Journal of Economic Perspectives—Volume 26, Number 2—Spring 2012—Pages 41–64

The Rise of Middle Kingdoms: Emerging
Economies in Global Trade
Gordon H. HansonIn the recent global financial crisis, there was a sharp divide in the economic
performance of high-income and emerging-market nations. The United States,
the countries of the European Union, and Japan suffered most. They have beenslow to recover, with heavy debt burdens and enfeebled banks promising continued
sluggishness. Many emerging economies, in contrast, hardly paused during 2008
and 2009. Led by China and India, their robust growth is now fueling the recoveryof the global economy. The shift in economic power is palpable. Brazilian, Chinese,and Indian multinational firms are eagerly acquiring assets abroad; U.S. and European leadership in the World Trade Organization, once unassailable, has failed toconsummate the Doha round of global trade negotiations; and the IMF has been
spending more time worrying about the balance sheets of high-income nations thanof lower-income ones.
Although events since 2007 have brought these changes in the world economy
into sharp focus, the rise of low- and middle-income countries in global trade
has been decades in the making. China’s economic transition, which accelerated
in the 1990s, allowed the country to realize a latent comparative advantage inlabor-intensive products (Amiti and Freund 2010; Harrigan and Deng 2010).
India’s surge of growth, which began even before the reforms it initiated in 1991
(Rodrik and Subramanian 2004), was, like China’s, aided by industries beginning
far inside the technology frontier (Hsieh and Klenow 2009). The result of China’s■ Gordon H. Hanson is Professor of Economics and Director of the Center on Emerging andPacific Economies, University of California–San Diego, La Jolla, California. He is also a
Research Associate, National Bureau of Economic Research, Cambridge, Massachusetts. His
e-mail address is 〈gohanson@ucsd.edu〉〉.
http://dx.doi.org/10.1257/jep.26.2.41.

doi=10.1257/jep.26.2.41

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Journal of Economic Perspectives

and India’s openings has been an immense global export supply shock. Between
1992 and 2008, average annual growth in exports was 18 percent in China and14 percent in India. These two are not the only significant new players in global
trade. Consider the next 15 middle-income countries, which (in order of marketsize) are Brazil, Korea, Mexico, Russia, Argentina, Turkey, Indonesia, Poland,South Africa, Thailand, Egypt, Colombia, Malaysia, the Philippines, and Chile.
In 2008, they each had a GDP above $100 billion; as a group, their collective
GDP is 1.4 times China and India’s combined total. From 1992 to 2008, these15 countries had average annual export growth of 8 percent. During this period,
low- and middle-income countries overall saw their share of global exports morethan double, from 21 to 43 percent.
In this paper, I examine changes in international trade associated with the
integration of low- and middle-income nations into the global economy. Fromthe 1950s to the 1980s, trade was dominated by flows between high-income countries both because they accounted for most of global GDP and because many
developing countries maintained high barriers to imports. In the international
economics literature, the exchange of goods between the United States, Canada,
the nations of Western Europe, and Japan is often referred to as North-North
trade. However, we are moving toward a world in which South-South commerce(trade between developing countries) and North-South commerce (trade between
developed and developing countries) are overtaking North-North flows. Whereas
high-income economies accounted for four-fifths of global trade in 1985, they willaccount for less than half by the middle of this decade.
I start by focusing on the growth in South-South trade. In part, this pattern has
arisen because urbanization and industrialization in China and India have contributed to strong demand for raw materials needed to build cities and factories. Other
developing economies are abundant in these materials and have become importantsources of global supply. Growth in low- and middle-income economies has also
deepened global production networks, with lengthening production chains in theSouth increasing cross-border flows of parts and components.
I then turn to the rise in North-South trade. During the 1980s, when NorthNorth trade was dominant, explanations for global trade patterns shifted awayfrom classic theories of comparative advantage. Models explaining trade as theresult of differences in national factor supplies, as in the Heckscher–Ohlin tradition, or differences in sectoral labor productivities, as in the Ricardian tradition,
seemed incapable of accounting for substantial trade flows between high-income
countries. The literature instead explained these types of trade flows using
models based on product differentiation and economies of scale (Helpman andKrugman 1985).
The rise in North-South trade has rekindled interest in the role of comparative advantage in global production. Countries export different types of goods at
different stages of development, with low-income countries producing a narrow
range of goods (Imbs and Wacziarg 2003; Cadot, Carrère, and Strauss-Kahn 2011)and moving up the product ladder in terms of capital intensity and quality as theirGordon H. Hanson

43

incomes rise (Schott 2003, 2004). For some countries, and for China in particular,industrial specialization evolves rapidly (Rodrik 2006), revealing a capacity to speed
up product ladders. For other countries, specialization in primary commodities,
long seen as a hallmark of underdevelopment, has been a pathway to economic
growth. Concomitant with recent changes in global trade, trade theorists haverevived the Ricardian model (Eaton and Kortum 2002), which for years was used as
little more than a tool for introducing undergraduates to international economics.
The new theories rightly emphasize differences in national industrial capabilities
as a driver of trade, but are not yet sufficiently developed to account for the fullrichness of the trade patterns that we see emerging.

