Quality Selection, Chinese Exports and Theories of Heterogeneous Firm Trade

Recent models of international trade have identified product quality as an important determinant of bilateral trade flows. Yet relatively little is understood about the relationship between the characteristics of the export market and the quality of products. In this paper we examine this link using Chinese data. We find evidence that product unit values vary with standard gravity variables in a different manner across sectors of the Chinese economy, and run contrary to earlier findings for the U.S. These results are not compatible with existing heterogeneous firm trade models such as Melitz (2003) model and its extension to include product quality by Baldwin and Harrigan (2007). To explain these differences we propose a heterogeneous firm trade model with quality differences and spatial price discrimination based on Melitz and Ottaviano (2007)