The puzzle of quality upgrading of Chinese exports from the trade liberalization perspective

• DOI: http://doi.org/10.1111/1468-0106.12330
• Date: 01 May 2020
• Published date: 01 May 2020

SPECIAL ISSUE ARTICLE

The puzzle of quality upgrading of Chinese

exports from the trade liberalization

perspective

Xianhai Huang | Kun Liu | Hangyu Chen

School of Economics, Institute for Fiscal

Big-Data & Policy, Zhejiang University,

Zhejiang, China

Correspondence

Hangyu Chen, School of Economics,

Institute for Fiscal Big-Data & Policy,

Zhejiang University, No. 38, Zheda Road,

Hangzhou 310027, China.

Email: chenhangyu1205@sina.com

Funding information

This paper is sponsored by the National

Social Science Fund (15ZDB156,

17VDL019, 19CJL050), the National

Nature Science Fund (71433002,

71873120), the Zhejiang Soft Science

Research Program (2017C35001), the

Center for Research in Regional

Economic Opening and Development

(REOD20181102), the Fundamental

Research Funds for the Central

Universities, the China Academy of West

Region Development, and the Center for

Research Regional Coordination

Development at Zhejiang University.

Abstract

Trade liberalization could accelerate the process of

quality upgrading through the competition effect. How-

ever, that the quality of Chinese exports exhibits an

opposite performance pattern is puzzling. The present

paper uses a framework based on multiproduct firms to

analyse the mechanism of how the product quality of

exports is affected by trade liberalization to explain this

puzzle. The model includes two major mechanisms:

the competition effect and the market effect. There is a

huge gap in the influence on the product quality of

exports between a decrease in tariff barriers and

non-tariff barriers: firms' product quality increases

(decreases) when non-tariff barriers (tariff barriers) fall.

The data of Chinese firms from 2001 to 2011 supports

this conclusion. Further research reveals that the influ-

ence of trade liberalization on the product quality of

exports in China varies among different types of firms.

1|INTRODUCTION

As one of the strate gies of firm produ ctivity improve ment, product qua lity upgrading h as

always been a focus of scholars' research, and the relationship between product quality and

international trade makes up a significant part of product quality upgrading research. The

early literature, such as Flam and Helpman (1987), Grossman and Helpman (1991), Copelan

and Kotwal (1996), and Murphy and Shleifer (1997), focused on the theoretical aspects,

exploring the relationships between product quality and international trade with general equi-

librium models. Following the introduction of corporate heterogeneity into the trade sector

Received: 2 April 2020 Accepted: 9 April 2020

DOI: 10.1111/1468-0106.12330

Pac Econ Rev. 2020;25:161–184. wileyonlinelibrary.com/journal/paer © 2020 John Wiley & Sons Australia, Ltd 161

(Melitz, 2003), some new approaches have been taken in the relevant fields, such as those of

Baldwin and Harrigan (2011), Verhoogen (2008), Kugler and Verhoogen (2012), and Manova

and Zhang (2017), all of which incorporate firm heterogeneity into the analytical framework

of product quality. Baldwin and Harrigan (2011) characterize product quality at the unit price

and show the impact of product quality on “export zeros”. Verhoogen (2008) links trade and

worker wages by constructing a quality upgrading mechanism. Kugler and Verhoogen (2012)

use a model with an endogenous mechanism of quality upgrading based on Melitz (2003), show-

ing that high-productivity companies are expected to use high-quality intermediate inputs and

produce high-quality products. Manova and Zhang (2017) indicate that trade liberalization pro-

motes multi-product firms to focus more on the production of high-quality products.

In terms of the empirical evidence, because the quality of export products cannot be directly

obtained, the way in which to measure the quality of export products has become the focus of

the relevant research. In the early literature, the quality of export products starts from the

macro level and scholars adopt a proxy variable method to depict it, such as an ISO9000 dummy

variable (Hallak & Sivadasan,2013; Verhoogen,2008), proportion of industry R&D and advertis-

ing investment in sales (Kugler & Verhoogen,2012), or unit value (Manova & Zhang,2017;

Schott,2008). However, these proxy variables also have their own problems. The product quality

described by Verhoogen(2008), Kugler and Verhoogen(2012), and Hallak and Sivadasan(2013)

is not a strict measurement of product quality but only an indirect measurement of it. While

using the unit value as the proxy variable is a direct reflection of product quality level, it ignores

the influence of other factors in the unit value like production costs and market power. For

example, the lower price of Chinese shirts in the US market may be due to the lower production

cost in China than in Italy, rather than the influence of product quality. Therefore, there is a

certain error involved in using the unit value to measure the quality of export products (Hallak

& Schott,2011). To solve this problem, some studies, such as Hallak (2006) Khandelwal(2010),

Hallak and Schott(2011), Feenstra and Romalis(2014), have attempted to extract quality infor-

mation from demand functions. The above studies extract quality information from the unit

value through the product price and quantity information in bilateral trade, but the relevant

data requirements are quite demanding and the data cannot be used to measure firm-level

product quality. In the measurement of product quality at the firm level, the existing research is

based on the constant elasticity of substitution (CES) utility function to estimate product quality

through the demand structure equation (Gervais,2015; Hottman, Redding, & Weinstein,2014;

Khandelwal, Schott, & Wei,2013; Piveteau & Smagghue,2013).

Using export product quality data, scholars have examined the impact of export product

quality on the relevant economic variables, such as employment and wage levels

(Khandelwal, 2010; Kugler & Verhoogen, 2012; Verhoogen, 2008), national income levels

(Feenstra & Romalis, 2014), and economic growth modes (Hallak & Schott, 2011). In the

research on the factors affecting the quality upgrading of export products, scholars focus on

trade liberalization (Osabuohien, Beecroft, & Efobi, 2018; Rahman, 2016), and their results are

quite similar. They all believe that trade liberalization will increase the degree of competition,

which will enable firms to improve the quality of their export products (Manova &

Zhang, 2017; Piveteau & Smagghue, 2013).

However, the quality of Chinese exports shows the opposite. Zhang, Zheng, and Zhai (2014)

found that the quality of Chinaʼs export products demonstrated a slight downward trend in

2000–2006 and a U-shaped change. Shi and Shao (2014) found that the quality of the export

products of Chinese local firms generally showed a downward trend during 2000–2006, but the

quality of the export products of foreign-funded firms generally showed an upward trend. In

162 HUANG ET AL.