Do Chinese Technical NTMs Increase the Exports of Less Sophisticated Products to China?

Abstract

Much evidence suggests that NTMs (non-tariff measures) have become a major instrument of trade policy. Compliance with NTMs entails significant costs on exporters who may be required to meet pre-determined standards set by the importing countries to prevent the import of substandard and dangerous products. We consider NTMs imposed by China on its imports as China not only dominates world trade but its trade policies influence global trading patterns. Our results suggest that NTMs do help increase imports of less sophisticated products into China, particularly if they are originating from low-income countries. Although, our OLS and IV estimations report similar results for products facing NTMs and not facing NTMs, the magnitude of the influence is higher for the products facing NTMs when we consider fixed effect estimations. We introduce an interaction variable defined by the income level of the trading partner. The interaction variable magnifies the influence of the level of export sophistication for products facing NTMs on imports into China, while that for products not facing NTMs become insignificant.

Keywords:

• Non-tariff measures;
• low-income countries;
• export sophistication

JEL CODES:

• F11
• F13
• F14
• F15
• F63

Data availability statement

The data on trade flows and the data on distance between trading partners is extracted from CEPII’s Databases and Models available at http://cepii.fr/CEPII/en/bdd_modele/bdd_modele.asp . The data extracted from World Bank’s World Development Indicators is available at https://databank.worldbank.org/source/world-development-indicators. The data on NTMs is extracted from the researchers file available at UNCTAD’s TRAIN database. This data can be downloaded from https://trainsonline.unctad.org/home. The data on free trade agreements is extracted from WTO’s Regional Trade Agreement Database (Regional Trade Agreements Information System), available at https://rtais.wto.org/UI/PublicMaintainRTAHome.aspx.

Data deposition

The dataset containing the relevant variables for this study can be downloaded from https://figshare.com/articles/dataset/data_china_study_ntms_dta/16828246.

Acknowledgements

We gratefully thank the anonymous referees for their useful suggestions and comments.

Disclosure statement

The authors report there are no competing interests to declare.

Notes

1 Data on GDP (PPP) and on imports retrieved from the World Bank’s World Development Indicators database.

2 We consider technical measures only in this study rather than include non-technical measures. The latter are more likely to be protectionist in nature as they involve licensing, quotas and other forms of trade-protective measures. Technical measures include labelling, certification, marking and packaging requirements that are likely to involve pre-defined product and process standards.

3 Roache (2012) finds that shock to aggregate activity in China influence global oil prices as well as prices of certain base metals.

4 If the Chinese policymakers believe a product is of low quality in its natural pre-processed form, it will impose NTMs in order to limit the imports of such goods. The NTMs may involve measures to improve the quality of the goods and require exporters in trading partners to produce according to pre-defined standards and processes. For instance, if TBTs, one of the technical measures, focus on improving the quality of products from low-income countries, the compliance with TBTs may allow importers in China to import products otherwise considered dangerous for consumption.

5 As we only consider technical NTMs, measures that are solely for the protection of domestic industries such as quantitative restrictions are not considered. Ghodsi (2019) reports that NTMs imposed by China on the imports of manufacturing products promote trade rather than restrict it. Further, technical measures imposed by China are not deemed complex for more successful exporters. Such technical measures are likely to be imposed due to legitimate concerns on product safety that could help facilitate trade.

6 The impact of NTMs varies for different exporters. UNCTAD (2018) reports that exports from low-income countries are more likely to be impacted by NTMs as not only are the costs of compliance higher for them but also due to the composition of their export baskets that includes a larger proportion of agricultural products and apparels. Consequently, exporters of different varieties of textile products and agricultural products are more likely to face NTMs as they are likely to originate from low-income countries and considered less sophisticated than different varieties of automobiles and machinery imported into their country.

7 As each good serves a different purpose, there is no reason to believe that a t-shirt will provide less satisfaction than a wristwatch.

8 Although our study focuses on NTMs imposed by China, we calculate EXPY using global exports of the trading partners at the product-level. This avoids bias that would result from shocks specific to the bilateral trading relationships between China and its trading partners.

9 We consider a balanced set of countries to calculate PRODY as otherwise our results could be severely biased if we had different countries in different years. This strategy is similar to that adopted in Hausmann et. al (2007) to calculate PRODY.

10 Several developing countries have large populations but not necessarily a large domestic economy in terms of GDP at PPP. There are several developing countries with high population growth rates and population densities but low levels of income per capita and consequently low levels of GDP at PPP. We believe that bilateral trade with China is likely to be influenced by the size of the economy, in terms of its GDP, of the trading partner rather than the size of its population. Lastly, GDP is often the preferred variable in the gravity equation.

11 We do not report the results of the first stage regression for brevity. However, we report the results of the various tests that reject the hypothesis that our instruments are weak and do not reject the hypothesis that over identifying restrictions are valid (Sargen test).

12 NTMs are mostly imposed on a product based on the threat it imposes to consumers rather than based on the characteristics of the trading partners. Also, our data on NTMs itself is product-specific.

13 The PRODY in year 2012 for products facing NTMs is $24,944 and the PRODY for products not facing NTMs is $27,611. Although, the difference between the former and the latter is approximately 10 percent of the former, it suggests that NTMs are more likely to be applied on products that are typically imported from countries with lower levels of income.

14 We consider the variance inflation factor for each independent variable after each regression and find that all values are less than 5. We are satisfied that multicollinearity is unlikely to be an issue across our regressions.

15 After controlling for the size of the trading partner’s economy (GDP), the level of trade openness and trading linkages with China (distance and FTA), the level of export sophistication has a negative influence on bilateral imports into China.

16 Although not reported, the interaction term in Column (1) remains significant after we adjust the standard error for clusters in the trading partners, while the interaction terms in Columns (2) and (3) follow a similar pattern as reported.