Growth in South-South Trade
As a starting point, I describe growth in trade between nations grouped byincome level. I assign countries to income categories based on their per capita GDP
in 1990, which characterizes their level of development at the beginning of therecent global trade surge.1 Low-income countries are those with per capita GDP ofless than $800 (in 2000 U.S. dollars); middle-income countries have per capita GDP
of $800 to $10,000; and high-income countries have per capita GDP of $10,000 to$33,000. These categories correspond closely to World Bank definitions of country
income status in 1990. China and India have their own category (whereas by theabove cutoffs they would be defined as low-income countries).
Table 1 shows trade flows, normalized by (regional) GDP, between country
income groups over the period 1994 to 2008 based on data from UN Comtrade (asare all other figures presented in the paper). Two properties of global trade are
immediately apparent. One is that for low- and middle-income countries, tradeas a share of regional GDP has grown sharply. Exports over GDP rise from 26
to 55 percent in low-income countries, from 25 to 55 percent in middle-income
countries, and from 25 to 44 percent in China and India. For high-income countries, the change is much smaller, from 17 to 26 percent. Changes in imports as ashare of GDP are similar.
The shifting pattern of international trade involves much larger South-Southflows. Between 1994 and 2008, the share of exports from low-income countries
going to low- and middle-income markets (including China and India) rose from24 to 42 percent, with China and India accounting for about half of this growth. The
share of exports from middle-income countries going to low- and middle-income
markets (including China and India) rose from 33 to 46 percent, with China andIndia accounting for two-fifths of this growth.
Growth in trade shares for low- and middle-income countries far exceeds theincrease in their relative economic size. Between 1994 and 2008, the share of1

I calculate per capita GDP in 1990 as the average over 1985 to 1995 to account for missing annual datain some countries and the creation of new nations after 1990.

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Journal of Economic Perspectives

Table 1
Exports and Imports Relative to GDP by Regional Trading Partner
Exports to partner
relative to regional GDP

Imports from partner
relative to regional GDP

Trade partner

1994

2008

Percentage
pointchange

Low-income
countries

Low-income countries
Middle-income countries
China, India
High-income countries
World

0.8%
4.5%
1.1%
20.0%
26.3%

3.2%
11.6%
8.3%
31.8%
55.0%

2.4
7.1
7.2
11.8
28.6

0.8%
6.0%
1.8%
15.1%
23.7%

3.2%
17.1%
10.7%
23.0%
54.0%

2.4
11.1
8.9
7.9
30.4

Mid-income
countries

Low-income countries
Middle-income countries
China, India
High-income countries
World

0.7%
5.3%
2.2%
16.9%
25.1%

2.1%
15.6%
7.5%
29.6%
54.8%

1.4
10.3
5.3
12.7
29.8

0.5%
5.3%
2.4%
18.6%
26.8%

1.4%
15.6%
7.4%
26.0%
50.4%

0.9
10.3
5.0
7.4
23.6

China andIndia

Low-income countries
Middle-income countries
China, India
High-income countries
World

0.8%
9.5%
0.1%
14.3%
24.8%

2.7%
15.2%
1.2%
25.3%
44.4%

1.9
5.7
1.1
11.0
19.6

0.5%
8.6%
0.1%
9.8%
19.0%

2.1%
15.4%
1.2%
14.1%
32.7%

1.6
6.8
1.1
4.3
13.7

High-income Low-income countries
countries
Middle-income countries
China, India
High-income countries
World

0.3%
3.7%
0.5%
12.8%
17.4%

0.7%
6.6%
1.7%
16.9%
26.0%

0.4
2.9
1.2
4.1
8.6

0.5%
3.4%
0.7%
12.8%
17.4%

1.0%
7.5%
3.1%
16.9%
28.6%

0.5
4.1
2.4
4.1
11.2

Region

1994

2008

Percentage
pointchangeSource: UN Comtrade, ⟨http://comtrade.un.org/⟩.

low- and middle-income countries (including China and India) in global GDP
increased from 22 to 29 percent. The gravity model of trade, which is a workhorse for empirical research on trade flows, expresses exports from one country
to another as a function of the countries’ GDPs, bilateral trade costs, and relative
prices (Anderson and van Wincoop 2004). Following the gravity logic, the shareof low- and middle-income countries in global trade should increase in roughproportion to their share of global income. But Southern trade has grown much
faster than Southern GDP.
What accounts for the surge in South-South commerce? A first possible explanation is falling trade costs in emerging economies, resulting from unilateral tradereform, growth in World Trade Organization membership, or reduced costs ofshipping goods. But these explanations are not well-supported by more detailed
research. Hummels (2007) documents in this journal that while the costs of air

