Enter the dragon: China's impact on pass-through to US import prices

China’s presence in the US import market increased tenfold during the same time period in which exchange rate pass-through to imports drastically decreased.  I examine these two trends and the potential of China’s fixed exchange rate regime to force competitors to maintain low prices following dollar devaluations.  The data used in the study is disaggregated to the Harmonized System ten-digit level, making it the most detailed study that exists on this topic.  For each ten-digit good, the data provides the total value and number of units imported by the United States from each individual trade partner.  Using this highly disaggregated data on US imports, I document China’s rise as a trade partner as measured by total trade volume, total goods traded, imports of new goods, and the number of commodities for which China is the United States’ top trade partner.  With the same data, I also show the nearly simultaneous decline in pass-through rates.  Lastly, I tie these effects together by showing that pass-through rates from other countries decrease more substantially for goods that have larger increases in China’s market share.  Specifically, I note the difference in pass-through rates for goods that are never imported from China compared with those that China ships at least once.  In addition, I show the negative effect on pass-through that occurs when China enters the market for an imported good, as well as a stronger effect when China's share grows to be the largest of any exporter of a good to the US.  These relationships are stronger when the dollar decreases in value, further suggesting that pressure from China forces competitors to maintain stable prices.