Product Quality, Trade, and Adjustment: The China-ASEAN Experience

Abstract

There is a fear among East Asian governments that China’s rapid export driven growth is significantly impairing the export performance of their own countries. The common belief among East Asian economies is that to remain competitive they must improve the quality of their exports relative to those of China. In this paper, we show how the emergence of China has affected the quality of its exports and imports to and from Malaysia, Singapore and Indonesia. Specifically, we combine a measure of marginal intra-industry trade (IIT) concerned with the adjustment implications of changes in matched trade, a measure of vertical and horizontal intra-industry trade concerned with the differences in product quality and a new dynamic measure of quality differentiated IIT. Our results suggest that Singapore and Malaysia have managed to maintain and even improve their position as the exporter of high quality varieties in bilateral trade with to China despite China’s rapid development and export orientated growth.