The Rise of Middle Kingdoms: Emerging Economies in Global Trade45

transport have fallen significantly in recent decades, the costs of ocean transport, themode of transport for most developing-country trade, have not. Between 1994 and2008, policy barriers to trade have fallen, with the average applied tariff rate acrossall goods (weighted by imports) declining from 12 to 4 percent in middle-income
countries and from 29 to 8 percent in China. In high-income nations, already-low
tariffs meant further reductions were small, with average tariffs falling from 5 to
3 percent. However, estimates by Yi (2003), using data for an earlier period, suggestthat such modest tariff changes are too small to explain the more than doubling oftrade as a share of GDP in developing economies.
The importance of the World Trade Organization in expanding trade appears
to be overblown. Since 1995, when the WTO was created out of the General Agreement on Trade and Tariffs, 41 new nations have joined the organization, bringing
membership to 153 countries. Yet, the literature provides ambiguous support for
the idea that WTO membership expands trade. Rose (2004a) finds that, conditional
on GDP, WTO members do not trade significantly more than nonmembers, which
he attributes to WTO members not having more liberal trade policies (Rose 2004b),
partly as a result of the WTO placing weak demands on developing countries toliberalize trade.
An alternative explanation is that the growth in Southern trade is a result of
expanding multistage global production networks. Much of the recent increase intrade appears to be the result of offshoring, in which firms fragment manufacturing
across borders by locating individual production stages in the countries where they
can be performed at least cost (Hummels, Ishii, and Yi 2001). A consequence may
be that gross trade flows (that is, total exports) overstate net trade flows (that is,exports net of imported intermediate inputs); if true, this would imply that the
expansion of South-South trade is in part a statistical artifact. If goods are produced
through a sequence of stages, as modeled by Costinot, Vogel, and Wang (2011),
each country will add value as a product is transformed from raw inputs into a final
output along a production chain than spans national borders; the value added ofcountries participating earlier in the chain will therefore be counted in trade flows
multiple times. The Intel Corporation, for example, produces semiconductors by
first manufacturing silicon wafers in the United States, Ireland, and Israel and thenassembling and testing integrated circuits made out of these wafers at plants in
China, Costa Rica, Malaysia, and the Philippines. Silicon wafers are counted in trade
twice, first in shipments of the raw wafers from the United States to Costa Rica, andagain in the shipment of integrated circuits that embody the wafers from Costa Ricato the final destination market.
Global production networks, however, need not be based on sequential
manufacturing. Dell follows an alternative model in making computers, in which it
subcontracts the production of parts and components to suppliers in many countries
and has these parts shipped to final destination markets, where they are assembled
into computers for final consumers. If production networks tend to follow the Intelmodel, total exports may greatly exceed trade in value added, whereas if they tend
to follow the Dell model they may not.

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Journal of Economic Perspectives

What fraction of measured trade flows is subject to concerns over double
counting? In the case of China, half of its manufacturing exports in the late 1990s
and early 2000s were produced by processing plants that assemble imported partsand components into final goods for export, primarily in consumer products(Feenstra and Hanson 2005). Within export processing plants, value added in
China as a share of total exports is only 36 percent. However, domestic value
added in China’s exports outside of processing plants appears to be much higher.
Koopmans, Powers, Wang, and Wei (2010) estimate that for China’s overall
exports, domestic value added accounts for 65 percent of total exports. For theworld as a whole, 75 percent of exports consists of value added in the country ofexport. Among middle-income countries, the share of domestic value added in
total exports is relatively low in Malaysia (59 percent), Mexico (62 percent), thePhilippines (58 percent), and Thailand (60 percent) and relatively high in Brazil(87 percent), Indonesia (77 percent), Russia (89 percent), and South Africa(81 percent). The latter group of countries specializes in producing commodities, in which fragmentation of production is less feasible, whereas the first groupspecializes in manufacturing, where production chains are more common. In
Mexico, for instance, half of manufacturing exports are by maquiladoras,, plantsthat assemble final goods in electronics, automotive goods, and machinery fromparts and components imported from the United States (Bergin, Feenstra, andHanson 2009).
Other evidence confirms that double counting in recorded total tradeflows is more severe for manufactured goods. Johnson and Noguera (2012) findthat the ratio of export value added to total exports is lower in manufacturing(44 percent) than in agriculture and natural resources (109 percent, where a valueof greater than 100 percent indicates that a large fraction of exports in the sector
are indirect in the form of value added embodied in the final exports of othersectors). Many middle-income countries specialize in manufacturing exports,suggesting that global production networks are part of the reason their trade isexpanding so rapidly. But double-counting as a result of such networks cannot
be the entire story. Most low-income and some middle-income nations specialize
in primary products, including minerals and farm goods. For these countries,
the increase in exports to GDP is not an artifact of total exports overstating
value added in exports but is instead a reflection of increasing specialization for
global markets.
Evidence on the share of value added in total exports is based largely on
cross-sectional data; there is little work providing clues on the expansion pathof production chains. We do not know whether the share of value added in totalexports is rising or falling. There is some evidence that emerging economies
are deepening their productive capacity, capturing production of intermediate inputs that they previously imported from abroad, a phenomenon that is
pronounced in China. By the mid-2000s, exports of completed computers had
become China’s top export good. Many of these computers are assembled inexport processing plants, requiring China to import components from abroad.

