This paper studies the effect of the China Shock on US markups using a difference-in-differences empirical design. I find that lowering tariffs on imports from China had a pro-competitive effect on US firms by interrupting the rising trajectory of markups. More specifically, firms facing the threat of import competition reduced the growth of their markups by 0.5 percentage points following US normalization of trade relations with China. The pro-competitive effect operated most clearly through intermediate goods, affecting both growth rates and to some extent levels. I also find a negative downstream effect of trade liberalization on markups, contradicting potential anticompetitive effects of increased import competition.

This article studies the domestic gains from trade using a model with variable markups and multiple sectors in an Input-Output structure. I find the domestic gains from trade are larger with variable markups, and decrease the higher the cost pass-through. Computing the model to the US in 1997 and 2007, I quantify the gains from trade to be 6.1%. In this period, the pro-competitive effect dominates the anti-competitive effects, with markups decreasing in all markets. This is a first approximation to general equilibrium models with both competitive effects of imports, and their interaction with the gains from trade.