Kee:2016ej (Trade adjustment dynamics and the welfare gains from trade)

A mostly empirical paper that examines the inputs used by Chinese firms to produce exported goods.

DVAR

The empirical analysis in this paper is centered around a variable named DVA, which stands for domestic value added in exports.

To derive DVA, we start with total revenue. The authors break total revenue into the sum of

• profits
• labor costs
• capital costs
• materials from domestic sources
• materials from foreign sources

Because intermediate good producers can get their inputs from China or foreign sources, the domestic and foreign materials sources are decomposed into Chinese and non-Chinese components.

DVA is then defined as the sum of

• profits
• labor costs
• capital costs
• Chinese component of materials from domestic sources
• Chinese component of materials from foreign sources

The authors restrict their analysis to processing exporters, which means exporters who do not sell any of their final good in domestic markets. With this restriction the value of total exports is equal to total revenue. In this case DVA can be written as total exports less cost of imported materials plus and adjustment to account for foreign content materials from domestic materials.

This is the form of DVA that is used throughout the paper. The important takeaway is that DAV is increasing in total exports and decreasing in cost of imported materials.

Data

The authors use Chinese customs data that includes all exporting firms from 2000-2007. They apply three criterion to narrow down this universe to the final data set used in their analyses:

1. Look at only processing firms
2. Look at firms that operate in a single industry (difficult to decompose share of imports and exports within a firm across industries)
3. Look at firms that aren’t “too extreme” in their importing and exporting behavior (an extreme exporter is a firm that imports strictly more than it exports – selling the additional imported goods to other domestic producers)

In all analyses they normalize DVA by total exports for each firm. The resulting variable is named DVAR.

Main findings

I’ll talk about 3 main findings:

1. Aggregate DVAR increased from near 45% to 55% from 2000 to 2007. This finding is also robust across industries, where 15 reported industries showed a similar evolution
2. The increase in DVAR is driven by firms actively substituting imported materials for domestic materials, not by rising domestic production costs (e.g. labor and capital costs). This has policy implications. They do some regressions that show that changes in import tariffs for domestic, non-processing firms – firms who sell input goods to the firms in our sample – and rising FDI liberalization made significant contributions to rising DVAR.
3. Restricting the analysis to processing exporters is not a bad estimate of total behavior. Recent work has used input-output tables to document facts about aggregate DVAR movement. The numbers reported here (using transactions level data, but only for processing firms) accounts for almost all the aggregate change.