Determinants of Foreign Trade in China's Textile Industry

Abstract

The article sets out to examine whether the volume of bilateral trade between China and 40 of its trading partners in the up-, mid-, and downstream segments of the textile industry is affected by factors such as GDP, per capita GDP, geographic distance, FDI outflows and inflows, openness to trade, and bilateral investment treaties. The significant negative correlation between import/export volume and distance reflects the close trading relations between China and the other countries of East Asia. A home market effect is evident for downstream exports. China's FDI outflows stimulate growth in midstream textile product exports.

Keywords:

• geographic distance
• bilateral trade
• gravity model
• home market effect
• China's textile industry

Notes

¹ The upstream segment includes items with HS codes for fiber (5001, 5002, 5003, 5101, 5102, 5103, 5104, 5105, 5201, 5202, 5203, 5301, 5302, 5303, 5304, 5305, 5503, 5504, 5505, 5506, 5507, 5601); the midstream segment includes items with HS codes for yarn (5004, 5005, 5006, 5106, 5107, 5108, 5109, 5110, 5204, 5205, 5206, 5207, 5306, 5307, 5308, 5401, 5402, 5403, 5404, 5405, 5406, 5501, 5502, 5508, 5509, 5510, 5511), and HS codes of cloth (5007, 5111, 5112, 5113, 5208, 5209, 5210, 5211, 5212, 5309, 5310, 5311, 5407, 5408, 5512, 5513, 5514, 5515, 5516, 5602, 5603, 5607, 5608, 5801, 5802, 5803, 5804, 5806, 5810, 5811, 5901, 5902, 5903, 5904, 5905, 5906, 5907, 5908, 5909, 5910, 5911, 6001, 6002, 6003, 6004, 6005, 6006); and the downstream segment includes items with HS codes for clothing (6101, 6102, 6103, 6104, 6105, 6106, 6107, 6108, 6109, 6110, 6111, 6112, 6113, 6114, 6115, 6116, 6117, 6201, 6202, 6203, 6204, 6205, 6206, 6207, 6208, 6209, 6210, 6211, 6212, 6213, 6214, 6215, 6216, 6217).

² Henderson and Millimet (2008) claimed that if the functional form appeared unwarranted, then the gravity model should be estimated in levels. This is because of the possibility of heterogeneity in the data. To control for the problem of unobserved heterogeneity of trading partner countries, Baier and Bergstrand (2007) further incorporated country-time fixed effects in a gravity model to account for the variation in a panel context. In this article, a panel dataset was used, and fixed effects and random effects models techniques have been estimated to control for the heterogeneity.

³ For a detailed discussion on China's outward foreign direct investment, see Wu and Chen (2001).