Empirical Study Of The Impact Of China’s Export Sophistication On Its Terms Of Trade

The terms of trade is an important indicator to measure the benefits derived from trade. Since reform and opening up, China’s trade volume and trade structure have improved dramatically, however, China’s terms of trade has been deteriorating unexpectedly. As the world’s largest exporter, China can’t gain the corresponding benefit from trade, which is worthy of our careful consideration. This paper begins with China’s export sophistication, and then studies its deep connection with the terms of trade. Based on that, the paper discusses the influencing mechanism of export sophistication towards trade terms. These researches can help China perform better in global markets.this paper analyzes the influencing mechanism, including fallacy of composition, asymmetry of market structures in global production networks, technological upgrading and low price/quality range, product cycle, large-country effect and so on. Next, based on the literature review and theoretical analysis, this paper sets up an algebraic model which comes up with an idea of intra-product specialization. The model shows that the paradox derives from the fact that China’s industrial products are lying at the low-adding-value part in the producing procedure, which leads to the misconception that China’s exporting trade structure upgrades rapidly.This paper measures the export sophistication by EXPY index which is developed by Hausmann, Jason and Rodrik(2006). The results show that China’s exports sophistication is growing rapidly. The increasing sophistication of China’s exports, as demonstrated by an export pattern, closely resembles high-income countries rather than that would be expected given its income level. However, the sophistication of each kind of products is still below the world average level. Simultaneously, China’s index of trade terms, calculated according to Laspeyres index formula, shows that China’s terms of trade has been deteriorating in recent years. This means that the increase in the sophistication of China’exports is accompanied by a deterioration of trade terms.In the part of empirical model study, the paper firstly uses co-integration model to show that in the long run, the stable co-integration relations exist between export sophistication and terms oftrade. After that, multivariate time series model and dynamic panel model are used to analyze the impact of export sophistication on the terms of trade from the domestic and international perspective respectively. It is obvious that the increase magnitude of export sophistication doesn’t improve China’s terms oftrade. Besides this, some other factors, such as FDI, tariffs, exchange rates, technological capabilities, economic development level and so on, should also account for the deterioration of China’s terms of trade. In the end of this part, the influence of export sophistication on trade terms is discussed further from the perspective of products.Finally, a summary is made combining China’s actual situation and some proposals are put forward to help China get rid of the deterioration on trade terms. get more benefits from international trade and avoid falling into the "trap of export sophistication".