Accounting for Revealed Comparative Advantage in Manufacturing Production

【Authors】

LI Yuting, XU Mingzhi

【WorkUnit】

LI Yuting （Southeast University, 211189）;XU Mingzhi （Peking University, 100871）

【Abstract】

Balassa’s （1965） Revealed Comparative Advantage （RCA） index is a widely used measure of a country’s relative ability to produce a good, valued for its simplicity and intuitive nature. However, understanding the underlying mechanisms behind RCA is complex, often requiring changes in functional forms and the use of general equilibrium macro models, which may rest on conflicting assumptions. This paper proposes a unified nested CES framework to better understand the relative importance of different micro-level factors in explaining RCA, with a focus on China’s trade patterns in manufacturing production and these factors’ contributes to economic development.
The study decomposes the Balassa RCA into supply-side factors （such as production costs, production techniques, product diversity, and price differentials） and demand-side factors （including the number of trading partners, the size of destination markets, and consumer preferences in those markets）. By combining macro-level data with firm-level data, this paper conducts a rigorous quantitative analysis of these factors. The findings reveal that both supply-side and demand-side factors play significant roles in explaining China’s comparative advantage in manufacturing. Since China’s accession to the World Trade Organization （WTO） in 2001, increased trade volume and greater openness have made supply-side factors the dominant drivers of China’s trade patterns. Notably, production techniques on the supply side and market size on the demand side emerge as the most significant determinants of China’s comparative advantage. Heterogeneity analysis further shows that supply-side RCA consistently explains trade patterns across all regions, underscoring the importance of supply-side reforms, such as optimizing product structures, improving industry quality, and enhancing production techniques, in boosting regional manufacturing competitiveness. Moreover, the impact of other factors on overall RCA is much higher in China’s western and northeastern regions than the national average, suggesting substantial trade potential in these areas.
This paper contributes to the literature in two ways. （1） Theoretically, it extends previous studies on revealed comparative advantage by dissecting both supply and demand-side factors at the micro-level. This decomposition of the widely used Balassa RCA provides a comprehensive understanding of the formation of comparative advantage in manufacturing and offers new theoretical insights for macro trade and economic growth. （2） Empirically, it employs robust calibration methods and integrates data from various sources, including the UN Comtrade database, the CEPII trade unit price database, and China’s Customs database, to quantitatively analyze the impact of these micro-mechanisms on trade patterns. The results confirm the importance of both supply-side and demand-side factors, providing new insights for policymakers aiming to enhance China’s manufacturing competitiveness.
The framework developed in this study can be adapted to study the comparative advantage in service sectors or other non-manufacturing industries, offering a more comprehensive understanding of global trade dynamics. Furthermore, it can be applied to other emerging economies with different economic structures, enabling cross-country comparisons and offering insights into how unique national factors influence trade patterns.

【KeyWords】

Revealed Comparative Advantage, Trade Pattern, Industrial Upgrading