Fixed Export Costs and Trade Patterns: The Case of China

Current research on heterogeneous firms does not include firms' choices on trade patterns. This is an important issue in developing countries. The growth in the number of low†productivity processing firms in developing countries needs further study to show how these firms survive and prosper. In this study, we adopt the idea in Castro, Li, Maskus and Xie that fixed trade costs should be a co†determinant of a firm's export decisions and it is a substitute for productivity. We use firm†level data for China, for the period 2000–2006, to show that fixed export costs play a key role in firms' trade pattern decisions. More specifically, firms with low productivity and low fixed trade costs have a significantly higher probability to choose the processing trade pattern. Although the processing trade is often criticised for its low productivity and value added, it has natural advantages in its savings on fixed export costs. Therefore, the exporting firm is able to survive, prosper and contribute to growth in developing regions.