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In trade models with scale economies import liberalization reduces exports
within industries by shrinking real market potential. We find this
export destruction mechanism reduced US export growth following the
permanent normalization of trade relations with China (PNTR). There
was also an offsetting boost to exports from lower input costs. We use
our estimates to calibrate a quantitative model and show that scale
economies are economically important for trade policy analysis. Although
PNTR increased aggregate US exports relative to GDP, exports
declined in the most exposed industries. US gains from PNTR are positive,
but 30 percent smaller than under constant returns.
