When institutions matter: a gravity model for Chinese meat imports

Abstract

PurposeIn international trade differences in political and legal systems confront trading partners with relatively greater information asymmetry and contract enforcement problems than in domestic trade, resulting in higher transaction costs. Nevertheless, well-functioning institutions in the exporting country could prove beneficial for the agricultural importer, as institutions generally establish food and product regulations and ensure that they are enforced and serve as a last resort for dispute resolution and contract enforcement. Given China’s increasingly stricter control of its food supply chain and its rising imports of meat products, the purpose of this paper is to analyze whether institutions in the exporting country matter for Chinese meat imports.Design/methodology/approachTo analyze the effect of the exporters’ institutions on Chinese meat imports, the authors estimate a gravity model for the 1990-2013 period. The authors apply the method suggested by Helpmanet al.(2008) to correct for sample selection and firm heterogeneity. To estimate the effect of time-invariant variables, the authors apply the Fixed Effects Vector Decomposition method proposed by Plümper and Troeger (2007).FindingsThe results show that institutions affect Chinese trade flows. In particular, the authors find that China imports more meat products from countries who host qualitatively better institutions and are geographically closer, and that the country’s imports rise with its GDP level. This confirms our hypothesis that institutions in the exporting country are positively associated with meat exports to China.Originality/valueThe importance of the exporters’ institutions for Chinese meat imports has not been studied so far and is of great interest given China’s rising role as a sizable importer. Furthermore, Chinese meat imports have attracted much attention recently due to the country’s potentially significant impact on world food security and sustainable development. Hence, this paper aims to make a substantial contribution to the literature, both from a scientific and a policy perspective.