Quality Upgrading and Import Competition in a Third Market: Evidence from Exports to the US of Asian Developing Countries

• Main Author: Banh, Hang T.
• Other Authors: YSI Asia Convening 2019
• Format: Conference or Workshop Item
• Language: English
• Published: H. : ĐHKT 2020
• Subjects: Third Market; Exports; Asian Developing Countries; Product-level bilateral trade data
• Online Access: http://repository.vnu.edu.vn/handle/VNU_123/70548
• Institution: Vietnam National University, Hanoi

This paper studies how Asian developing countries responded to the rise of China in the US market using product-level bilateral trade data from BACI-CEPII dataset for the period from 1995 to 2015. In particular, the paper investigates the effect of increasing import competition from China on quality upgrading of exporting products from Asian developing countries. In contrast to previous approaches that use unit values as proxies for quality, I estimate quality at the product level for bilateral import data in the US using both prices and quantity information following the method proposed by Khandelwal (2010). I base the empirical framework on the gravity model to investigate the impact of the competition from China on exports of other Asian developing countries. Apart from traditional variables in a gravity equation to control for observables, I include China’s share in the US market at HS6 product level as a measure of Chinese competition. I follow Autor et al. (2013a) to identify the impact of trade shocks emanating from China by exploiting exogenous intensification of Chinese exports to other developed countries at product-year level. The results show robust evidence that Chinese competition leads to an increase in export values and export quantities in Bangladesh and Vietnam but a decrease in export values and export quantities in Indonesia, Malaysia, Mongolia, Nepal, Philippines and Thailand. On the other hand, all Asian developing countries except for Laos respond to the rising competition from China by upgrading product quality. The analysis also looks at heterogeneity in the response by taking into account differences in the intensity of the competition from China, countries’ comparative advantage, the distance to the world quality frontier and the long and short of the quality ladder. Countries further upgrade quality of products close to the frontier or short-ladder products.