Fixed Export Costs and Trade Patterns: The Case of China

• Author: Yin He,Yu Gao,Xiaopeng Yin
• DOI: http://doi.org/10.1111/twec.12425
• Published date: 01 August 2017
• Date: 01 August 2017

Fixed Export Costs and Trade Patterns:

The Case of China

Yu Gao

1

, Yin He

2

and Xiaopeng Yin

2

1

Institute of International Business, Shanghai University of International Business and Economics,

Shanghai, P. R. China and

2

Department of International Trade, School of International Trade and

Economics, University of International Business and Economics, Beijing, P. R. China

1. INTRODUCTION AND LITERATURE

AS globalisation prevails and production processes are being segmented and distributed to

different parts of the world, trade patterns, and mainly the choice between the processing

trade and ordinary trade, have become an important issue in the international trade for devel-

oping countries. Processing exporters differ from ordinary exporters in that the business mode

of this type of exporters is to import all or part of the raw and auxiliary materials, parts and

components, accessories, and packaging materials from abroad in bond, and re-export as fin-

ished products after processing or assembly.

The processing export trade is popular in China. In 2007, about half of China’s total exports

(Figure 1) was consisted of processing exports. According to Baldwin and Lopez-Gonzalez

(2015), on the supply side China is a factory economy with its comparative advantage in final

assembly. However, processing exporters, who mostly engage in these final assembly activities,

are often criticised for their low value added. For example, Xing and Detert (2010) find that the

estimated wholesale cost of an iPhone shipped from China is $178.96, while the value added by

Chinese workers at Hon Hai Precision Industry Corporation accounts for just 3.6 per cent of the

total or $6.50.

Due to the importance and uniqueness of China’s trade patterns, scholars have begun to

examine how the two types of firms’ perform differently and the factors that affect a firm’s

choices between China’s two different trade patterns. When making this decision, a firm needs

to choose whether to export and which trade pattern to adopt.

The theory of heterogeneous firms, developed by Melitz (2003) and many other subsequent

researchers, tells us that firms only export when they pass a certain productivity threshold.

This means exporters are usually more productive and profitable than non-exporters (Bernard

et al., 2003; Eaton et al., 2004; Helpman et al., 2004, etc.). Castro et al. (2016) build up a

fixed cost index and explore how fixed export costs and productivity jointly determine the

export decisions of the firm. They also construct indices of fixed export costs for each indus-

try region year triplet and match them to domestic (non-exporting) firms. Further, they

demonstrate that increasing fixed export costs and productivity have opposite effects on the

propensity to export and that they could substitute for each other. However, this substitution

effect is weaker for high-productivity exporters. In addition, Castro et al. (2016) find that

high-productivity non-exporters face greater fixed export costs than low-productivity exporters

do. However, these studies have no implications for decisions on trade patterns.

We thank Keith Maskus, Edwin Lai, Albert Hu, Huiwen Lai, Mi Dai, Zhi Yu and participants of 2014

UIBE workshop on Technology Innovation and Intellectual Property Rights for their valuable comments.

All remaining errors are our responsibility.

©2016 John Wiley & Sons Ltd

1614

The World Economy (2017)

doi: 10.1111/twec.12425

The World Economy