Is competition from China so special?

• Published date: 01 January 2021
• Author: Asier Minondo,Benedikt Heid,Raúl Mínguez
• Date: 01 January 2021
• DOI: http://doi.org/10.1111/twec.12991

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wileyonlinelibrary.com/journal/twec World Econ. 2021;44:64–88.

© 2020 John Wiley & Sons Ltd

Received: 19 May 2019

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Revised: 29 April 2020

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Accepted: 21 May 2020

DOI: 10.1111/twec.12991

ORIGINAL ARTICLE

Is competition from China so special?

BenediktHeid1,2

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RaúlMínguez3,4

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AsierMinondo5

1The University of Adelaide, Adelaide, SA, Australia

2CESifo, Munich, Germany

3Universidad Nebrija, Madrid, Spain

4Chamber of Commerce of Spain, Madrid, Spain

5Economics, Deusto Business School, San Sebastian, Spain

Funding information

Spanish Ministry of Science, Innovation and Universities, Grant/Award Number: RTI2018-100899-B-I00; Ministerio de

Economía y Competitividad, Grant/Award Number: MINECO ECO2016-79650-P; Australian Research Council, Grant/

Award Number: DP190103524; Basque Government Department of Education, Language Policy and Culture, Grant/Award

Number: IT885-16

KEYWORDS

China, competition, exports, Spain, transaction-level data

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INTRODUCTION

China has rapidly integrated itself into the world economy during the past few decades. At the begin-

ning of its transition to a more market-based economy in 1980, China produced 0.9% of global mer-

chandise exports only. By 2016, however, China was the source of 13% of world merchandise exports

and the world's largest exporter.1

The rise in China's exports has raised concerns among developed countries not only due to its

magnitude, but also because Chinese exports overlap considerably with the products manufactured

by developed economies (Rodrik,2006; Schott,2008) and sell at lower prices (Fontagne, Gaulier, &

Zignago, 2008). Due to China's low wages, its allegedly undervalued currency and still ineffective in-

tellectual property rights enforcement, lower environmental standards, and (implicit) export subsidies,

there is a broad sentiment that Chinese competition is particularly damaging for developed countries'

firms. Alas, firms do not only compete with their Chinese counterparts but with fir ms from across

the globe.

In this paper, we assess whether Chinese competition is more damaging to firms' performance by

comparing it to the effect of competition from other countries. Undeniably, the level of Chinese exports

has risen, and the increase in Chinese competition, as measured by its market share in export markets,

has increased more than for any other competitor. Instead of focusing on its absolute magnitude, we

1Authors' own calculations using World Trade Organization data.

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HEID Et al.

focus on the nature of competition, and evaluate whether an increase in competition from China has a

larger negative effect on firms' performance than a similarly sized increase in competition from other

countries. Essentially, we are asking the question whether China’s competition is special.

Unlike previous studies that focus on the effect of Chinese competition on the domestic economy

(Autor,2013; Mion,2013; Pierce,2016), we investigate its impact on the performance of firms in their

export markets. Competition affects firm performance in several ways. In a standard heterogeneous

firm model with CES demand (Melitz,2003), an increase in competition, measured by a lower price

index, reduces firms' export revenues and drives the least productive firms out of foreign markets. If

markups are endogenous, higher competition translates into lower prices (Melitz & Ottaviano, 2008).

However, prices may increase if firms upgrade the quality of their products in response to rising im-

port competition (Amiti,2013). In addition, tougher competition may lead multi-product exporters

to reduce their total number of exported products (Bernard,2011; Eckel,2010; Mayer,2014; Mayer,

Melitz, & Ottaviano,2016). If China has a particularly damaging impact on exporters, it should show

up in any of these variables in our data.

We use administrative export transactions data for the universe of Spanish exporters from 1997 to

2016 combined with balance-sheet data to analyse the impact of Chinese and other countries' compe-

tition on Spanish firms' export revenues, prices, range of exported products and the probability that

a firm stops to export a good to a given market. In particular, we assess whether stiffer competition

from China has been more damaging than a similar increase in competition from other important ex-

porters, such as Germany, Italy or France. Our data allow us to control for unobserved heterogeneity at

the firm–destination–product level, such as differences in product appeal or firm-specific trade costs

across export markets.

We make three contributions. First, we document that tougher competition from China reduces

Spanish firms' export revenues. However, this effect is similar to the effect of competition from other

countries if their competition was to increase by the same amount. In this sense, we do not find that

Chinese competition has a particularly damaging effect on Spanish firms' export revenues. We do not

find either a stronger impact of tougher Chinese competition on firms' export prices or their number

of exported products. However, an increase in Chinese competition raises the probability of a firm

ceasing to serve an export market with a particular good more than a similar increase in competition

from other countries. Nevertheless, this differential impact diminishes over time and is small relative

to a firm's average risk to cease exporting a good to a destination.

Second, we document an omitted variable bias in studies which only focus on Chinese competition.

Mechanically, a rise in China's market share implies a reduction in the share of its competitors.

Interestingly, the literature studies the impact of Chinese competition in isolation.2 We show that ne-

glecting other countries' simultaneous changes in their market shares underestimates the impact of

Chinese competition on firm performance.

Third, we investigate whether Chinese competition has a larger impact on firms which may be

particularly vulnerable as they produce low-tech products or with low productivity. We find that the

impact of competition on firms' revenue is lower for high-tech products. However, this is not particular

to competition from China. We find that firms with higher productivity are less affected by the impact

of Chinese competition on export revenues and product scope; however, this effect is economically

small. Our results are robust to instrumenting the competition–intensity measure, estimating spec-

ifications with alternative fixed effects, and across different product categories and time intervals.

2Examples for this type of studies of the ‘China shock’ are (Ahearne etal.2003; Eichengreen etal.,2007; Greenaway

etal.,2008; Hanson and Robertson,2010; Autor etal.,2013; Iacovone etal.,2013; Utar and Ruiz,2013; Mion and

Zhu,2013; Utar,2014; Autor etal.,2016; Bloom etal.,2016; Pierce and Schott,2016).