negative relationship between import exposure and price.

41

For example, Fort, Pierce, and Schott (2018) find that within manufacturing firms in the United States,
employment had shifted from manufacturing plants to non-manufacturing plants (e.g. professional services and retail)over the past couple of decades – see Figure 7 in their paper.
42
In 2005, IBM’s personal computer business (and its ThinkPad brand) was purchased by a Chinese multinational
technology firm, Lenovo. ThinkPad computers are now produced in manufacturing facilities in China (e.g.
Guandong, Schenzen, Shanghai, and Beijing).

15

Table 2: Average annual percentage-point change in the Chinese share in total
imports and average annual inflation (per cent), 2001-2011
Ten largest
ΔVSH
ΔPriceDigital computing equipment and devices
3.87-14.98Bedding and other household textiles
3.32
-0.55
Upholstered furniture
3.18
-0.83
Video equipment
2.88
-8.62
Non-electric kitchen utensils, tableware and cookware
2.74
-1.80
Window coverings
2.69
2.37
Clothing
2.54-1.71
Audio equipment
2.37
-4.83
Other personal care supplies and equipment
2.11
0.53
Footwear
2.08-0.77
Ten Smallest
ΔVSH
ΔPriceMedicinal and pharmaceutical products
-0.29
3.24
Beer purchased from stores
-0.27
7.47
Other fresh fruit
-0.18
1.30
Ham and bacon
-0.16
2.51
Cigarettes
-0.05
5.68
Gasoline
-0.01
7.21
Nuts
-0.01
1.09
Oranges-0.0040.31
Fuel oil and other fuels-0.004
1.51
Sugar and syrup-0.0020.51
Note: Author's calculations based on the United Nations Comtrade database and Statistics
Canada Table 18-10-0005-01 after mapping CPI products to HS commodities. ΔVSH representsa change in the Chinese value share (i.e. the share of imports from China in total Canada imports
of a given product class).

The ten largest product classes in terms of ΔVSH are consistent with our observations
from Charts 2 and 4, which showed the Chinese share in total imports by product category.
Digital computing equipment and devices (which is classified under recreational equipment inPanel A in Chart 4) had the fastest growth in Chinese import exposure and the fastest decline inits consumer price over the 2001-2011 period.43 Other product classes included in the ten largest
list are related to clothing, furniture, textiles and electronics. All ten products, except for otherpersonal care supplies and equipment, belong to the three upper-level product categories –recreation and reading materials; household operations, furnishings and equipment; and clothing
and footwear– for which the Chinese import share increased the most over the 2001-2017 period(see Chart 2). Most of the CPI products in the top quartile in terms of ΔVSH belong to these43

The decline in the price is exceptionally large relative to other product classes in the list. Falling prices could also
be driven by innovations in the use of information technology, which were commonly observed in most of theadvanced economies around the world. Due to these common shocks, product classes related to ICT such as
computers may be a source of endogeneity, potentially contaminating our estimates, even with the identification
strategy we adopt. Kim (2018a) shows that this is indeed the case. See footnote 22 in the paper. Later, we present arobustness check for this issue.

16three categories. Some examples are home appliances (refrigerators and freezers and laundry anddishwashing appliances), toys, area rugs and wooden furniture.
The product classes in the ten smallest list tend to be food products in which the Chinese
share in total imports remained very low over the sample period (See Chart 1). For all the
product classes, ΔVSH is negative.44 Importantly, inflation for these product classes tends to behigher than for the products in the ten largest list.
A negative relationship is not limited to the 20 product classes reported in Table 2 but
observed across most of the product classes we include in our sample. This is illustrated in Chart
A2 in Appendix C, which shows a scatter plot and the best-fit line between the two variables of
our interest.

IV. Empirical Approach
In this section, we introduce our econometrics model and identification strategy. We first
introduce our estimating equation that assesses the effect of rising Chinese imports in Canada on
Canadian consumer prices. Theoretical motivation and the associated reduced-form equation arepresented in Appendix A. Next, we discuss our identification strategy to capture exogenouschanges in the Chinese share of total imports in Canada. Lastly, we briefly discuss the summary
statistics of the key variables used in our estimation.

1. Estimating equation
We mainly rely on across-products variations in prices and exposure to Chinese imports to
identify the parameters of our interest. Motivated by a multi-sector version of the basic trademodel and its reduced-form equation introduced in Appendix A, we estimate the marginal effectof an increase in Chinese import exposure on the rate of price change as follows:(1)
where denotes time period during which a variable's change is measured andis a vector ofcontrols.
represents period fixed effects. corresponds toin equation (10a) in
Appendix A.45
denotes changes in Chinese import penetration ratio:(2)

44

Not all food products in CPI had a decrease in VSH. For example, canned vegetables and other vegetablepreparations is ranked 11th in terms of ΔVSH. This is consistent with the data in Broda and Romalies (2008). Theyshow that the Chinese import share in the United States and in the total world increased very rapidly for canned
foods.
45
Notice that Equation (1) is based on a multi-sector model. When we estimate the equation in practice, we use thesquare root of final consumption spending weights for so that we recover the average expenditure-weighted
given that the specification is correct.

17

where the numerator
denotes the change in imports of product from China overperiod . The denominator
represents the domestic absorption for
product in the initial period .
However, information on domestic absorption at a detailed product level is not readily
available. Due to limited data availability, we adopt the value of imports from China as a shareof total imports in Canada at a product level as our main measure, following the value shareapproach proposed in Bernard, Jensen, and Schott (2002).46 The value share measure is defined
as follows:(3)
which would replace
prices.

in equation (1) when we estimate the variable's effect on consumer

We also construct
as in equation (2) at a product level by mapping CPI products tocommodities in an input-output table to obtain estimates of domestic absorption. Although themapping is relatively straightforward, there is no official information available on which we canobjectively validate our concordance. Therefore, we prefer our estimates based on the value
share approach. The results based on
at a product level are reported in Table A2 in
Appendix C.47
Equations (2) and (3) capture two possible channels through which an increase in
Chinese import exposure affects consumer prices. First, an increase in Chinese imports for
product implies that Canadian consumers can now substitute cheaper Chinese imports,
reducing the observed consumer price for that product. Some existing domestic (or imported)
products may exit the market as new Chinese products replace them. Second, an increase in theshare of Chinese imports in the total imports of product or the domestic market for productcan be a proxy for an increase in Chinese competition in the product market for . Domestic
producers (and other foreign importers) may change their prices in response to increased
competition from China, lowering markups or improving productivity.

