1 CHINA'S LOCAL COMPARATIVE ADVANTAGE

China’s trade pattern is influenced not just by it’s overall comparative advantage in labor intensive goods but also by geography. We show theoretically that since trade costs are proportional to weight rather than value, relative distance affects local comparative advantage as well as the overall volume of trade. The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets. This theory motivates a simple empirical prediction: within a product, China’s export unit values should be increasing in distance. We find some evidence for this effect in our empirical analysis on product-level Chinese exports in 2006, although the effect is small. This paper was prepared for presentation at the “Conference on China’s Growing Role i