Import Competition and Household Debt

We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual-level data on leverage and defaults. We exploit cross-regional variation in exposure to foreign import competition using industry level shipping costs and initial differences in regions' industry specialization. We confirm the adverse effect of import competition on local labor markets during this period (Autor et al. 2013). We then show that household debt increased significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation in exposure to import competition explains 30% of the cross-regional variation in the growth in household leverage over the period. Our results highlight the interaction of credit supply and demand as a driver of increased mortgage borrowing in the run-up to the financial crisis.