Can trade liberalization shape sector dynamics by inducing reallocation of resources towards more efficient use?This paper explores whether and how import competition affects productivity dispersion in 425 narrowly-defined Chinese industries.Using a number of comprehensive micro-level datasets over the period of 2000-2006, we find that import penetration reduces the productivity dispersion in general and the main channel is through the competition-induced resource reallocation within industries.The trade-induced productivity truncation is evident for industries with more ordinary-trade imports, for industries importing more final goods and standard intermediate goods, and for industries with more differentiated products.The effect of foreign competition is present for the entire industries including both importers and non-importers.Such effect is not found for processing-trade imports, upstream-intermediate imports, and homogeneous-product imports.When considering the effect of exports along with imports, we find that only the ordinary-trade exports are conducive to resource reallocation and reducing productivity dispersion, but not the processing-trade exports.The effect of import competition on productivity dispersion is found to be more significant after Chinas WTO accession.Our results are robust to various model specifications and estimation methods.