The China Shock in India: Input Linkages and Output Competition in Manufacturing

This paper studies how the impact of a trade shock depends on a country's production technology as well as its position in the global supply chain. I decompose the effect of China's WTO accession in 2001 on Indian manufacturing into two channels - direct competition and higher intermediate input availability. The input channel dominates, in part driven by the fact that Indian manufacturers were predominantly buyers of Chinese intermediates rather than competitors in final-goods markets. Using district-level data and a shift-share IV methodology, I find that a 1 standard deviation higher exposure to Chinese inputs per worker is associated with a 0.61 percentage point higher manufacturing employment share. Disaggregating imports by end-use, I show that the direct competition channel lowers employment shares only for intermediate goods sectors while the input channel is associated with higher employment shares for consumer, intermediate and capital goods. To quantify aggregate welfare and employment effects, I construct a quantitative trade model with input-output linkages in production. The model implies a moderate welfare improvement and corroborates the reduced form mechanism, with welfare gains larger in states reliant on China-shocked sectors for inputs.