Decomposing China’s bilateral export growth: A firm-regional-transactions structural gravity approach

Abstract

This paper undertakes a decomposition of China’s firm-transaction-level exports with an emphasis on aggregates thereof at the prefectural level. Chinese prefectures are large and, relative to some smaller countries, the larger ones are visible players in the world market. We decompose China’s prefecture-product-level bilateral exports to foreign countries into their main components. These are factor costs, market potential (including trade frictions and foreign expenditure) as well as quality and productivity. We consider the latter two as to be drawn from a bivariate Pareto distribution that is specific to prefectures, products, and countries. This strategy enables retrieving fixed market access costs and permits conducting counterfactual experiments with a focus on the distribution across Chinese prefectures.