The factor content of Chinese trade

Abstract

This article demonstrates that the growth of China's exports in recent years is consistent with the Heckscher–Ohlin–Vanek (HOV) prediction of the factor content of trade based on international differences in factor endowments, after adjusting for substantial differences in factor-specific productivity. A comparison of the Organisation for Economic Co-Operation and Development input–output data in the year 2000 shows that China's labor productivity relative to the United States is the lowest in a sample of 33 diverse countries, although China's capital is more productive than US capital. This in turn demonstrates the importance of a factor-specific rather than factor-neutral productivity adjustment common in much of the HOV literature. The use of value-added data to measure factor usage helps to correct for unobserved differences in factor qualities and differences in productivity across sectors, as is demonstrated for China. China's low average labor productivity reflects the structure of the Chinese economy where most employment is still in the inefficient agriculture and service sectors, with only 11% of employment in the more modern export-oriented manufacturing sector. Due to a trade surplus, China exports both labor and capital but Leamer's (The Journal of Political Economy 1980;88: 495–503) test for trade-revealed factor abundance confirms that China is labor abundant even after substantial factor-specific productivity adjustments.

Keywords:

• China
• factor proportions
• Heckscher–Ohlin model
• factor shares
• comparative advantage

JEL Classifications:

• F1
• F11

Notes

1. Based on World Trade Indicators 2008 published on the internet by the World Bank at http://go.worldbank.org/3Q2ER38J50. The United States is the largest trading nation, accounting for 11.91% of world trade, while Germany is the second largest with 8.76% of world trade in 2007.

2. Capital stock estimates are in purchasing power parity dollars; the method of computation is described in the Appendix.

3. The term ‘labor productivity’ in this article refers to the amount of labor used to produce a unit of output in two countries based on a comparison of input–output coefficients.

4. The OECD value-added components also include net taxes on production. Net taxes were distributed to labor and capital according to the share of each in value-added in each sector. All currency values were converted to $US dollars using the ICP PPP exchange rates, as described in the Appendix.

5. The Appendix details the sources and construction of the capital stock and labor supply measures. As noted there, the capital stocks of Russia and Slovakia are likely inaccurate due to more limited data.

6. This sample of 33 countries represents 78% of world GDP, based on 2005 International Comparison Project data. To correct for the non-sample trade from the rest of the world (row), the world endowment for each factor i is measured by , where is the weighted average productivity across sample countries corresponding to each test. In H1, .

7. These figures are based on the sample of 33 countries with the rest of the world correction.

8. Based on UN Comtrade trade data for 2000 and 2006, deflated by the US producer price index.