Financial Development And The New Comparative Advantage

Since the reform and opening up in 1978,China's export has grown rapidly.China became the world's largest trading nation in 2013,overtaking the US in what Beijing described as "a landmark milestone" for the country.However,China's foreign trade is impeded due to the appreciation of the renminbi(RMB),the disappearance of the demographic dividend and the rising costs of domestic labors and raw materials.In addition,there are many other problems such as the worldwide anti-globalization movement,the upcoming "Black Swan" events and other uncertain issues,which become large challenges of China's trade.Therefore,it is necessary to explore new comparative advantages for China to accelerate the transformation of the trade pattern and improve the export structure.On the other hand,with deepening the reform,The Chinese government has made remarkable achievements in the financial development.The financial market plays an important role in improving the resource allocation,decentralizing the market risk and supporting the service sector.Under this background,many researchers begin to study the relationship between the financial development and the international trade.Both of theoretical and empirical studies suggest that financial development is an important source of comparative advantage in a country and has a significant effect on the growth of trade.However,the specific mechanism of the effect hasn't been clarified.This paper aims to summarize the literatures and extract the inherent logic in order to reveal the inner link between financial development and foreign trade.It will help us make more effective policy recommendations so as to maintain China's sustainable development.Firstly,this paper discusses the conceptual and theoretical foundations for the interaction of financial development and trade growth.Secondly,based on the model provided by Chor(2010),this paper combines the factor endowments and institutional strengths to explore how the financial development effects export as an institutional strength and seek to quantify the importance of financial development as a new comparative advantage for country welfare.This represents an exercise at jointly verifying the significance of financial development and the industrial characteristics.Thirdly,for the empirical implementation,I used cross-sectional and panel specifications on a sample of 89 countries over the period 2003-2013 and used the gravity model of bilateral trade to measure the impact of the financial development on export.It helps understand the mechanism of financial development as a new comparative advantage of export comprehensively and systematically.There are three main results.First,the joint effect of financial development and industry characteristics has a positive effect on the overall export of China's industrial sector,which indicates that financial development has become a new source of comparative advantage of China's export.Second,the article also demonstrates that sectors with strong reliance on external finance can export higher volume if the country has good financial support.In this paper,I used two indexes to measure the level of financial development in China from the macro-scale and efficiency dimensions.Both of the two indexes have a positive effect on China's industrial export while the macro-scale index has a larger effect than the latter.Third,the effect of financial scale on export shows an inverted U shape,which reveals that financial scale effects dynamically on China's manufacturing exports in the long term.It suggests that financial scale should be reasonably controlled.Otherwise it may hurt the real economy and impede the trade growth.On the other hand,the financial efficiency doesn't have a significant effect in this regression.It shows the financial efficiency in China is still underdeveloped.China should gradually promote the capital market,further marketization reform of interest rates and maintain the macroeconomic and financial stability.