Determinants of China's bilateral trade balance in global value chains

ABSTRACT

This paper identifies the determinants of China's bilateral trade balance using a new measure based on international input–output data, the so-called ‘trade in value-added’ (TiVA), which can prevent double counting in the estimation of bilateral trade balance. Our results show that using a measure based on gross exports, rather than TiVA, causes relatively large overestimation of the impact of the RMB exchange rate on China's bilateral trade balance. This overestimation is mainly because that the increasing production of exports may require increasing intermediate imports as a consequence of international fragmentation of production in global value chains. In addition, our results also show that the impact of FDI inflows on China's bilateral trade balances depends on the position and role of China and its trading partners in GVCs.

KEYWORDS:

• China's trade balance
• trade in value-added
• GVCs
• exchange rate
• FDI

JEL Classifications:

• F1
• F4
• F31
• O24
• R15

Acknowledgments

The paper is supported by the Program for New Century Excellent Talents in Zhejiang University (NCET, NCET-12-0496), the National Natural Science Foundation of China (grant number 71473217), the Fundamental Research Funds for the Central Universities and the joint research project ‘BRICs Economy and Global Value Chains’ co-funded by IDE-JETRO and Fudan University. In addition, we thank Dr. Masami ISHIDA (Director-General, Development Studies Center, IDE-JETRO) and Yoshihiro HASHIGUCHI (Research Fellow, IDE-JETRO) for their helpful comments on this paper.

Disclosure statement

The views in the paper are solely the authors' own opinions. The paper is not meant to represent in any way the views of IDE-JETRO, Fudan University, or Zhejiang University.

Notes

1. When we included distance in our basic model, the results were not statistically significantly different.

2. Despite the above difficulties with using physical distance as a proxy for international trade costs, some studies (e.g. Head and Mayer 2011; Yu 2010) still use physical distance as a proxy for trade cost.

Additional information

Funding

Program for New Century Excellent Talents in University (NCET) [grant number NCET-12-0496]; The National Natural Science Foundation of China [grant number 71473217]; “BRICs Economy and Global Value Chains” co-funded by IDE-JETRO and Fudan University; the Fundamental Research Funds for the Central Universities