2. Identification strategy
To identify shocks exogenously driven by rising Chinese exporting capacity, we exploit
the fact that growth in Chinese exports to developed economies like Canada since the early
2000s mostly stemmed from factors internal to China, such as urbanization, opening to foreign
investment, rising competitiveness in manufacturing, and China’s accession to the World Trade
Organization in 2001, rather than from positive demand shocks within developed economies.

46

Bloom, Draca, and Van Reenen (2016) also adopt the value share approach as their main measure of trade
exposure to China as they work with commodity-level trade data.
47
As in the case with the value share approach, we observe a negative effect of increasing Chinese trade exposure on
consumer prices. However, the effect tends to be larger in magnitude than that based on the value share approach.

18

We capture the common within-product (or industry) factors of rising Chinese exporting
capacity, which stemmed from rising Chinese comparative advantage in manufacturing andlower trade costs due to factors internal to China. Thus, following Autor, Dorn, and Hanson(2013), we instrument for changes in the Chinese share of total imports in Canada using thechanges in the Chinese share of total imports in the following eight advanced economies:
Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain and Switzerland.48
The first-stage regression is given by the following:
(4)
where
countries.

represents changes in the Chinese share in total exports to the eight comparison

The above strategy has the following key identifying assumptions: 1. product-specificshocks are uncorrelated across Canada and the eight countries; and 2. there are no strong
increasing returns to scale in Chinese manufacturing such that Canadian shocks increase
efficiency within the Chinese manufacturing industries and lead them to export more to the eight
other economies. The former may be a concern in our analysis. We are particularly concernedwith the possibility of correlated shocks related to the innovation in the use of ICT technologies,
which were observed in most of the advanced economies around the world, increasing demandfor ICT-related goods from China.49 However, the latter is not a serious concern since Canada isa small, open economy. Shocks within products in Canada are not likely to have a substantial
impact on the overall efficiency within relevant Chinese industries.
It appears that the change in trade exposure to China in the eight countries has significant
predictive power for the change in Canada (See Chart 5). Approximately 70 per cent of thevariation in the value share in Canada is presumably driven by exogenous supply shocks for the
2001-2011 period.50 A strong predictive power is also observed in terms of import penetration
ratio (). The partial R-squared is 0.93. (Chart not reported.)48

We exclude the United States because its economy is highly integrated with Canada and is likely to haveexperienced similar demand shocks.
49
Related to this issue is that in this IV setting, there could be a small number of products driving a large share of theidentifying variations in our sample (see Goldsmith-Pinkham et al., 2018). We carry out a simple robustness check
but find that the impact of ICT-related products is potentially not substantial. See section V.
49
See Autor et al. (2013) for further discussion.
50
The R-squared is 0.564 for the 1991-2011 stacked differenced sample.

19

Chart 5: Average annual change in the Chinese share in total imports (and),
Consumer product classes in CPI, Canada and eight other advanced economies, 2001-2011,
percentage point

Note: Services are excluded from the calculations. The comparison countries include: Australia, Denmark, Finland,
Germany, Japan, New Zealand, Spain and Switzerland. Source: Author's calculation based on the United Nations
Comtrade database after mapping CPI products to HS commodities.

3. Summary statistics
Table 3: Summary statistics, Stacked sub-periods, 1991-2011
Mean

MedianStd. Dev.

ΔVSH

0.065

0.016

0.098

ΔVSHE

0.073

0.033

0.096

ΔPrice
0.011
0.014
0.029
Note: CPI products that are included in our regression sample are used. The square-root of household consumption
expenditure shares in the initial year are used as weights. The number of observations is 137. We should have 186
observations (93x2). (See subsection 3 in Section II for more detail.) However, some CPI products are excluded
from our estimation samples since they have missing information for CPI or ΔVSH or ΔVSHE or household
expenditure shares or some combination of the four. For example, the CPI data for telephone equipment starts from2012. Some CPI products related to fresh or frozen meat and dairy products do not have any imports from China(e.g. beef, pork, and chicken; milk, butter, and cheese). Telephone equipment, eye-care goods, and other recreational
equipment do not have information on household expenditure shares in 1991, 1996, and 2001.

Table 3 shows the summary statistics for the variables in our regression, based on thestacked difference sample for the 1991-2011 period.51 The mean increase in VSH is 6.5
percentage points (or 0.65 percentage points per year on average) but features large variations
across products. Its standard deviation amounts to 9.8 percentage points. Our instrument(ΔVSHE) exhibits a similar mean and standard deviation but the median is twice as large as thatof ΔVSH. The mean annual inflation (ΔPrice) is 1.1 per cent with a standard deviation of 2.9
percentage points. These variations in ΔVSH and ΔPrice across products would provide us withvaluable information to estimate the parameter of our interest (i.e. the marginal effect of ΔVSH
on ΔPrice).
51

We also run regressions based on samples covering other periods such as 1991-2017, 1991-2007, and 1996-2011
but we do not report the summary statistics for these periods. The summary statistics are very similar to the ones
reported in Table 3 except that the standard deviations for the variables based on the 1991-2007 period tend to beslightly smaller as we exclude the period after the financial crisis in 2007.

