The trade facilitation impact of the Chinese diaspora

• Author: Inmaculada Martínez‐Zarzoso,Robert Rudolf
• Published date: 01 September 2020
• Date: 01 September 2020
• DOI: http://doi.org/10.1111/twec.12950

World Econ. 2020;43:2411–2436. wileyonlinelibrary.com/journal/twec

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2411

Received: 26 April 2019

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Revised: 13 November 2019

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Accepted: 25 February 2020

DOI: 10.1111/twec.12950

ORIGINAL ARTICLE

The trade facilitation impact of the Chinese

diaspora

InmaculadaMartínez-Zarzoso1,2

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RobertRudolf3

1Department of Economics, University of Goettingen, Goettingen, Germany

2University Jaume I, Castellón de la Plana, Spain

3Division of International Studies, Korea University, Seoul, Korea

Funding information

Spanish Ministry of Economy and Competitiveness, Grant/Award Number: ECO2017-83255-C3-3-P and UJI-B2017-33;

Korea University Research Grant, Grant/Award Number: K1717891

KEYWORDS

Chinese networks, correlated random-effects Poisson pseudo-maximum likelihood, gravity model, panel data, sectoral trade

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INTRODUCTION

With approximately US$2.3 trillion worth in exports of goods and services in 2015, the People's

Republic of China (PRC) is by far the number one exporter in the world. In addition, China's merchan-

dise imports stood at US$1.7 trillion making it the world's second largest importer closely following

the United States. Understanding the determinants of Chinese bilateral trade flows thus is of vital

importance given the prominent role that China plays in world trade today (Bussière & Schnatz, 2009;

Caporale, Sova, & Sova, 2015; Johnston, Morgan, & Wang, 2015; Yang & Martínez-Zarzoso, 2014).

At the same time, ethnic Chinese play an enormous role in global migration. Being the world's most

populous nation and having witnessed large outmigration streams, in both past and present, gives

mainland Chinese state and business actors access to a unique coethnic network spread around the

world. The overseas Chinese with an estimated size of approximately 65 million are considered one

of the largest diasporas in the world (Poston & Wong, 2016).

Rising levels of migration around the world today have sparked growing public and academic

interest in the social and economic impacts of migrants. Diasporas often function as an important

economic link between their source and their host countries. At least three channels have been sug-

gested through which the presence of migrants can promote trade between source and host countries

(Felbermayr, Grossmann, & Kohler, 2015). First, migrant networks alleviate incomplete informa-

tion. They can help overcoming informal trade barriers related to language, culture and institutions.

Coethnic networks often share valuable market information and thus help in identifying business

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction

in any medium, provided the original work is properly cited.

© 2020 The Authors. The World Economy published by John Wiley & Sons Ltd

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MARTÍNEZ-ZARZOSO ANd RUdOLF

opportunities and creating business partnerships. Second, migrant networks reduce frictions related

to asymmetric information. For instance, coethnicity can raise contract enforceability since members

of the same ethnic network are less likely to cheat each other. These two mechanisms constitute the

trade-cost channel. Third, via the preference channel, migrants boost imports to the host country if

they derive higher utility from the consumption of goods made in the country of their ethnic origin

(Aleksynska & Peri, 2014; Felbermayr & Toubal, 2012; Gould, 1994; Greif, 1993; Head & Ries,

1998; Munshi, 2003; Parsons & Vézina, 2018; Rauch, 2001).

Past studies that have focused on Chinese coethnic networks have established a robust effect of overseas

Chinese on the facilitation of international trade (Anderson & van Wincoop, 2004; Felbermayr, Jung, &

Toubal, 2010; Rauch, 2001; Rauch & Trindade, 2002) and foreign direct investment (Gao, Liu, & Zou,

2013; Gao, 2003; Tong, 2005).1 Rauch (2001) and Rauch and Trindade (R&T) (2002) were the first to

study the impact of overseas Chinese on bilateral trade flows. Using a gravity model for a sample of 60

countries, they were able to show that the product of the ethnic Chinese population shares of each two

countries was positively related to these countries' bilateral trade flows in 1980 and 1990. R&T further

showed that effects were stronger for differentiated than for homogeneous products, providing evidence for

the hypothesis that part of the effect runs through information sharing.2 The authors attribute their findings

to Chinese coethnicity helping to lower trade costs by overcoming information barriers on the one hand and

raising contract enforceability on the other. As noted by Combes, Lafourcade, and Mayer (2005), ethnic

networks do affect bilateral trade through yet another channel, preferences for home country goods. Since

R&T's landmark study, a growing number of economists have been engaged in the study of coethnic net-

works in international trade. Anderson and van Wincoop (2004) estimate the ad-valorem tariff equivalent

of informational costs implied by R&T's findings to be approximately 6%, a figure higher than average

applied tariff rates around the world today. Felbermayr et al. (2010) re-estimate the R&T model considering

multilateral resistance terms (MRT) and confirm their main findings. They also distinguish between the

direct effects—involving China as a trading partner—and the indirect effects of Chinese migrants. The

former are found to be sizeable, whereas the latter almost vanish in some cases, when models properly

control for MRT in a cross-sectional setting. The authors further show similar trade creation effects for other

ethnic networks and find particularly strong effects for Polish, Turkish, Mexican and Pakistani networks.

Trade creation effects of overseas Chinese are further in line with the sociological literature, which

sees diasporas “as middlemen who are active as cosmopolitan catalysts for economic transactions be-

tween global cities […] that form the backbone of the world economy” (Felbermayr et al., 2010: 41).

Sociologists have further pointed out that Chinese business networks are often built on informal personal

relations based on regional connections and kinship, sometimes referred to by the popular Chinese term

Guanxi (Folk & Jomo, 2013; Hamilton, 1996). A recent study by Priebe and Rudolf (2015) extends the

discussion of economic impacts of the Chinese diaspora to aggregate economic growth in host countries.

Introducing a new, enhanced dataset on the population share of overseas Chinese covering 147 host

countries in 1970, the authors find that a country's initial relative endowment with overseas Chinese is

positively related to subsequent economic growth of host countries. Besides enhanced investment and

general TFP effects, the authors identify greater trade openness as a major growth transmission channel.

The present paper's main objective is to quantify the influence of the Chinese diaspora in explain-

ing Chinese bilateral trade flows. Using an enhanced dataset on overseas Chinese, this study estimates

1Such effects have been observed not only between the host country and the PRC, but also between host country pairs.

2R&T define homogeneous goods as goods for which reference prices are available. In contrast, differentiated goods are

defined as goods without reference prices.