Gordon H. Hanson

47

Figure 1
China’s Imports and Exports of Computers and Parts
0.08
Exports of computers, parts, & peripherals
Imports of computers, parts, & peripherals

Trade flow/GDP

0.06

0.04

0.02

0
1994

1996

1998

2000

2002

2004

2006

2008

Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.
Note: The figure shows exports and imports of computers, computer parts, and computer peripheraldevices (Standard International Trade Classification products 752, 7512, and 7519) in China over theperiod 1994 to 2008.

However, over time China’s reliance on imports in the sector has declined markedly. Figure 1 shows exports and imports of computers, computer parts, andcomputer peripheral devices (Standard International Trade Classification products 752, 7512 and 7559) in China over the period 1994 to 2008. In 1994, exports
were 1.6 times imports in the sector; by 2008, they were 4.2 times imports. While
it is unclear how much one can generalize from China’s experience, growthin trade involving middle-income manufacturers does not necessarily go handin hand with greater back and forth flows of intermediate inputs.
As China develops, it may continue to take over the manufacture of inputs,
making production in some sectors less fragmented globally. This experience issimilar to that of Hong Kong, Korea, Singapore, and Taiwan, which also enteredglobal production networks by specializing in product assembly and later expanded
into input production and the design and distribution of goods. But not all countries
that begin as assemblers succeed in graduating into other manufacturing stages.
After nearly three decades of global manufacturing, most exporters in Mexico andCentral America remain in the assembly stage.
Growth in South-South trade is a major part of the recent global tradeboom. Falling trade barriers and expanding global production networks havesurely contributed to Southern trade growth. However, they appear insufficienton their own to explain why trade to GDP ratios have risen so much in low- and48

Journal of Economic Perspectives

middle-income countries. What else could be behind the rapid expansion of traderelative to GDP? One possibility, as yet unexplored in the literature, is that thegreater role of emerging economies in global trade is inducing a much finer degreeof international specialization than occurred during previous decades, in which
North-North trade predominated. As I discuss next, such an explanation would
require that comparative advantage is assuming a larger role in determining global
trade flows than it did in the past.

The Return of Comparative Advantage
The 1980s and 1990s were not kind to theories of trade based on comparative advantage. The dominance of high-income countries in global commerce
led international economists to develop models that explain trade as the resultof increasing returns to scale and monopolistic competition in differentiatedproducts (Helpman and Krugman 1985). The Heckscher–Ohlin model, once a
staple of graduate training in international trade, failed repeatedly to explain
prevailing trade patterns (Feenstra 2003). And the Ricardian model (based on
sectoral labor productivities) remained little more than an intellectual curiosity,
given its tendency to predict extreme patterns of industry specialization, seemingly at odds with the data (at least for Northern countries). Further, the robust
success of the gravity model, in which country size and trade costs are the primary
determinants of trade flows, seemed to defy a significant role for comparativeadvantage (Anderson and van Wincoop 2003). If we can explain much of bilateral
trade using the size and location of the importer and exporter, why do we needcomparative advantage at all?
Much has changed in the last decade. On the empirical side, China’s andIndia’s growth are powerful reminders that cross-country differences in technology and resources are potent motivations for commerce. On the theory side,
Eaton and Kortum (2002) show that Ricardian comparative advantage is consistent with the gravity model. In their formulation, an exporter captures a share of
an importer’s market according to its technological capability and its trade costs
in delivering goods. They avoid the knife-edge feature of the textbook Ricardianmodel, in which a country tends to supply either the entire market for a good ornone, by having productivity vary randomly across firms within a country and theposition of the country’s productivity distribution in an industry be given by its
predetermined technological capability, which they liken to absolute advantage.
These technological capabilities (along with the dispersion of productivity acrossfirms) are the key primitives of the model. Other models have comparative advantage arising from country differences in factor supplies that result in trade inintermediate inputs associated with the formation of global production networks(Feenstra 2010). In either set of theories, it is differences between countries,
whether in terms of their technological capabilities or their factor supplies, thatcause trade.