20

V. Results
1. Regression results
Table 4 reports our estimation results based on stacked differenced data (stacked crosssections of two sub-periods). We present four sets of results:1991-2017;1991-2007; 1991-2011;
and 1996-2011.52 In all sample periods, the effect based on OLS tends to be less negative thanthat based on 2SLS. This observation supports our expectation that OLS estimates are likely to
be biased upwardly as unobserved domestic demand shocks would be positively correlated withboth Chinese imports and inflation.53 Therefore, the coefficient would be closer to zero or somepositive number if we fail to account for those unobserved factors.
In all sample periods, our 2SLS estimates show that a 1-percentage-point increase in the
Chinese share in total imports of a given consumer good is associated with a decline ranging
from 0.2 to 0.3 percentage points in its average annual inflation. Such effect is not negligible
given that the average annual inflation for consumer goods in Canada was 1.4 per cent over the
1991-2017 period.54
Chart 6 summarizes 2SLS estimates based on selected sub-periods. As suggested byCharts 1 and 3, the effect of trade with China on consumer prices is found to be smaller during
the earlier period (1991-2001), compared to the estimates based on the later periods. This
indicates that the results reported in Table 4 are mainly driven by developments that occurred
after 2000. Also, note that the price effect remains negative and statistically significant when we
exclude the period covering the recession after the financial crisis in 2007.55

52

We report the results based on 1996-2011 since the period maximizes the number of observations in our sample.
Some CPI products do not have price information prior to 1996.
53
We would like to note that, ex-ante, the correlation between unobserved shocks and the change in the Chinese
share in total imports in Canada is not always positive. For example, it is possible that some positive demand shock
may lead to an acceleration of the change in imports from both China and other countries such that there is nochange in ΔVSH. However, this would not be the case for ΔIP where the change in Chinese imports is normalized
by the initial domestic market size.
54
The average annual inflation was 1.7 per cent and 1.6 per cent over the 1991-2007 and the 1991-2011 period,
respectively.
55
It is worth noting that the share of Chinese imported goods in total imported consumer goods in Canada declined
between 2011 and 2017 (see Table 1) and that the share of Chinese imports in total imports in Canada stabilized
after 2011 (see Chart 1 and Chart 2). The impact of an increasing share of Chinese imports becomes negligible forthe post-2011 period. When the equation is estimated on the sample period of 2011-2017, the coefficient on ΔVSH
is not statistically different from zero based on both OLS and 2SLS.

21

Table 4: The effect of change in the Chinese share of total imports in Canada on consumer goods prices
Stacked differences: 1991-2001 and 2001-2017; 1991-2001 and 2001-2007; 1991-2001 and 2001-2011; 1996-2001 and 20012011
Dependent variable: Average annual inflation
1996-2011
1991-2017
1991-2007
1991-2011(1) OLS(2) 2SLS(3) OLS(4) 2SLS(5) OLS(6) 2SLS(7) OLS(8) 2SLS
ΔVSH-0.131***-0.161***-0.151***-0.221***-0.163***-0.221***-0.229***-0.295***(0.043)(0.042)(0.058)(0.076)(0.053)(0.056)(0.062)(0.064)
Obs.
137
136
138
136
138
137
150
150
62.0
First-stage F Statistics
36.9
30.3
44.8
Note: In all columns, period fixed effects are included but not reported. Standard errors are clustered by products. The square-root ofhousehold consumption expenditure shares in the initial year are used as weights. Expenditure shares are obtained from Statistics Canada
Table 18-10-0007-0. For each column, we should have 186 observations (93x2). (See subsection 3 in Section II for more detail.) However,some CPI products are excluded from our estimation samples since they have missing information for CPI or ΔVSH or ΔVSHE or household
expenditure shares or some combination of the four. For example, the CPI data for telephone equipment starts from 2012. Some CPI products
related to fresh or frozen meat and dairy products do not have any imports from China (e.g. beef, pork, and chicken; milk, butter, and cheese).
Telephone equipment, eye-care goods, and other recreational equipment do not have information on household expenditure shares in 1991,
1996, and 2001.The remaining products in our sample still account for nearly 90 per cent of the consumption basket of total goods (excluding
services). *** < 0.01; ** <0 .05; * < 0.10.

22Chart 6: Estimated marginal price effects, by sub-period, 2SLS estimates, 90% confidence band
1991-2001

2001-2017

2001-2011

2001-2007

0
-0.1
-0.2

-0.065-0.217-0.3-0.299-0.340

-0.4
-0.5
-0.6
Note: Standard errors are clustered by products. The square-root of household consumption expenditure shares in
the initial year are used as weights. Expenditure shares are obtained from Statistics Canada Table 18-10-0007-0.

Some products may have particularly large increases in Chinese import share over time
but they may also have different trends in inflation. For example, electronics such as computers
are subject to a high degree of innovation in related technologies and very low inflation overtime (even before the 2000s), potentially resulting in downward bias in our estimates. Hence, wereport some robustness checks in Table 5, focusing on the 2001-2011 period. The results fromthe third column in Chart 6 are reproduced in Column 1 for comparison.
First, we estimate the equation excluding the top five products in terms of Δ
(see
Table 2 for the top five products). Note that these top five products include digital computing
equipment and devices, which exhibit an exceptionally large decline in their price over the 20012011 period while exhibiting the fastest growth inamong the CPI products in our sample.
As shown in Column (2), the size of the coefficient decreases but remains negative andstatistically significant.56 Second, Column (3) controls for prior inflation and indicates that the
Chinese impact tends to be smaller for products with higher average inflation prior to the periodof a substantial increase in Chinese import shares.57 The average price response to China is 10.8per-cent lower () if the prior inflation for a given product is one standard
deviation higher. Lastly, we exclude the bottom five products in terms of inflation (or top five interms of deflation) to examine whether our estimate is largely affected by products with aparticularly large fall in prices.58 Column (4) shows that the coefficient decreases but remains
negative and statistically significant.

