Friday, 9 May 2008

China's Local Comparative Advantage

An interesting new paper for trade economists. This relates to a number of papers I have written in this area.

I always have some concern when unit values are used for China but otherwise this appears to be an interesting paper.

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"China's Local Comparative Advantage"

NBER Working Paper No. W13963

JAMES HARRIGAN, Federal Reserve Bank of New York, National Bureau of Economic Research (NBER)
Email: james.harrigan@ny.frb.org
HAIYAN DENG, The Conference Board
Email: haiyan.deng@conference-board.org

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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