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China's Local Comparative Advantage

  • James Harrigan
  • Haiyan Deng

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13963.

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Date of creation: Apr 2008
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Publication status: published as China's Local Comparative Advantage , James Harrigan, Haiyan Deng. in China's Growing Role in World Trade , Feenstra and Wei. 2010
Handle: RePEc:nbr:nberwo:13963
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  1. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
  2. 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.
  3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  4. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  5. 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.
  6. 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.
  7. James Harrigan & Carolyn Evans, 2004. "Distance, Time and Specialization," Econometric Society 2004 North American Winter Meetings 640, Econometric Society.
  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. Harrigan, James, 2010. "Airplanes and comparative advantage," Journal of International Economics, Elsevier, vol. 82(2), pages 181-194, November.
  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.
  11. Alan V. Deardorff, 2014. "Local comparative advantage: Trade costs and the pattern of trade," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(1), pages 9-35, 03.
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