56

As discussed earlier, ICT-related products, such as computers, may be a source of endogeneity in our identification
strategy as ICT innovations appear to be correlated across Canada and the eight advanced economies we havechosen. When we exclude only computer products from the sample, the coefficient becomes -0.238*** whichindicates that failing to account for the common ICT shock potentially leads to a downward bias. As a further check,we estimate an equation where ΔVSH and its instrument are interacted with a dummy indicating ICT-related
products. We find that the marginal price effect for ICT-related products is twice as large as that for non-ICT-related
products (-0.433*** vs. -0.208***). The difference is statistically significant.
57
Prior inflation is defined as the average inflation over the 1991-2001 period, standardized by its standard deviation.
58
Note that only two products overlap with the top five products in terms of ΔVSH.

23

We conclude from these checks that our estimate is fairly robust. That is, the marginal
price response to a one-percentage-point-increase in the Chinese import share is negative andremains between -0.2 and -0.3 percentage points.
It is reassuring to find that our estimate is consistent with the estimates from the literature
on quantitative trade models. Although there are some variations in the estimate of tradeelasticity (i.e in equation 1a in Appendix A), the consensus in the literature appears to be4
or-0.3 which is similar in magnitude to our estimate of -0.299 in the third column of59
Chart 6. Our finding deviates largely from Jaravel and Sager (2018) in which the authors
estimate-3. The authors reconcile their large estimate by suggesting that their estimate isbased on very disaggregated data and hence, is likely to be larger than the estimate based on
more aggregated sectors in quantitative trade models (attenuation bias). Note that our estimate isbased on much more aggregated product level data than Jaravel and Sager (2018) in which very
detailed-level micro data are exploited.
Table 5: The effect of Chinese imports on Canadian CPI for consumer goods, Robustness checks,
2001-2011, 2SLS estimates
Dependent variable: Average annual inflation(2) Top 5 ΔVSH
(3) Prior inflation(4) Bottom5 ΔP
ΔVSH-0.257***-0.249***-0.204***(0.054)(0.047)(0.043)
ΔVSH x Prior Inflation
0.027**(0.013)
Prior Inflation-0.003(0.005)Constant
0.032***
0.031***
0.032***
0.030***(0.006)(0.006)(0.007)(0.005)
Obs.
79
74
79
74
First-stage F Statistics
117.2
37.0
376.1
76.1
Note: Standard errors are clustered by products. The square-root of household consumption expenditure shares in theinitial year are used as weights. Expenditure shares are obtained from Statistics Canada Table 18-10-0007-0. For
each column, we should have 93 observations. However, some CPI products are excluded from our estimation
samples since they have missing information for CPI or ΔVSH or ΔVSHE or household expenditure shares or somecombination of the four. Top five products in ΔVSH include digital computing equipment and devices, bedding andother household textiles, upholstered furniture, video equipment, and non-electric kitchen utensils, tableware andcookware. Bottom five in ΔP (or Top five in deflation) products in deflation are digital computing equipment anddevices, video equipment, photographic equipment and supplies, audio equipment, and other recreational equipment.
Prior inflation is defined as the average inflation over the 1991-2001 period, standardized by its standard deviation.
*** < 0.01; ** <0 .05; * <0.10.
(1) Full sample-0.299***(0.062)-

A non-negligible portion of trade with China is in intermediate goods and such tradeflows can, in theory, be another channel through which trade can affect consumer prices. Notethat the share of intermediate goods in total Chinese exports to Canada increased from 26.9 percent to 33.8 percent between 2000 and 2017.60 We examine this issue in Appendix B.

59
60

In general, our estimated coefficients range from -0.2 to -0.3.
Source: Statistics Canada Table 12-10-0090-01.

24

2. Contextualizing the results
We compute the implied change in annual inflation for household consumption goods bymultiplying the estimated coefficient from Column (6) in Table 4 by the median increase in(0.022) for the 2001-2011 period.61 This quantity is then discounted by the R-squared fromthe first-stage regression to capture the portion explained by exogenous trade shocks related toChina. We estimate that the annual inflation for household consumption goods included in our
sample would have been higher by 0.280 percentage points (or 0.238 percentage points for all
goods in the CPI or 0.116 percentage points for the total CPI) had there been no change in the
Chinese share of total imports in Canada over the 2001-2011 period.62 The average annual
inflation for the total CPI was 2.1 per cent over the 2001-2011 period, implying that the annual
inflation would have been about 6 per cent higher (or 0.12 percentage-points) with no increase in
Chinese import shares.63
Our estimate of the implied effect is aligned with the findings in the literature. Jaravel
and Sager (2018) estimate the effect of rising Chinese import penetration on the U.S. consumer
prices to be -0.281 percentage points per year on average.64 Following a slightly different
specification for the estimating equation and using a different subset of the micro data used by
Jaravel and Sager (2018), Bai and Stumpner (2017) estimate that the effect on the U.S. consumer
prices to be -0.284 percentage points per year on average.65
Table 6 reports implied price effects of China, focusing on selected individual CPI
products in our sample. Trade-induced price declines are large for products in clothing, textiles,
electronics and furniture. Also, note that the household expenditure share for those products is
non-negligible. In 2001, Canadian households spent 17.6 per cent of their total expenditure
related to goods on the ten product classes reported in Table 6. For example, on average, theconsumer price for clothing would have increased by 1.46 per cent annually over the 2001-2011
period instead of falling by 1.71 per cent had there been no increase in imports from China. In
2001, Canadian households devoted 9.1 per cent of their expenditure related to goods on clothing.
61

