China’s export bundle is observed to be more sophisticated than other countries. It exports products that are commonly exported by OECD countries and it commands lower prices compared with its per capita GDP. Endowment-based comparative advantage implies that China should compete only indirectly with capital- and skill-abundant countries in world markets. The observed product penetration of China is not consistent with this claim while the low prices that the country receives within product markets agrees with it. China’s large increase in export product penetration allowed it to jump from a rank of 21 among non-OECD U.S. trading partners in 1972 to a rank of 3 in 2001. On the other hand, Chinese export has been selling at a discount with respect to its per capita GDP; this discount has also increased with respect to its skill abundance.
This paper analyzes export sophistication by comparing the range of product categories China exports to the United States to the export bundles of other U.S. trading partners and by comparing Chinese export unit values within product categories to the prices received by other U.S. trading partners.
Theory
A two-factor version of the multiple cone equilibrium of the Heckscher-Ohlin model suggests that high production costs drive countries out of industries that are at odds with their comparative advantage. Furthermore, careful analysis of the Lerner diagram reveals that the United States and China have no industries in common. The labor intensive portion of the product mix of Latin America overlaps with that of labor-abundant China, while the capital-intensive portion of its product mix overlaps with that of capital-abundant United States. These overlaps are a function of the similarity of their endowments.
The uneven distribution of factors of the country can prompt it to export capital-intensive goods. This factor unevenness is supported by the control of factor movements exercised by the government. This may prevent factor-price disparities from being arbitraged away inside the country, supporting the regional production and export of goods with different capital intensity.
Product-level data were used in this paper. It provides a better measure of sophistication – compared to industry-level data – because they exhibit extensive heterogeneity across products within industries and they scrutinize trading partner heterogeneity within product markets via unit values.
China’s Relative Endowments
Country-region assignments were used to compare China to other groups of countries.
Skill is scarce in China as highly skilled workers are very few. In fact, 21 percent of its population have never received formal schooling. China’s skill scarcity ranks the country below the median of the Asian, Latin American and Caribbean countries. In addition to this, capital and land are also found to be limited in the country.
Regional comparison within China reveals that some regions may be more able to produce goods with skill and capital intensity similar to countries that have much greater skill and capital. As such, regions within China vary in terms of relative development.
The Relative Sophistication of Chinese Exports
To examine the relative sophistication of China’s manufacturing exports, product-level U.S. import data from the U.S. Census Bureau were examined; the data span the years 1972 to 2001. In the analysis, imports at higher levels of aggregation were referred as industries, while imports within product categories were referred as country varieties.
A comparison of trade patterns of China and other countries is grounded on the assumption that exports to the U.S. reflect domestic production as well as exports to other markets. After assessing the relative sophistication of China’s manufacturing export bundle in terms of its similarity to that of the aggregate OECD and other developing countries, three findings were discovered:
· China’s export similarity with the OECD increases more than any other U.S. trading partner.
· China’s export similarity vis a vis the OECD exceeds that of countries with similar relative endowments.
· China’s “excess” similarity with the OECD increases over time.
Market share trends show that exports from developed economies dominate the U.S. market. They also show that China is the main contributor to Asia’s overall growth. China’s share of manufacturing imports increases steadily from just above 0 percent in 1972 to 11 percent in 2001, driven by miscellaneous manufacturing.
Among the top U.S. trading partners, product penetration by the OECD is practically 100 percent throughout the sample period. Also, product penetration by Asian and Latin American countries has increased significantly over time; the said increase is exhibited by China in particular.
Chinese exports are similar with that of Asia, Latin America, and the OECD from 1972 to 2001. Its overlap is greatest with Asia and lowest with OECD. Even so, China’s export overlap with OECD is growing faster than that of any other U.S. trading partner.
Regression analysis indicates that China’s manufacturing export similarity with the OECD is substantially higher than that of countries with similar relative endowments, and that this premium is increasing with time. Consistent with the factor proportions framework, results show that export similarity with the OECD is positively and significantly related to countries’ per capita GDP and skill abundance. The sign and significance of decade dummies suggest that excess similarity has increased over time.
Chinese Export Prices
Export prices were analyzed using Feenstra et al. (2002) data to describe the sophistication of Chinese export varieties within products. It was discovered that Chinese goods commanded a premium compared to countries with similar per capita GDP and skill abundance in the 1970s and 1980s. This was no longer the case, however, in the 1990s. Also, the price premium of OECD varieties relative to Chinese varieties is widening in some industries.
Country-product unit values were regressed on country relative endowments and a China dummy variable to identify the relative price of Chinese exports relative to similarly developed countries. Regression coefficients and robust standard errors suggest a positive and statistically significant relationship between export prices and their per capita GDP or skill abundance. They suggest that capital- and skill-abundant countries use their endowment advantage to produce goods that are superior to goods from labor abundant countries. By-decade dummy variables indicate that the price of Chinese goods is declining over time. This result is strong in machinery and weak in chemicals and manufactured materials.
Source:
Schott, Peter, “The Relative Sophistication of Chinese Exports” Working Paper 12173, National Bureau of Economic Research, (April 2006).
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