Introduction to the Special Issue of China's Growing Trade and its Role to the World Economy

• Author: Miaojie Yu,Kenneth S. Chan
• Published date: 01 February 2016
• DOI: http://doi.org/10.1111/1468-0106.12149
• Date: 01 February 2016

INTRODUCTION TO THE SPECIAL ISSUE OF CHINA’S

GROWING TRADE AND ITS ROLE TO THE WORLD

ECONOMY

KENNETH S. CHAN*McMaster University

MIAOJIE YUPeking University

This special issue examines how China’s growing international trade plays a sub-

stantial role in its own economy as well as the global economy.

We start by considering the overall gains from trade theoretically. The most

widely-accepted monopolistic competition model in international trade predicts

three sources of gains from trade: (i) consumer gains from access to more import

varieties; (ii) firms’markup reduction due to tougher import competition; and

(iii) firms’self-selection of more efficient firms into the export markets. Such the-

oretical predictions have gained empirical support using firm-level data in many

countries, including developed countries like the United States and developing

countries like China and India. With the present heterogeneous works such as

Melitz (2015) and Chaney (2008), the last source of gains from trade (self-selec-

tion of more efficient firms) is already well established. However, it is interesting

that the first two sources of gains are absent in many theoretical trade models of

heterogeneous firms.

Where are the missing gains from trade? The first article by Robert Feenstra

insightfully highlights that the missing gains are completely due to the applica-

tion of the Pareto distribution of firms’productivity, which is set to have no

upper-bound. He argues that if the Pareto distribution is bounded above, all

three gains from trade once again operate. Without an upper-bound Pareto

parameter, the tougher import competition will drive out a mass of domestic

varieties, which, in turn, exactly cancels out the welfare gain from increased

import varieties. Accordingly, the first two sources of gains from trade men-

tioned above are completely absent. We then come back to a simple world

in which the gains from trade depend on a simple function of the share of

expenditure on domestic goods, as demonstrated by Arkolakis et al. (2012).

Thus, Feenstra’s important finding guides us to use a more flexible distribu-

tion functional form of firms’productivity if we want to find those missing

gains from trade.

We then come back to ask how much we know about the global influence of

China’s growing trade and its fast economic development. Larry Qiu and his

*Address for Correspondence: Department of Economics, McMaster University, L8S 4M4. E-mail:

chanken93@gmail.com. The unequivocal support from Dean Yang Yao, China Center for Economic Re-

search, and from the editorial board members of the Pacific Economic Review for this special issue are

highly appreciated.

Pacific Economic Review, 21: 1 (2016) pp. 32–34

doi: 10.1111/1468-0106.12149

© 2016 Wiley Publishing Asia Pty Ltd

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