Export Quality and the Dynamics of North–South Competition

• Author: Jorge Chami Batista,Yan Liu
• Date: 01 January 2017
• Published date: 01 January 2017
• DOI: http://doi.org/10.1111/twec.12270

Export Quality and the Dynamics of

North–South Competition

Jorge Chami Batista

1

and Yan Liu

2

1

Instituto de Economia, Universidade Federal do Rio de Janeiro, Rio de Janeiro, Brazil and

2

International Business School, Dalian Nationalities University, Dalian, China

1. INTRODUCTION

IN the past two decades (1991–2011), the share of developed economies in world merchan-

dise trade fell approximately 20 percentage points (p.p.).

1

Export revenue of the North, as

developed economies are often referred to in the literature, was down to slightly over half of

world export revenues (53 per cent) in 2011. Considering all countries, the North’s loss corre-

sponds to the South’s gain of market share. The share of developed economies’ major export-

ers of manufactured goods fell even more, 22 p.p. in the same period. The G-7 (the United

States, Germany, Japan, France, the UK, Italy and Canada) accounted for 91 per cent of the

loss of market share of developed countries classified as major exporters of manufactured

goods. The main gainers in the South were emerging economies led by China, which

accounted for over 42 per cent of the South gains in world exports, Russia, India, Mexico,

Vietnam, Brazil, Thailand and Turkey.

As the South expanded its share in world exports, particularly in the 1990s and 2000s,

empirical research documented a new pattern of trade specialisation. Large economies of the

South export roughly the same range of products as the North, but specialise in lower-price

varieties of each of these products, while high-income countries specialise in higher-price

varieties (Schott, 2004; Hummels and Klenow, 2005).

This new pattern of trade specialisation raises important theoretical and empirical issues.

Schott (2004), for example, provides strong evidence that this vertically differentiated pattern

of specialisation within products can largely be explained by the traditional factor proportion

argument that the North exports high-unit-value varieties, which are intensive in the region’s

abundant capital and skills, while the South exports low-unit-value varieties, which are

intensive in the region’s abundant unskilled labour.

2

Bearing in mind the evidence of large differences in prices observed between varieties

within products defined at the most detailed level of classifications, an interesting empirical

issue is to what extent exports from the North enter into direct competition with exports from

the South. Fontagn

e et al. (2008, p. 54) suggest that they do not. Therefore, high-income

Financial support from CAPES/Ministry of Education of Brazil and from the National Social Science

Fund of China (Project No. 13CGJ034; Project Title “Research on the Chinese Manufacturing Export

Quality”) are gratefully acknowledged by Chami Batista and Y. Liu, respectively.

[Correction added on 17 November 2015 after first online publication: The reader should be aware that

some minor corrections have been made in the Abstract and main text of this article since its online

publication in May 2015.]

1

UNCTAD Database. The list of developed countries varies a little according to the source. For

UNCTAD’s list, see http://unctadstat.unctad.org/TableViewer/dimView.aspx (accessed 7 July 2012).

2

The main contrast with the traditional factor argument is that specialisation takes place within products

rather than within industries.

©2015 John Wiley & Sons Ltd 207

The World Economy (2017)

doi: 10.1111/twec.12270

The World Economy

countries would not have to worry so much about the South’s rising share in world trade, as

long as they kept their share in an expanding upmarket segment. Without direct competition

from the South, exports of high-price product varieties would sustain employment and relative

wages of skilled labour in the North.

Fontagn

e et al. (2008) and Cheptea et al. (2014) both argue that Western Europe has been

more resilient to competition from the South than the United States and Japan. Fontagn

e et al.

(2008) come to this conclusion just by examining changes in market shares by segments of

Northern and Southern countries between 1995 and 2004. Although the North as a whole can

only gain from or lose to the South, a country or a particular region in the North, such as Western

Europe, may lose market share to the South as well as to other Northern countries. A reduction

in the market share of Western Europe does not say whether the region is losing to the South or

to other groups of countries in the North. Cheptea et al. (2014) recognise the need to measure

the changes in market shares due to direct competition.

3

Their methodology can estimate the

growth rates of market shares resulting from direct competition but has nothing to say about

from whom developed and non-developed countries are gaining or to whom they are losing.

The main objective of this paper was to estimate the changes of market share of major

exporting countries or groups of countries of the North and the South in the past two decades,

due to direct competition, and uncover to whom each exporter of the North is losing market

share on each segmented product market. In addition to finding out whether the North is los-

ing market share in the lower or upper segments of the market, we shall be able to say

whether North America, for example, is losing market share to developed countries of Wes-

tern Europe or Asia, or to China and other developing countries, through direct competition.

To achieve this objective, we combine two existing methods in a pioneer manner and apply

them to Japanese imports of manufacturing goods in the period 1988-2010. Firstly, we segment

the import value of each product into three categories: low, medium and high segments, as in

Fontagn

e et al. (2008). Then, we apply a method of distributing the gains and losses of each

exporting country to each of its competitors in each product market, as in Chami Batista (2008).

This latter method allows us to estimate, for instance, how much a Northern country or region

gained or lost to other Northern or Southern countries or regions in a particular period.

The combination of the two methods allows us to measure to what extent exports from the

North are in direct competition with exports from the South in different segments of the mar-

ket and to test the resilience of countries or regions of the North to South competition. It also

allows us to test the sensitivity of our results to changes in a particular parameter of the seg-

mentation method that affects the size of each segment, helping us to identify where product

varieties of the North and the South enter into direct competition.

Chami Batista (2010) shows that the Chami Batista’s (2008) method of distributing export-

ers’ gains and losses among competitors is consistent with the main theoretical models of

competition. However, the method requires that product markets are defined in such a way

that the varieties exported by each exporting country directly compete with or are substitutes

of the varieties of all the other exporting countries in each product market. These are the rele-

vant product-variety markets. By computing the distribution of gains and losses of each

exporter among competitors with different degrees of product market segmentation, the com-

3

We are thankful to an anonymous referee for calling our attention to this reference. The insightful

methodology of Cheptea et al. (2014) makes use of an econometric shift-share decomposition to measure

the direct competition component of market share changes.

©2015 John Wiley & Sons Ltd

208 J. CHAMI BATISTA AND Y. LIU