China's exports in a world of increasing oil prices

Abstract

PurposeThis paper aims to examine the impact of oil prices on trade's sensitivity to distance. Furthermore, it seeks to investigate if the nature of trade and the type of goods have a mediating role on the oil prices' impact on trade.Design/methodology/approachA set of gravity models are estimated on a unique panel dataset from China Customs Statistics that reports trade by customs regime (processing trade vs non‐processing trade) and by transportation mode (air vs sea) for the years 1988‐2008.FindingsHigher oil prices increase the sensitivity of China's exports to distance. This effect is especially pronounced for processing exports, where goods cross borders multiple times. On the other hand, it is smaller for exports shipped by air. While these results are statistically significant, their economic effects are relatively small. This paper estimates that the quadrupling of oil prices between 2002 and 2008 has increased the elasticity of Chinese exports with respect to distance by a mere 5‐7 per cent.Social implicationsThe surge of oil prices in recent years has led to speculation that rising transportation costs could end the period of dramatic world trade growth – in the words of Rubin, “[…] Your world is going to get a whole lot smaller.” This paper suggests that this concern is overstated.Originality/valueThis is the first paper that estimates the mediating role that the nature of trade and the type of goods play on trade's sensitivity to distance.