We choose to use median instead of mean as the distribution of ΔVSH is highly skewed. We also tried using theweighted mean of ΔVSH (0.0296) with weights being the expenditure shares. With the weighted mean, the implied
effect on Price for the consumer goods in our sample is estimated to be -0.368 percentage points per year or -0.313
percentage points per year for all consumer goods in the CPI – -0.368 multiplied by 0.85 which is the expenditure
share for the goods included in our sample. A very similar implied effect is found when we aggregate the productspecific actual changes in VSH based on expenditure weights.
62
To get the implied effect on all consumer goods in the CPI, we multiply -0.280 by the household expenditure sharefor the goods included in our sample. We use the initial expenditure share (the share in 2001) which is 85.0 per cent(See footnote 22). Hence, we have the following: -0.280*0.85 = -0.238. For the total CPI, the initial expenditure
share is 0.415 and hence, we have -0.116 (-0.280*0.415).
63
Note that the implied effect is calculated without factoring in general equilibrium effects such as monetary policy
responses or changes in the consumption patterns. In response to changing prices, the policy rate would have been
set to achieve the target inflation of 2 per cent in Canada (starting in 1991). Also, Canadian households could havechanged their spending patterns as more Chinese imports become available. Hence, we expect to see some changes
in quantity weights in the CPI.
64
Using their estimate, we have that
= -0.281. Their estimated coefficient is much larger thanours but the actual increase of their measure of Chinese import penetration is much smaller than the increase
observed in our data, resulting in a similar implied effect on average annual inflation.
65
We annualize their implied effect as follows:= -0.284.

25

The Chinese import share increased the most in digital computing equipment and devices
between 2001 and 2011. However, the relative importance of China in explaining its actual pricedecline is the smallest among the ten product categories in Table 2. On average, about 32 percent of the actual annual price fall for digital computing equipment and devices was due toincreasing Chinese imports in Canada over the 2001-2011 period. A similar pattern is observedfor other electronics products such as audio and video equipment. The relative importance ofChinese imports in ΔPrice for them tends to be smaller than other products. One potential
explanation is that a significant portion of the price fall in electronics products may be explainedby a high degree of innovation in ICT related to them over the 2001-2011 period.
Table 6: Trade-induced annual price changes, per cent, Selected CPI products, 2001-2011, Canada
TradeCounter Expenditure
Top ten product categories in Table 2
inducedActualfactualshare
Digital computing equipment and devices-4.82-14.98-10.161.90
Bedding and other household textiles
Upholstered furniture
Video equipment
Non-electric kitchen utensils, tableware and cookware
Window coverings
Clothing
Audio equipment
Other personal care supplies and equipment
Footwear

-4.13
-3.95
-3.58
-3.40
-3.34
-3.16
-2.95
-2.62
-2.58

-0.55
-0.83
-8.62
-1.80
2.37
-1.71
-4.83
0.53
-0.77

3.58
3.12
-5.04
1.60
5.72
1.46
-1.89
3.15
1.81

0.50
1.20
1.09
0.36
0.29
9.09
0.52
0.57
2.13

Note: Author’s calculations based on the estimates in Table 4 and CPI data published by Statistics Canada (Table
18-10-0005-01). Trade-induced price change is computed by multiplying the actual change inby the estimatedcoefficient, scaled by the R squared in the first-stage regression. Actual is the average annual price change based on
CPI data published by Statistics Canada. Counterfactual price change is computed as actual minus trade-inducedchange. Expenditure share is defined as the share in total household expenditure on goods (excluding services) in
2001.

We now turn to implied effects at the aggregate level and relate them to the aggregate job
loss in manufacturing due to increasing Chinese import competition. Table 7 reports the actual
cumulative inflation for all consumer goods in the CPI over the 2001-2011 period and thecounterfactual inflation implied by the estimates based on our baseline specification (Column 6
in Table 4). The cumulative inflation for all consumer goods in the CPI over the 2001-2011
period was 17.60 per cent and it would have been 2.41 percentage point higher (20.01 per cent)had the Chinese share in total imports in Canada remained at the 2001 level. For the total CPI,
we find that the cumulative inflation would have been 26.85 per cent instead of 25.68 per cent(higher by 1.17 percentage point) had there been no change in the Chinese share of total imports
in Canada.66

66

This is calculated by multiplying the implied effect on annual inflation for the goods included in our sample (0.280 percentage point) by their expenditure share in the total CPI (0.415), which is -0.116 percentage point per year
– see footnote 22. Then, using this quantity, we compute the counterfactual cumulative inflation for the total CPI
over the 2001-2011 period.

26

To assess the gain in terms of dollars, we compute the counterfactual expenditure on final
household consumption goods by multiplying annual expenditure by
where represents
the difference between the counterfactual and actual annual inflation for the consumer goods in
the CPI. We define the annual gain as the difference between counterfactual and actual
expenditure, which represents the additional money Canadian households would have had tospend on goods due to higher prices.67
Table 7: Implied effects of Chinese imports, Cumulative over 2001-2011
Panel A: Cumulative inflation on all consumer goods in CPI
Actual cumulative inflation
17.60%Counterfactual cumulative inflation
20.01%Counterfactual - Actual
2.41% pt.
Panel B: Implied gain from trade with China, in 2002 CAD
Total gain
$8.74 billion CAD# of manufacturing job loss due to China
113,500
Gain per job loss
$76,996
Note: Author's calculations based on the baseline estimates and Statistics Canada
Table 36-10-0222-01 and 18-10-0005-01.