The Rise of Middle Kingdoms: Emerging Economies in Global Trade

49

International Specialization
A role for comparative advantage in trade is evident in the pattern of net exportsby sector across country income groups, as shown in Figures 2A–D. I group non-oil
exports into nine categories: agriculture and food products; minerals and other raw
materials; apparel, footwear, and textiles; metals and metal products; chemicals;
machinery; electronics and electrical machinery; transportation equipment; andother manufactures.2 Agriculture and raw materials are intensive in the use of land,mineral reserves, and in some cases raw labor. Apparel, footwear, textiles, someelectronics, and other manufactures (which include furniture, toys, and games)
are intensive in the use of low-skilled labor. And chemicals, machinery, some electronics, and transportation equipment are intensive in human and physical capital.
International specialization, at least in broad overview, follows perceived
patterns of comparative advantage. Low-income countries (Figure 2A) have positive
net exports in three resource- or labor-intensive sectors—agriculture, raw materials,
and apparel and shoes—and negative net exports in other sectors. China and India(Figure 2B) have positive net exports in three labor-intensive sectors—apparel andshoes, electronics, and other manufactures—and negative or negligible net exports
in other sectors. Middle-income countries (Figure 2C) have negative net exports inthe three capital-intensive sectors—chemicals, machinery, and transportation equipment—and export strength in other goods. And high-income countries (Figure 2D)
have positive net exports in the three capital-intensive sectors and negative net
exports elsewhere.
Underlying these specialization patterns is growing South-South trade along
comparative advantage lines, with resource-poor emerging economies purchasing
raw materials from ones that are resource rich. For low-income countries over theperiod 1994 to 2008, shipments to low- and middle-income markets (including
China and India) accounted for 70 percent of their export growth in agriculture
and food products and 73 percent of their export growth in raw materials. China
and India are particularly important sources of raw material demand, absorbing
40 percent of low-income country growth in exports of these goods over the period.
Not surprisingly, emerging economies are a relatively unimportant source ofdemand for apparel and textiles, absorbing only 25 percent of low-income country
export growth in that sector. Low-income countries send most of their output ofclothing and shoes to high-income markets.
Middle-income countries export a diverse set of goods, owing to the heterogeneity of countries within the group. Individual countries tend to specialize in a
2

The corresponding one- and two-digit Standard International Trade Classification (SITC) products are:agriculture and food products (SITC 0, 1, 4, 21, 22, 29, and 94); raw materials, which include rubber,wood, paper, iron ore, and other minerals (SITC, 23–25, 27–28, 62–64, and 66); apparel, footwear, andtextiles (SITC 26, 61, 65, and 83–85); metals and metal products (SITC 67–69), chemicals (SITC 5),
machinery (SITC 71–74), electronics and electrical machinery (SITC 75–77), transportation equipment(SITC 78–79, 95), and other manufactures, which include toys and games, plumbing and light fixtures,
furniture, professional and scientific equipment, photographic and optical equipment, watches, andmiscellaneous goods (SITC 81–82, 87–89). Petroleum, coal, and natural gas (SITC 3) are excluded.

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Journal of Economic Perspectives

Figure 2
Sector Trade Shares of GDP, by Income Group
A: Low-income countries
1994

2008

Food, agriculture

Food, agriculture

Raw materials

Raw materials

Apparel, shoes

Apparel, shoes

Metals

MetalsChemicals

Chemicals

Machinery

Machinery

Electronics

Electronics

Transport equipment

Transport equipment

Other manufacturing

Other manufacturing
0 .02 .04 .06 .08 .10 .12 .14

0 .02 .04 .06 .08 .10 .12 .14
Exports/GDP

Imports/GDP

B: China and India
1994

2008

Food, agriculture

Food, agriculture

Raw materials

Raw materials

Apparel, shoes

Apparel, shoes

Metals

MetalsChemicals

Chemicals

Machinery

Machinery

Electronics

Electronics

Transport equipment

Transport equipment

Other manufacturing

Other manufacturing
0 .02 .04 .06 .08 .10 .12 .14
Exports/GDP

0 .02 .04 .06 .08 .10 .12 .14
Imports/GDP

Gordon H. Hanson

51

Figure 2 (continued)
C: Middle-income countries

1994

2008

Food, agriculture

Food, agriculture

Raw materials

Raw materials

Apparel, shoes

Apparel, shoes

Metals

MetalsChemicals

Chemicals

Machinery

Machinery

Electronics

Electronics

Transport equipment

Transport equipment

Other manufacturing

Other manufacturing
0 .02 .04 .06 .08 .10 .12 .14
Exports/GDP

0 .02 .04 .06 .08 .10 .12 .14
Imports/GDP

D: High-income countries

1994

2008

Food, agriculture

Food, agriculture

Raw materials

Raw materials

Apparel, shoes

Apparel, shoes

Metals

MetalsChemicals

Chemicals

Machinery

Machinery

Electronics

Electronics

Transport equipment

Transport equipment

Other manufacturing

Other manufacturing

0 .02 .04 .06 .08 .10 .12 .14
Exports/GDP

0 .02 .04 .06 .08 .10 .12 .14
Imports/GDP

Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.

