Measuring China’s Export Sophistication.doc

Measuring China’s Export Sophistication Measuring China’s Export Sophistication Bin Xu* China Europe International Business School October 2007 * Correspondence: Bin Xu, China Europe International Business School (CEIBS), 699 Hongfeng Road, Pudong, Shanghai 201206, China. Tel: 86-21 Fax: 86-21 E-mail: xubin@ceibs.edu. I would like to thank Shang-Jin Wei for useful comments, and Sally Hu, Yixin Luo, and Dafeng Xu for excellent research assistance. Financial support from CEIBS Research Fund is gratefully acknowledged. All errors are my responsibility. ABSTRACT Recent studies find that China is special in a cross-country relationship between level of export sophistication and level of per capita income: China’s exports are found to be much more sophisticated than one would expect from its income level. In this paper we identify two measurement biases that account for the China-is-special observation. First, China’s overall income level significantly underestimates the income level of its exporting regions. Using China’s export-region-weighted income level, we find that the China-is-special result is weakened by about 30 to 80 percent depending on the year. Second, export sophistication indices used in existing studies overestimate the sophistication level of Chinese exports because they do not consider product quality. Using unit-value differences as a proxy for quality differences in constructing a quality-adjusted index of export sophistication, we find that the China-is-special result is weakened by another 10 to 30 percent depending on the year. After correcting the two measurement biases, the estimated China-is-special effect is statistically insignificant and its point estimates are close to zero in recent years (2001-2005). Keywords: China; Development; Export sophistication; Export quality; Product data JEL classification: O1; O4; F1; F4 1. Introduction China is well-known for its rapid growth in