Trade integration, product diversification and the gravity equation: evidence from the Chinese merchandise imports

Abstract

PurposeThe purpose of this paper is to identify trade integration and structure effects on bilateral trade between China and its partners, focusing on Chinese merchandise imports during the period 1995–2018.Design/methodology/approachThe methodological approach applied here uses the augmented gravity model to investigate the factors lying behind import intensity, by use of the ordinary least squares (OLS) and Poisson pseudo maximum likelihood (PPML) estimators.FindingsThe findings provide evidence of complementarity between the Chinese demand and the world commodity markets. Free trade agreements between China and third countries seem to gradually lose significance, as the Chinese economy consolidates in world trade. Higher product diversification in export structures of China’s trading partners can become advantageous for facilitating market penetration. Diversification of energy resources, the steady, high demand for infrastructure equipment and more sophisticated consumer products constantly determine the structure of Chinese merchandise imports originating mainly and increasingly from countries with direct access to the Pacific Ocean.Originality/valueThe analytical breakdown of Chinese imports, presented in this paper, adds value to the existing literature with regard to trade structure analysis for China, paving the way for similar research for other developing countries as well.