52

Journal of Economic Perspectives

subset of sectors. Overall, middle-income countries have had strong export growthin agriculture, led by Argentina and Brazil; metals, led by Russia, Korea, South
Africa, and Chile; electronics, led by Korea, Malaysia, Thailand, and the Philippines;
and transportation equipment, led by Korea, Mexico, Poland, and Turkey. In eachof these sectors, except autos, low- and middle-income markets absorbed 50 percent
or more of middle-income country export growth over the period 1994 to 2008.
China and India alone accounted for more than 25 percent of absorption of theexport growth of middle-income countries in raw materials and electronics. Theirraw material demand reflects the need for iron ore, copper, and other minerals
they require to build their economies; their electronics demand, coming primarily
from China, represents the deepening of production networks among emerging
economies. China and India are distinct among low- and middle-countries for being
reliant on high-income markets to absorb their ever-growing exports. High-income
countries absorbed over 70 percent of China’s and India’s export growth in apparel,
footwear, and other manufactures and over 55 percent in electronics (one of China’s
strengths) and metals (one of India’s).
Foreign direct investment is abetting the growth of emerging-economy trade.
North-to-South flows of foreign direct investment are well known to international
economists. A large literature documents the importance of these flows in building
global production chains (for example, Hanson, Mataloni, and Slaughter 2005;
Harrison and MacMillan 2011; Becker and Muendler 2010). Between 1994 and 2008,
inflows of foreign direct investment as a share of GDP rose from 2.1 to 3.4 percent
in low-income countries, rose from 1.3 to 4.4 percent in middle-income countries,
and held steady at 3 percent in China and India. Much less appreciated is the growthin outward foreign direct investment by emerging economies. Outflows of foreign
direct investment as a share of GDP rose over the 1994 to 2008 period from 0.2 to
2.2 percent of GDP in middle-income countries and from 0.2 to 1.2 percent of GDP
in India and China. For comparison, outflows of foreign direct investment fromhigh-income countries were 3.6 percent of GDP in 2008.
Dynamics in Specialization
The cross-sectional view of trade data seen in the last section highlights what
appears to be specialization according to comparative advantage, whether Heckscher–Ohlin (resource-based) or Ricardian (technology-based) in origin. A dynamic
view of trade reveals that specialization in low- and middle-income countries canchange rapidly over time.
The data from Figure 2C show that for middle-income countries in 1994,
apparel and footwear was the top sector for net exports, but that by 2008, electronics
had displaced it. This change is consistent with middle-income economies accumulating human and physical capital, pushing them out of labor-intensive clothes
and shoes and into more capital-intensive goods (Schott 2003). Low-income countries, including Bangladesh and Vietnam, are moving in to fill the space vacated bymiddle-income countries in apparel. The largest changes in specialization occur
in China and India. As shown in Figure 2B, China’s and India’s net exports as a

The Rise of Middle Kingdoms: Emerging Economies in Global Trade53

Figure 3
China’s Top Export Products, 1994–2008

Share of China’s total exports

.08

.06

.04

.02

0
1994

1996

1998

2000

2002

2004

2006

2008

Footwear (SITC 8510)
Children’s toys & indoor games (SITC 8942)
Completed computers (SITC 7522)
Cell phones, TV & radio transmitters (SITC 7643)

Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.

share of GDP decline over 1994–2008 in apparel and footwear, the sector with theirlargest net exports in 1994. Since the early 1990s, China has been moving into moresophisticated products, including cellphones and computers. The sector with thelargest growth in net exports is electronics, with an increase in net exports to GDP
of 10 percentage points, followed by metals and machinery, each with increases ofnet exports to GDP of 2.8 percentage points. In the future, China and India may
acquire comparative advantage in new sectors, such as chemicals or transportationequipment, as occurred in the last decade with machinery.
China’s recent experience is worth a closer look. Figure 3 shows the share of four
(Standard International Trade Classification four-digit) products in China’s totalexports. The first two, footwear and children’s toys, were China’s top two exports
in 1994, the former accounting for 7.3 percent of total shipments and the latter for
7.0 percent. By 2008, the export shares of these two products had declined to 2.4
and 3.5 percent, respectively. Joining shoes and toys among China’s top exports
are completed computers, with 4.5 percent of total shipments in 2008, making thisthe country’s top export good, and cellphones, TVs, and radio transmitters, with
3.0 percent of total shipments in 2008, making this category China’s third–largest
export. China’s transition into computer production happened virtually overnight,
with most of its export growth in the product occurring between 2002 and 2005.
Of course, if China is just progressing from assembling tennis shoes to assembling laptops, the change in its export patterns would not be all that impressive.

