Product Quality and Intra-Industry Trade

29 Pages Posted: 3 Dec 2014

See all articles by Tadashi Ito

Tadashi Ito

Institute of Developing Economies

Toshihiro Okubo

Keio University

Date Written: December 2014

Abstract

In this study, we argue that the conventional intra-industry trade (IIT) index does not directly address the quality issue and propose a methodology to make full use of unit-price gap information to deduce quality differences between simultaneously exported and imported products. By applying this measure to German trade data at the eight-digit level, we study the quality change of Chinese export goods in its IIT with Germany. We compare the case of China with those of Eastern European countries, which are also major trading partners of Germany. Our results show that the unit-value difference in IIT between Germany and Eastern European countries is clearly narrowing. However, China’s export prices to Germany are much lower than Germany’s export prices to China, and this gap has not narrowed over the last 23 years. This is at odds with the common perception that China’s product quality has improved, as documented by Rodrik (2006) and Schott (2008). Our results support Xu (2010), which argued that incorporating the quality aspect of the exported goods weakens or even eliminates the evidence of the sophistication of Chinese export goods in Rodrik (2006).

Suggested Citation

Ito, Tadashi and Okubo, Toshihiro, Product Quality and Intra-Industry Trade (December 2014). Available at SSRN: https://ssrn.com/abstract=2532734 or http://dx.doi.org/10.2139/ssrn.2532734

Tadashi Ito

Institute of Developing Economies ( email )

3-2-2 Wakaba, Mihama-ku
Chiba, 261-8545
Japan

HOME PAGE: http://www.ide.go.jp/English/

Toshihiro Okubo (Contact Author)

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

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