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| The Forgotten Half World: A Study on “Zero Trade” in China's Product Exports |
| ZHANG Penglong, HU Yushan
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School of Public Policy and Management,Tsinghua University;
School of Economics, Renmin University of China |
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Abstract As the largest exporter in the world, China currently still has as much as 54% of its “product-country” export as zero, indicating that China still has plenty of scope at that level to explore new trading partners at the product level. For example, in 2019, 670 out of the 5196 products produced and exported by China failed to be exported to the United States (such as passenger boarding bridges for airports, tank trailers, radar display tubes, etc.), and similarly 1234, 1146, 1024, 954, 879, and 870 products failed to be exported to Italy, France, the United Kingdom, Germany, Japan, and Canada, respectively. The traditional constant elastic trade theory, which explains ‘zero trade' primarily with fixed trade costs, ignores the important role of variable trade costs. China is the only country to have all industrial categories in the Industrial Classification of the United Nations. In order to better characterize the heterogeneity at the product level, this paper introduces the Almost Ideal Demand System (AIDS) preference into the international trade framework of firm heterogeneity and derives the Almost Ideal gravity equation that embodies heterogeneous price and income elasticity, which can theoretically explain bilateral zero trade and reveal the specific quantitative estimation method. Based on this model, this paper uses the data of China's export trade to 187 countries and 5196 categories of products from 2015 to 2019 to measure the distance how far export enterprises in each product market from opening a specific potential market, that is, the latent trade bias is used to measure the gap between the latent trade share of zero-trading countries and their friction-free trade hare.
This paper yields the following findings. (1) This paper uses latent trade estimated from a theoretical model to measure the distance between countries from no trade to trade. It also uses the interaction of idiosyncratic price and income elasticities with variable and fixed costs to explain bilateral zero trade. Empirical results show that the higher the per capita output (a proxy for quality) of China's exported products, the lower the hindering impact of bilateral trade costs (distance, tariffs, or market entry costs) or trade frictions on latent trade shares, and the lower the promoting impact of trade agreements or common languages on latent trade shares. At the same time, countries with higher income levels are more inclined to import products with higher productivity from China. Thus, China's exports have significant heterogeneous characteristics of product prices and income elasticities at an extensive margin. (2) The variance decomposition of latent trade bias shows that changes in bilateral variable trade costs (the sum of tariffs and distance costs) can explain 26% of zero trade deviations, which is higher than the explanatory power of fixed trade costs. Compared to capital-intensive industries, the impact of tariffs, distance, or trade agreement factors on zero trade is more significant in labor-intensive industries, whereas the income effect is less significant in labor-intensive industries. Conversely, high-tech capital-intensive industries are more affected by trade frictions and less affected by entry costs. (3) The results of the counterfactual policy simulation show that, compared to the reduction or subsidy of fixed costs, the reduction or subsidy of variable costs, especially distance costs, can increase the possibility of establishing new trading partners to a greater extent, and this trade promotion effect is stronger for traditional comparative advantage industries, products with relatively low per capita output, or trading partner countries, especially RCEP countries.
This paper has the following policy implications. (1) improve quality standards and regulatory systems to promote technological innovation and industrial upgrading of China's manufacturing industry, thereby cultivating new foreign trade momentum in emerging markets. (2) strengthen the construction of transportation infrastructure and logistics support facilities, continuously reduce variable trade costs, and continue to promote China's manufacturing industry in accessing new overseas markets with a higher level of openness. (3) for product markets with different industry characteristics, adopt differentiated foreign trade policies to promote stability and improve quality, first rely on traditional comparative advantage industries to open up new markets, and then gradually expand emerging strategic industries. (4) The government can identify small-scale markets with greater potential based on the product markets of different destination countries and refer to the model in this article to provide priority support, deepen trade cooperation with small-scale market countries, and guide Chinese enterprises to explore emerging markets. (5) improve the resilience of China's manufacturing supply chains, strengthen the diversified layout of the international market, and promote the development of new formats and trade models, to effectively deal with the uncertainties caused by trade frictions.
The marginal contributions are as follows. (1) Theoretically, this paper provides a basic framework and a policy evaluation tool to analyze the impact of variable trade costs on the extensive margin of trade by building an AIDS structural gravity model at the product level. At the same time, this article introduces the impact of “trade friction” as a new type of trade barrier, which could effectively describe the various barriers facing China's current exports. That is, this paper has important references and significance in promoting research on China's zero-trade issues. (2) Empirically, this article expands and quantifies the theoretical concept of “Latent Trade” in the literature at the product level and uses Tobit's structural regression and instrumental variable methods to estimate the model. It also empirically tests and compares the marginal impact on “zero trade” of Chinese product exports of variable trade costs (distance and tariff), fixed trade costs (market entry costs), trade frictions (no entry), and other factors. (3) In terms of policy implications, based on heterogeneity price and income elasticity at the product level, combined with the differentiated characteristics of China's export products, this article quantitatively evaluates the latent effects of China's extended marginal trade policy from the perspective of variable trade costs and fixed trade costs in a structural form. This paper focuses on bilateral zero trade at the product level. In addition, it quantifies the possibility of “zero to one conversion” through latent trade bias, that is, the difference between latent trade and frictionless trade share.
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Received: 20 June 2024
Published: 01 February 2025
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