54

Journal of Economic Perspectives

While export processing plants continue to account for a large share of China’s
total shipments abroad, as Figure 1 showed earlier, China’s exports of computersand computer parts have grown much more rapidly than its imports of final andintermediate goods in the sector, suggesting that at least part of China’s graduationfrom apparel to electronics also involves capturing more links in global production
chains. Huawei and Lenovo, companies based in China and controlled by Chinese
investors, are respectively the world’s second-largest manufacturer of mobile
telecommunications equipment and the world’s fourth-largest manufacturer of
laptops and personal computers. Over time, China is both manufacturing more
technologically advanced goods and accounting for a larger share of value addedin their production.
Is China’s specialization in computers unusual for a country at its level ofdevelopment? Rodrik (2006) doubts that China’s export strength in electronics is
attributable to comparative advantage, suggesting instead that the country has usedindustrial policy to expand high-tech production. Figure 4 plots countries’ revealed
comparative advantage in office machines—Standard International Trade Classification (SITC) industry 75—averaged over 2006 to 2008, against the average years ofschooling of the adult population in 2005 (Barro and Lee 2010). Revealed comparative advantage in computers is defined as the log ratio of a country’s share of world
exports of SITC 75 to its share of world exports of all merchandise.3 China is above
the regression line, indicating that its specialization in the sector is greater than
one would expect given its level of education, but it is hardly an extreme outlier.
Other middle-income countries—including Costa Rica, the Philippines, Malaysia,
and Thailand—have larger positive residuals. While China’s rapid export growthin electronics grabs one’s attention, its current specialization in the sector does notseem unwarranted given its stock of human capital.
The results in Figure 4 suggest that international specialization in computers is
associated with cross-country variation in the supply of skilled labor. More generally,
we would like to know whether the accumulation of human and physical capital bymiddle-income countries explains their rapid progression into electronics, which isvisible in Figure 2. The literature has yet to address the issue—which is surprising
given that the growth of international trade in electronics is perhaps the single mostimportant factor behind the expansion of global production networks.
Another perspective on China’s evolution highlights that while the country isshifting into more advanced sectors, it remains locked into producing low-priced
goods. Schott (2008) finds that the overlap between the products that the U.S.
imports from China and from OECD countries is substantial. Between 1983 and2005, the similarity of the U.S. import bundle from China relative to that for theOECD jumped from rank 13 among developing countries to rank 4, behind Korea,
Mexico, and Taiwan. As of 2005, U.S. imports from China covered 89 percent of3

To purge the revealed comparative advantage index of the effects of country size, I use the residuals
from a regression of the index on log country population.

Gordon H. Hanson

55

10

14

Figure 4
Education and Exports of Office Machines
5

Revealed comparative advantage
in office machines, 2006–08

China

0

–5
0

2

4

6

8

12

Years of schooling, 2005
Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.
Notes: Figure 4 plots countries’ revealed comparative advantage in office machines—Standard International
Trade Classification (SITC) industry 75—averaged over 2006 to 2008, against the average years of schoolingof the adult population in 2005. Revealed comparative advantage in computers is defined as the log ratio ofa country’s share of world exports of SITC 75 to its share of world exports of all merchandise. The countries
are indicated by their World Bank abbreviations.

all ten-digit products in the Harmonized System,4 compared to 97 percent for
the OECD as a whole. Despite the breadth in the goods that China exports, andthe similarity of its product categories with far richer countries, China appears to
occupy a down-market niche within narrowly defined goods. Schott (2008) finds alarge price discount on Chinese imports in the United States. He regresses the unit
value (average price) of U.S. imports on product-year dummy variables, the distance
between the United States and the exporting country, the U.S. applied tariff rate on
the product, and the exporting country’s per capita GDP. In the 2000s, unit values
on Chinese imports are 48 log points lower than those of other countries.

4

The trade data used in this paper are based on the Standard International Trade Classification systemdeveloped by the United Nations (see ⟨http://unstats.un.org/⟩). Recently, trade data have become
available based on the Harmonized System of product classification developed by the World Customs
Organization (see ⟨http://www.wcoomd.org/⟩), which provides more disaggregated product categories
than are available in the SITC system.

56

Journal of Economic Perspectives

Lower unit values for U.S. imports from China may indicate that the country
produces goods of inferior quality, leading to lower market prices. However, China’s
experience isn’t all that different from some comparison countries. For the 2000s,
the discount on unit values for U.S. imports from Korea is 45 log points, from Japan
is 33 log points, and from Mexico is 59 log points (Schott 2008). Whatever accounts
for the relatively low average prices of U.S. imports from China, its unit values are
similar to its neighbors in either geographic or product space. Further, lower average
import prices do not necessarily imply lower quality. Japan and Korea have a strong
reputation for quality. And the success of Lenovo, the Chinese manufacturer of
laptops, demonstrates that the country is capable of producing high-quality goods.
Hyper-specialized Exporters
We have now seen that: 1) at any moment in time, country specialization bybroad sector appears to be consistent with standard models of comparative advantage, and 2) over time specialization patterns evolve rapidly, perhaps in line withfactor accumulation. Missing in the discussion is information on what is happening
inside the broad sectors. When we drill down, we observe a fine degree of specialization in which the exports of low- and middle-income countries are concentrated
in a relatively small number of products (Easterly and Reshef 2009). Such hyperspecialization is harder to explain with standard trade models.
Many developing countries have zero exports in broad swaths of productspace. Using data for 2008, Figure 5 shows the fraction of products in which countries have greater than zero exports, plotted against log real GDP, as a measureof country size. At the two-digit Standard International Trade Classification level,
there are 69 products (examples would include cereals, pharmaceutical products,
electrical machinery), and at the four-digit SITC level there are 786 products (forexample, milled rice, antibiotics, semiconductors). Most countries with GDP of lessthan $3.6 billion (an example would be Senegal) have positive exports in fewer
than 60 percent of four-digit products and in fewer than 80 percent of two-digit
products. It is not until countries reach a GDP of $72 billion (Iran) that they tend
to export the full range of two-digit goods and not until $195 billion (Sweden) thatthey export the full range of four-digit products.
Further, exports of most countries are concentrated in a small number ofgoods. Figure 6 is concerned with the share of a country’s top products in total
trade (its single top product, its four top products, and its eight top products atthe three-digit SITC level). It shows an export-weighted average of these shares bycountry income category for 2000 and 2008. I exclude petroleum exports (althoughgraphs including them are similar), and I aggregate up to the three-digit level (ofwhich there are 238 products) to account for reporting anomalies in some countries. For low-income countries in 2008, the share of exports accounted for by thesingle largest three-digit good is a whopping 21 percent; for the top four goods,
the share of exports is 45 percent; and for the top eight goods, the share is
58 percent. Hyper-specialization extends beyond poor nations. In middle-income
countries, the one-, four-, and eight-good export concentration ratios are 16, 37,

