Description

We use detailed data on Chilean imports between 1990 and 2005 to analyze the causes of China’s import penetration relative to other countries. China exports a wide variety of products. The growth in China’s exports, however, is mainly driven by an increase in import penetration within common product categories with the rest of the world—the intensive margin—rather than by an increase in the number of product varieties exported—the extensive margin. Surprisingly, the growth in the intensive margin is explained by an increase in exported quantities without a significant fall in the relative price of Chinese varieties. This apparent paradox suggests that an increase in either the number of unobserved varieties or the willingness to pay for Chinese products—an increase in the relative quality of Chinese products—is the driving force behind China’s export performance. We present evidence regarding China’s export prices, the similarity of China’s export bundle to that of developed countries, and the relative quality of Chinese products, to conclude that improvements in the quality of Chinese products is an important dimension of Chinese export growth.