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China's Local Comparative Advantage

In: China's Growing Role in World Trade

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  • James Harrigan
  • Haiyan Deng

Abstract

China's trade pattern is influenced not just by its overall comparative advantage in labor intensive goods but also by geography. We use two variants of the Eaton-Kortum (2002) model to study China's local comparative advantage. The theory predicts that China's share of export markets should grow most rapidly where China's share is initially large. A corollary is that exporters that have a big market share where China's share is initially large should see the largest fall in their market shares. These market share change predictions are strongly supported in the data from 1996 to 2006. We also show theoretically that since trade costs are proportional to weight rather than value, relative distance affects local comparative advantage as well as the overall volume of trade. The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets. This theory motivates a simple empirical prediction: within a product, China's export unit values should be increasing in distance. We find strong support for this effect in our empirical analysis on product-level Chinese exports in 2006.

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This chapter was published in:

  • Robert C. Feenstra & Shang-Jin Wei, 2010. "China's Growing Role in World Trade," NBER Books, National Bureau of Economic Research, Inc, number feen07-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10453.

    Handle: RePEc:nbr:nberch:10453

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    1. James Harrigan & Carolyn Evans, 2004. "Distance, Time and Specialization," Econometric Society 2004 North American Winter Meetings 640, Econometric Society.
    2. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
    3. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May.
    4. Hansen, Christian B., 2007. "Asymptotic properties of a robust variance matrix estimator for panel data when T is large," Journal of Econometrics, Elsevier, vol. 141(2), pages 597-620, December.
    5. Robert C. Feenstra & Barbara J. Spencer, 2005. "Contractual Versus Generic Outsourcing: The Role of Proximity," NBER Working Papers 11885, National Bureau of Economic Research, Inc.
    6. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
    7. Alan V Deardorff, 2004. "Local Comparative Advantage: Trade Costs and the Pattern of Trade," Working Papers 500, Research Seminar in International Economics, University of Michigan.
    8. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
    9. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    10. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May.
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    Cited by:
    1. Mayer, Thierry & Melitz, Marc J & Ottaviano, Gianmarco Ireo Paolo, 2011. "Market Size, Competition, and the Product Mix of Exporters," CEPR Discussion Papers 8349, C.E.P.R. Discussion Papers.
    2. Bianka Dettmer & Andreas Freytag & Peter Draper, 2013. "Check-in, departure and arrival times: Air cargo in Southern Africa?," Jena Economic Research Papers 2013-018, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
    3. Békés, Gábor & Muraközy, Balázs, 2012. "Temporary trade and heterogeneous firms," Journal of International Economics, Elsevier, vol. 87(2), pages 232-246.
    4. Giovanni Federico & Nikolaus Wolf, 2011. "Comparative Advantages in Italy: A Long-Run Perspective," Quaderni di storia economica (Economic History Working Papers) 09, Bank of Italy, Economic Research and International Relations Area.

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