Structural change and global trade flows: Does an emerging giant matter?

Abstract

AbstractIn this paper, we develop a novel trade‐accounting framework that is based on a multi‐country, multi‐industry model of trade. The framework links observed changes in wages, sectoral employment shares, total labor force, and bilateral trade costs to changes in bilateral trade values at the sector level. In our application, we quantify the changes in trade patterns from 1995 to 2010 among 15 advanced and emerging market economies attributable to structural change in China, focusing on three manifestations of trade creation and destruction: China’s replacement of manufactured final goods exports to advanced economies at the expense of other economies; an expansion of China’s imports of manufactured final goods and commodities; and an expansion of China’s imports of parts and components that are then processed and exported as manufactured final goods to the advanced economies. Our main findings are: (a) scale effects have more than compensated for the loss of competitiveness due to higher wages in China; (b) China’s wage growth has been an economically more significant determinant of trade creation and destruction than its reallocation of labor across sectors, and (c) structural change in China has shifted other countries toward more commodity‐intensive production.