Import Competition and the Cost of Capital

We investigate how the displacement risk associated with import competition is reflected in the cost of capital. We sort U.S. industries on their exposure to import competition, based on shipping costs. We find that output and employment in high exposure industries is more sensitive to tariff cuts than in low exposure industries, consistent with the idea that they face a higher risk of being displaced by import competition. We then show that high exposure industries have a higher cost of capital. We confirm displacement risk of import competition is priced and covaries with the marginal utility of the representative agent.