Gravity or Distorted Gravity: Evidence from Chinese Data (JOB Market Paper)
The paper empirically tests the main conclusions of Chaney (2008) by using Chinese Customs data. Chaney (2008) theoretically demonstrated that in the heterogeneous firm model of trade, on top of the intensive margin adjustment as in the homogeneous firm model, trade also adjusts through the extensive margin. The elasticity of substitution dampens the impact of trade barrier on the extensive margin while magnifies its impact on the intensive margin. In my paper, to empirically test the implications of the model, first of all, I establish and collect the ad valorem variable trade costs, including freight and tariff costs, for Chinese exports by merging many datasets. Moreover, by applying the measures of trade barriers and trade flows from Customs Data into the structural gravity equations which I derived based on the model I get the estimate of the variable cost elasticity for each industry. Combining this estimate with the elasticity of substitution data from Broda and Weinstein (2006), I find that the supporting evidences for the heterogeneous firm model are; first, 70% of trade volume growth for China can be attributed to an increase in the number of exporting firms; second, the elasticity of substitution is uncorrelated with the magnitude of the effect of variable costs on trade volume across industries. However, in Chinese data the main channel of variable trade costs affecting the trade value is through the average sales per firm instead of the number of firms which is against the implication in Chaney (2008).
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The Missing Trade of China: Balls and Bins Model
The paper provides a benchmark match between the model and the data in the extensive margins of trade. The balls-and-bins model in Armenter, Koren (2008) provides a new perspective on the sparse nature of trade. Taking advantage of extremely disaggregated shipment-level data, my paper finds that similar to the U.S. data, the balls-and-bins model matches the numbers of zero-trade flows at the country-product and country-firm levels for China. However, at the firm level, with specific numbers of shipments for each firm, the balls-and-bins model cannot predict the percentages of single-product and single-destination exporters as for the U.S. data. Last, the theoretical trade models do not outperform the atheoretical balls-and-bins model at the country-product level.
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An Anatomy of Chinese Trade: The Extensive and Intensive Margins
The paper dissects Chinese trade into the extensive and intensive margins at the shipment, firm, and product levels. First, by merging the Customs Data and the Firm-Level Survey data, I find that surprisingly the positive relationship between productivity and export status, which is the key motivation for the heterogeneous firm model, is insignificant for Chinese data. Second, contrary to the U.S. data in Bernard et al (2007), I find that distance does not dampen the extensive margin at the product or the firm level. Last, the adjustment of shipment numbers accounts for 85% of total value variation. Changes in the number of firms account for 83% of the change in the number of shipments. This is consistent with the Colombia data discussed in Eaton et al (2007, 2008).
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