Over the 2001-2011 period, the cumulative gain amounts to $8.74billion CAD. To
contextualize this quantity, we note that the total employment in Canada was roughly 16 million
on average over the 2001-2011 period, implying the total direct welfare gain of $546 CAD per
worker (or $55 CAD per worker per year) over this period.
We also examine the gain relative to the number of jobs lost in manufacturing due toChina. Kim (2018a) estimates that 113,500 jobs were lost between 2001 and 2011 due toincreasing import competition from China. This implies a gain of $76,996 CAD per job loss in
manufacturing (). Given that the average annual earning for workers inmanufacturing was $42,868 CAD (in 2002 dollars) over the 2001-2011 period68, this appears tobe sufficient to compensate an average manufacturing worker that loses his or her job for lostearnings and/or for training and other financial costs associated with re-employment.
The expected complete duration of unemployment in Canadian manufacturing ranges
from 11.3 weeks to 12.0 weeks (adjusted for age and gender) in 2000, 2004 and 2008 (seeBernard, 2009). As an illustrative example, if we assume that each of the 113,500 unemployedworkers in manufacturing remained unemployed for 12 weeks until they were re-employed injobs with the same salary as before, then the cumulative lost earnings are $42,868 CAD * (12/52)= $9,893 CAD per displaced manufacturing worker or $1.12 billion CAD for all 113,500
displaced manufacturing workers over the 2001-2011 period.
To obtain a rough benchmark for the cost of training, we look at the Canada-Ontario Job
Grant (COJG), an Ontario government funding program that offers grants to employers for
67

The gain is converted to constant 2002 dollars using CPI for household consumption goods.
Data are based on gross payroll before source deductions (i.e. CPP, EI, and federal/provincial or territory incometax). Source: Statistics Canada Data Table 14-10-0204-01.
68

27

training their workers. Eligible training expenses vary by firm size, ranging from $10,000 to$15,000 per trainee. Although the program is for those who are currently employed, the numbers
provide us with a benchmark for how much the government is currently spending per worker tosupport job training in Ontario.69 Second Career, a provincial government program that provides
financial support for unemployed workers in Ontario who need new skills for re-employment,
provides up to $28,000 to cover the costs of tuition, books, manuals, transportation, basic living
allowance and childcare.
Our analysis indicates that the cumulative gain is likely to outweigh the cumulative loss
from trade with China, implying that trade with China can, in theory, lead to a Pareto
improvement (making at least one person better off without making any other person worse off
through redistribution). It is important to note that the losses are concentrated in a subset of theCanadian population (manufacturing workers) while the gains are widely dispersed acrossconsumers in the form of higher purchasing power. This observation provides support forcompensation programs and other policies that redistribute the gains from trade.
It is worth emphasizing that this assessment is intended to serve as a benchmark. It isbased on the assumption that all displaced workers are able to quickly find jobs offering the samesalary. In reality, this is unlikely to be true for all unemployed workers.

VI. Conclusion
Canadian consumers purchased an increasing amount of Chinese goods over the past two
decades. This has had both negative and positive consequences in Canada. The rapid rise in
Chinese imports seems to have negatively affected employment in Canadian manufacturing. But
it has also led to lower prices for some consumer goods, especially textiles, clothing, furnitureand electronics. Consumers devote a significant share of their total spending on these items.
We estimate that a 1-percentage-point increase in the Chinese share in total imports of agiven consumer product leads to a 0.221 percentage-point decline in its price annually, on
average. This means that cumulative inflation between 2001 and 2011 for all consumer goods in
the CPI would have been 2.41 percentage points higher (roughly 14 per cent of the actual
cumulative inflation) had there been no change in the Chinese share in total imports in Canada.
We based our estimates on a sample of 79 CPI products covering 85 per cent of total
household expenditure on goods. Some of the price decline for final consumption goods is driven
by increasing imports of intermediates from China. However, this impact is potentially small andwe have not included it in our overall estimate.

69

In 2001, Ontario accounted for 51.3 per cent of total manufacturing employment in Canada (see Table 18-1 in Kim,
2018a).

28

We conclude the report by suggesting some directions for future research. First, ourreport focuses on the overall effect of imported China goods on consumer prices in Canada.
However, these price effects may have distributional implications if the spending pattern ofconsumers differs significantly by income group. That is, the group that spends proportionallymore on final goods in which the Chinese import share increased rapidly or on final goods that
rely heavily on imported intermediate inputs may reap greater purchasing-power benefits fromtrade.
The implication for distributional effects is mixed in the literature. Recent work showsthat high- and low-income households in the United States have similar spending shares forimports, both in total and from China specifically (e.g. Borusyak and Jaravel, 2017; Hottman andMonarch, 2018). This suggests that the expenditure channel of trade could be neutral in terms of
distribution. Using barcode-level data, Bai and Stumpner (2017) find no statistical evidence fordifferential price effects across income groups in the United States. However, using similar data
for the United States, Broda and Romalis (2008) found that in response to an increase in Chinese
imports, low-income households experienced a larger decline in prices for non-durable goods
than high-income households. In contrast, Jaravel and Sagel (2018) find that, in the United States,
the price response was greater in product categories that cater more to highly-educatedhouseholds, suggesting high-income groups benefit more from trade. Similarly, Faber (2014)
finds that high-income households benefited more from increasing trade than low-income
households after Mexico joined Canada and the United States in the North American Free Trade
Agreement.
More work is needed to identify true trade shocks. A price drop for a given product may
be caused by increasing imports from China. But it could also be caused by technologicalprogress or some combination of technology and increasing imports. The two appear to beinterrelated. It is possible that increasing trade with China induces domestic manufacturers to
adopt advanced technologies, such as computers and robots. The manufacturers may be driven
by competition or because cheaper intermediates for those technologies become available with
imports from China. Indeed, the share of U.S. firms that purchase computers or use electronic
networks to control shipments started to increase rapidly from the early 2000s (see Figure 2 inFort, Pierce, and Schott, 2018). Also, Bloom, Draca, and Van Reenen (2013) find that European
firms spent more resources on R&D and on adopting advanced technologies in response toincreasing Chinese import competition. Hence, identifying true trade shocks appears to be quite
tricky. A better empirical strategy should be explored.

29

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32

Appendix A
1. Theoretical motivation
The welfare prediction of a dominant class of trade model in the literature depends on
two sufficient statistics: 1. the share of expenditure on domestic goods; 2. an elasticity of imports
with respect to variable trade costs, often referred to as the trade elasticity. The change in real
income () driven by any foreign shock can be related to the change in the share of
expenditure on domestically produced goods (
):
(1a)
where

<0 is the trade elasticity.

