The China Phenomenon: Price, Quality or Variety?

China’s exports have skyrocketed in the last 15 years. We use highly-disaggregated import data from Chile between 1990 and 2005 to decompose the causes of such export performance. We find that China’s high export growth is mainly explained by an increase in the quality of its varieties relative to those from the rest of the world, which raises world demand for its varieties as well as it increases the number of varieties produced in China. Our results show that Chinese products are cheaper than those from the rest of the world, but the small decline in their relative price has a negligible contribution to the growth of China’s penetration. There is heterogeneity across products, however. The increase in quality and the decline in product prices are more pronounced for highly-differentiated products. Because international product-price differences reflect productivity and factor cost differences, these results reveal that productivity growth has been higher in highlydifferentiated products, which coincides with the pattern of quality growth. Therefore, we conjecture that productivity growth is behind the increase in the quality of Chinese varieties as well as the raise in number of varieties produced and exported by China.