What's special about the extensive and intensive margins in Chinese manufacturing exports?
| Published date | 01 February 2013 |
| Pages | 19-34 |
| Date | 01 February 2013 |
| DOI | https://doi.org/10.1108/17544401311292655 |
| Author | Yan Zhou,Jiadong Tong,Puyang Sun |
| Subject Matter | Economics |
What’s special about the
extensive and intensive margins
in Chinese manufacturing
exports?
Yan Zhou and Jiadong Tong
Department of International Economics and Trade, Nankai University,
Tian Jin, China, and
Puyang Sun
Department of International Economics and Trade, Nankai University,
Tian Jin, China and
Department of Economics, University of Birmingham, Birmingham, UK
Abstract
Purpose – The purpose of this paper is to examine the effects of gravity variables and trade costs on
China’s export margins.
Design/methodology/approach – Following the structural gravity model with firm heterogeneity,
the paper measures the extensive margins and intensive margins of China’s export across 46 export
destinations and estimates the linkage between export margins and its potential determinants.
Findings – The empirical results confirm the gravity relationship hold for bilateral trade and export
margins. Furthermore, trade costs have different influence on extensive margins and intensive
margins as the structural gravity model with firm heterogeneity expected. The paper also shows the
rapid growth of China’s export is mainly along the intensive margins which are increasing in fixed
cost for export.
Originality/value – The paper contributes to the measurements of China’s export margins and the
empirical research on effects of trade liberalization on China’s foreign trade.
Keywords Structure gravitymodel, Extensive margin, Intensivemargin, Firm heterogeneity,
Trade cost, China,Trade, Exports
Paper type Research paper
I. Introduction
It is well known that Chinese manufacturing exports experienced a surprising
development during the past decades, while China is currently the largest exporter due
to its comparative advantage and labor bonus. But some important features of China’s
exports are not well understood and are still being debated, one of which is how trad e
barriers affect China’s exports in different margins exported with various destinations.
That is what we try to understand in this paper.
Since the original paper by Tinbergen (1962), the gravity model, the mean workhorse
among studies regarding trade barriers on trade flows has linked a number of factors on
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
The authors thank Professor Kunwang Li for advice; and some seminar participants at CES
Annual Conference (Beijing, 2011). This paper is part of research project supported from
Humanities and Social Science Fund, Ministry of Education in China (Project ID: 10YJC790413).
Chinese
manufacturing
exports
19
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 6 No. 1, 2013
pp. 19-34
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401311292655
trade flows, such as the impact of distance, borders, non-tariff barriers and other trade
frictions. With extensions both theoretically and empirically in structural gravity
equations (Anderson and Wincoop, 2003, 2004, 2009), the gravity model remains one of
the most useful models in international economics (Anderson and Yotov, 2009, 2010;
Bernard et al., 2007). However, estimations of trade barriers based on the traditional
structural gravity equations have two weaknesses.
First, trade theory probing into the export behavior has been successfully
developed by Bernard et al. (2003), Melitz (2003) and Bernard et al. (2007) to incorporate
firm heterogeneity into the traditional trade theories since the mid-1990s. Firm
heterogeneity suggests self-selection phenomenon: exporters are more productive than
non-exporters. Moreover, export behavior varies significantly across destinations with
different costs and firms with different productivities. If trade costs fall, incumbent
exporters increase their volume of exports, and new firms can also break into
the export market. But firm heterogeneity is not considered in the traditional gravity
model.
Second, the gravity model does not differentiate a country’s exports thro ugh either
increasing in volume of existing products, i.e. intensive margin or exporting new
varieties (or geographic spread of export) of goods, i.e. extensive margin. In fact, it is
not only feasible to decompose exports into extensive margin and intensive margin,
but highly relevant to better understand a country’s export expansion (Evenett and
Venables, 2002; Hummels and Klenow, 2005). Evenett and Venables (2002) show that
about 30 percent of export growth in developing countries is attributed to geographic
expansion. Hummels and Klenow (2005) examine differences with cross-country trade
data in 1995, and find the extensive margin accounts for 60 percent of the greater
exports of larger economies.
To tackle these two weaknesses, some studies including Chaney (2008) have
examined the relationship between trade barriers, trade elasticity and export margins.
Ruhl (2003) builds a dynamic version of the Melitz (2003) model to explain the so-called
elasticity puzzle. He argues that in response to high frequency transitory shocks, most of
the adjustments of exports happen at the intensive margin, whereas in response to
permanent shocks such as trade liberalization, both the intensive and the extensive
margins adjust. Helpman et al. (2008) estimate a structural trade model using bilateral
export data across 158 countries and obtain trade-margin elasticity based on bilateral
trade flows. Eaton et al. (2004) analyses how French’s market share abroad affects the
nature of Frances’ bilateral trade. Hillberry and Hummels (2008) provide a
decomposition of the distance effect on US trade, and Bernard et al. (2007) use
US export data at the firm level to estimate the impact of distance on the intensive and
extensive (decomposed into the number of firms and the number of products) margins.
Chaney (2008) incorporates the model by Melitz (2003) and the structural gravity
model from Anderson and Wincoop (2003) to provide an explicit interpretation of the
effects of trade barriers on trade volumes and on export margin. Chaney (2008) shows
that the extensive and intensive margins depend not only on trade barriers, but also on
fixed cost and on the distribution of productivity level across firms. At the aggregate
level, the impact of trade costs on bilateral trade flows is the sum of the effects of
trade-cost effect on intensive and extensive margins. Export expands when trade
barriers decrease. If substitution elasticity is high, export expands ma inly through
extensive margin because the new entrants with low productivity level can only capture
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