We rely on a very simple trade model to illustrate the derivation of Equation (1a) – theArmington model (Armington, 1969).70 Assume each country produces a differentiated good
one-to-one from their labour (which is inelastically supplied. Also, assume that a
representative household in each country maximizes the following Dixit-Stiglitz utility function:
(2a)
where
is the quantity of country 's goods consumed by country andof substitution between goods.

is the elasticity

The price index in country is expressed as follows:
(3a)
where
is the wage in country andcountry .

is the variable trade costs between country andTotal expenditure of country on imports from country is given by:
(4a)

70

We rely on the most basic trade model as it is convenient for us show important implications we would like todraw for our analysis. Arkolakis et al. (2012) introduce a large class of trade models such as Anderson (1979), Eaton
and Kortum (2002), Krugman (1980), and Melitz (2003). These models tend to show the same implication for the
relationship descried in equation (1a) and hence, our reduced-form equation. That is, the welfare effect of a foreign
shock can be summarized by the change in the share of expenditure on domestically-produced goods.

33whereis total expenditure in country andis the partial elasticity of theexpenditure on imports relative to that on domestically-produced goods (i.e. relative imports)
with respect to variable trade costs. That is,With trade balance, we have
. Now, if there is an external shock for country affecting
labour endowments and trade costs in all other countries except for its own, the change in real
income,can be derived as follows. First, taking wage in country as numeraire andnoting that trade balance implies, we have. Then, changes in real income
are given by:
(5a)
where

=

.

Now, with Equation (4a), changes in relative imports are given by:(6a)Equation (5a) and Equation (6a) imply the following relationship:(7a)/where the second equality is obtained by noting that=.

Combined with the initial equilibrium and the new equilibrium after the shock, we obtain:(8a)where the hat denotes the change in the corresponding variable between the initial and the new
equilibrium.

2. Reduced-form equation
In our empirical analysis, we derive an equivalent expression for Equation (8a) from amulti-sector model since we run regressions across sectors (or products). From a multi-sector
version of Equation (1a), we derive a reduced-form equation for econometrics estimation. We
denote product classes by subscript . By taking the domestic wage as numeraire, welfare (orreal income) in the class of trade model discussed above is the inverse of the domestic priceindex. That is, welfare increases as the domestic price index decreases in response to a lower
share of expenditure on domestically produced goods due to a trade shock:
(9a)

34

Introducing inflation shocks – both common and product-specific:
(9a')
where

is the domestic price index.

Note thatbe re-written as:

is one minus the import penetration ratio (. Therefore, Equation (9a') can

(10a)

where

.71

The above reduced-form equation motivates our estimating equation as in equation (1) inthe main text. Note thatfrom the multi-sector version is analogous toin
Equation (8a).
from the multi-sector model represents varying
across sectors (orproducts) whereas
from the one-sector model represents the entire economy. We
weight each product by its expenditure share. Hence,
estimated by our regression
equation would be an average expenditure-weighted
across products.

71

The approximation is better if the value ofis small in the initial period.

35

Appendix B
As cheaper Chinese intermediate goods become available, the cost of producing productacross Canadian industries could decline or increase less rapidly, affecting the consumer priceof product .72 Therefore, we explicitly quantify the degree of import penetration forintermediate goods relevant for product and include it in Equation (1) as a control variable.
For the empirical analysis on this issue, we rely on import penetration ratios as describedin section IV instead of the value share approach.73 We exploit input-output relationships
available in a detailed-level input-output table published by Statistics Canada. After computing asymmetrical industry-by-industry requirement table, we first construct a measure of importpenetration in intermediates defined at the 4-digit NAICS industry level as follows:
(11a)
where
is the gross output of 4-digit NAICS industry andis the value of industry's gross output purchased as input by industry at the start of period .
is the change in
Chinese import penetration in industry over .74 Therefore,
is a weighted average inimport exposure changes experienced by industry 's suppliers.75
Next, we define

at the product level as follows:(11a')

whereis the output value of product produced by industry andis the total
76
output of product . Thus,
is a weighted average in import exposure changes
experienced by the suppliers of the industries that produce product .

72

Industries could either substitute domestically-produced intermediates with cheaper Chinese intermediates or
obtain access to cheaper domestically-produced intermediates as domestic intermediate producers reduce markups in
response to increasing Chinese import competition.
73
The reason is that we need to map I-O commodities not only to CPI products but also to HS commodities in order
to constructbased onas in equation (11a) and (11a'). Since there is very limited information for us toconstruct such mappings, we did not pursue this approach.
74
We normalize the change in Chinese imports to Canada by dividing it by the 1997 domestic absorption. We choose
1997 for normalization since we rely on the 1997 I-O table to establish initial I-O linkages. See section II-3 for moredetail.
75
It is also possible to directly construct a commodity-by-commodity requirement table but this would make itnecessary to construct concordance between I-O commodities (all commodities including intermediates) and the HS
commodities in trade data. Since there is no official concordance available or reliable source of information for us toconstruct the concordance between the two classification systems, we did not pursue this approach.
76
We compute the weights by constructing an industry-by-commodity market share table after mapping I-O
commodities to product classes in CPI following the concordance we construct.

36

is used to assess the first-order effect on prices stemming from increasing trade
exposure relevant for the intermediates to produce product . It does not reflect further spillovers
from increasing trade exposure faced by lower-level intermediates (i.e. intermediates used to
produce the intermediates for product ). To account for the full chain of input-output linkages,
we construct the following measure based on the Leontief inverse of the matrix of first-orderlinkages:(12a)(12a')
whereis the matrix that contains

and is the identity matrix.

