Estimating domestic content in China’s exports: Accounting for a dual-trade regime

Abstract

This paper identifies the heterogeneity issue as a key challenge that is central to but not fully addressed when measuring global value chains. To resolve this issue, we propose an extended input-output model that is consistent with the theoretical framework of heterogeneous firms. Empirically, we use China as a prominent example of a country that is engaged in both normal trade and the processing trade under a dual-trade regime, and we synthesize methods for constructing China’s extended input-output dataset for the period 1997 to 2015. Our results show that when alternative generic datasets are used, this is likely to result in overestimating the domestic content in China’s exports by as much as 44%, compared to a model that uses an extended database that incorporates production heterogeneity, as does the one in this study. This paper’s proposed methodology and rich dataset may be useful to a wider range of empirical applications.