Table A1 shows the results from including
in our regressions equation, based on
the stacked differences of two sub-periods: 1991-2001 and 2001-2011. For comparison, Column(1) reproduces the results from Column (3) in Table A2 in Appendix C. In all columns, we report
2SLS estimates, using as instruments the change inandin the eight other countries.
Table A1: Input-output linkage, Stacked differences, 1991-2011, Using import penetration ratio,
2SLS estimates

ΔIP
ΔIPII

Dependent variable: Average annual inflation(1) Direct effect(2) First-order linkage(3) Full linkage-0.453***-0.265***-0.094(0.209)(0.103)(0.113)-0.012***-0.002***(0.004)(0.0003)

Obs.
139
139
139
First-stage F Statistics
114.3
86.7; 246.4
71.3; 68.4
Note: In all columns, period-fixed effects are included but not reported. Standard errors are clustered by products.
The square-root of household consumption expenditure shares in the initial year are used as weights. Expenditure
shares are obtained from Statistics Canada Table 18-10-0007-0. For each column, we should have 154 observations(77x2) (See subsection 3 in Section II for more detail.) However, some CPI products are excluded from ourestimation samples since they have missing information for CPI or ΔVSH or ΔVSHE or household expenditure
shares or some combination of the four. All nominal are converted from U.S. dollars to Canadian dollars, using
annual PPPs for PCE available from OECD. Then, they are deflated to chained 2007 Canadian dollars using theCanadian PCE deflator. *** < 0.01; ** <0 .05; * < 0.10.

We find evidence that trade exposure based on input-output linkages () plays a rolein explaining annual changes in prices across consumer products in Canada. But the magnitude
appears to be very small. Our result for the first-order effect (Column 2) indicates that a onepercentage-point increase in trade exposure of the intermediates to produce a given consumer
product is associated with a 0.01-percentage-point decrease in the average annual inflation forthat final product. When we include, the coefficient for the direct effect becomes smaller
than that reported in Column (1) but remains highly statistically significant. A small price effect37

ofis also observed when we include the measure of full input-output linkage but themagnitude is much smaller and the direct effect loses its statistical significance.77
Our results in Table A1 indicate that spillovers from intermediates do explain falling
consumer prices but their magnitude is potentially minimal. This is consistent with the findingsin Bai and Stumpner (2017). They find no evidence of the I-O linkage effect on consumer prices
for the United States. The spillover effects stemmed from I-O linkages are potentially small onother outcome variables in Canada. For example, Murray (2017) finds no strong evidence that
the I-O linkage effect is important in explaining employment growth in Canadian manufacturing.
Chart A1: The Chinese share in total imports by category, Canada, 2000-2011
25%
21.6%
20%
15%

12.0%

10%
6.2%
5%
1.5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Consumption goods

Intermediate goods

Note: The data follow the Broad Economic Categories (BEC). Consumption goods in BEC include foodand beverages (primary and processed for household consumption), transport equipment (non-industrial),and consumer goods not elsewhere specified. Intermediate goods include food and beverages (primary andprocessed for industry), industrial supplies not elsewhere specified (primary and processed), fuel andlubricants (primary and processed), parts and accessories of capital goods, and parts and accessories oftransport equipment. Source: Statistics Canada Table 12-10-0090-01.

One potential explanation for the small spillover effect through I-O linkages (relative tothe direct effect of trade exposure for final consumption goods) is that China is less important in
the total imports of intermediate goods to Canada than in the total imports of final consumption
goods. Chart A1 shows the Chinese share in total imports of intermediates and consumption
goods in Canada. First, the Chinese share in total intermediate imports to Canada remained much
lower than the country’s share in total consumption goods imported (e.g.1.5 per cent vs. 12.0 per
cent in 2000). Moreover, the change in the Chinese share was smaller for intermediate goods.
Between 2000 and 2011, the increase in the Chinese share of total intermediate imports stood at
4.7 percentage points while the increase in the share of imported consumption goods amounted
to 9.6 percentage points.
77

As discussed in Acemoglu, Autor, Dorn, Hanson, and Price (2016) and Murray (2017),
andare highly
correlated, resulting in a smaller or insignificant direct effect. As a solution, following Acemoglu et al. (2016), we
include the sum of the direct and I-O linkage effect in the equation by imposing a restriction that the direct impact isthe same as the I-O linkage effect. However, the coefficient on the combined effect remains negative andstatistically significant but much smaller for both first-order and full linkage – not reported.

38

Appendix C
Table A2: The effect of Chinese imports on Canadian CPI for consumer goods, Using
Import penetration ratio, Stacked differences, 2SLS estimates
Dependent variable: Average annual inflation
ΔIP(1) 1991-2017-0.283***(0.140)(2) 1991-2007-0.639***(0.244)(3) 1991-2011-0.453***(0.209)

Obs.

139

139

139

First-stage F Statistics
95.5
165.3
114.3
Note: In all columns, period-fixed effects are included but not reported. Standard errors are clustered by products.
The square-root of household consumption expenditure shares in the initial year are used as weights. Expenditure
shares are obtained from Statistics Canada Table 18-10-0007-0. For each column, we should have 154 observations(77x2) (See subsection 3 in Section II for more detail.) However, some CPI products are excluded from ourestimation samples since they have missing information for CPI or ΔVSH or ΔVSHE or household expenditure
shares or some combination of the four. All nominal are converted from U.S. dollars to Canadian dollars using
annual PPPs for PCE available from OECD. Then, they are deflated to chained 2007 Canadian dollars using theCanadian PCE deflator. The instrument is the average annual change in imports from China in the eight advanced
economies divided by the total Canadian market volume (i.e. domestic absorption) in that industry in 1997, scaled
by 9.36 which is the ratio of the eight countries' combined GDP to Canadian GDP in 1997 at PPP.*** < 0.01; **<0 .05; * < 0.10.

Chart A2: Average annual inflation (per cent) and Average annual change in the Chinese share in
total imports (percentage point), by product class in CPI, Canada, 2001-2011

Source: Author's calculation based on the United Nations Comtrade database after mapping CPI products to HS
commodities.

39