The Rise of Middle Kingdoms: Emerging Economies in Global Trade57

Figure 5
Share of Products with Positive Exports by Country

Share of products with exports > 0, 2008

2-Digit SITC products

4-Digit SITC products

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2
20

22

24

26

28

30

20

22

24

26

28

30

log GDP in 1990
Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.
Note: Using data for 2008, Figure 5 shows the fraction of products in which countries have greater thanzero exports, plotted against log real GDP, as a measure of country size.

and 49 percent, respectively, and in high-income countries they are 11, 26, and36 percent. For comparison, the U.S. ratios are 5, 17, and 28 percent.
For low-income countries, the most common top four-digit SITC export products (in order of frequency) are petroleum, unwrought aluminum, tea, coffee,
edible nuts, raw cotton, diamonds, copper, and knitted apparel. For middle-income
countries, the most common export products are petroleum, semiconductors, autos,
knitted apparel, frozen fish, cane sugar, aluminum ore, diamonds, ferro-alloys,
copper, and ships. The exports from the two groups overlap, with middle-income
countries adding goods intensive in human or physical capital (microchips, cars,
metals, and boats) to the list. Differences between the low- and middle-income lists
may reflect countries investing in education and machinery as they develop.
Specialization in a small number of exports is not simply a function of developing countries having small economies and therefore producing a relatively narrow
range of goods. Even the largest middle-income economies hyper-specialize. Taking
the largest middle-income economy in each geographic region, Brazil’s top 2008
exports are iron ore (11 percent of total exports), petroleum (8 percent), and soyabeans (6 percent); Korea’s are semiconductors (11 percent), autos (7 percent), andships (7 percent); Mexico’s are petroleum (14 percent), televisions (8 percent),
and autos (8 percent); Indonesia’s are coal (9 percent), palm oil (8 percent), and58

Journal of Economic Perspectives

Figure 6
Concentration of Non-Oil Exports in Top Products
Low-income countries

Middle-income countries

2000

2000

2008

2008

High-income countries

China and India

2000

2000

2008

2008

0

.1

.2

.3

.4

.5

.6

0

.1

.2

.3

.4

.5

.6

Share of top SITC three-digit product in non-oil exports
Share of top 4 SITC three-digit products in non-oil exports
Share of top 8 SITC three-digit products in non-oil exports

Source: Author’s calculations using (World Bank) World Development Indicators and UN Comtrade.
Notes: Figure 6 is concerned with the share of a country’s top products in total trade (its single top
product, its four top products, and its eight top products at the three-digit SITC level). It shows an exportweighted average of these shares by country income category for 2000 and 2008. I exclude petroleum
exports (although graphs including them are similar), and I aggregate up to the three-digit level (ofwhich there are 238 products) to account for reporting anomalies in some countries.

petroleum (7 percent); Poland’s are autos (6 percent), auto parts (5 percent),
and televisions (3 percent); and South Africa’s are platinum (13 percent), coal
(7 percent), and diamonds (6 percent). Of this group, only Poland’s top threeexports account for less than 25 percent of the country’s total foreign shipments.
For comparison, the top U.S. exports are aircraft (5 percent), petroleum products(4 percent), and microcircuits and transistors (4 percent).
What explains hyper-specialization in exporting? One account comes from thebooming literature on firm heterogeneity and trade. Following the empirical findings of Bernard and Jensen (1999) that most firms do not export, Melitz (2003)
develops a model in which firm productivity is a random variable (drawn from a
Pareto distribution that is identical across countries) and firms face fixed costs
in exporting goods abroad. Helpman, Melitz, and Rubinstein (2008) extend theMelitz model to account for the fact that the majority of bilateral trade flows are
zero (that is, most pairs of countries do not trade) (Santos Silva and Tenreyro 2006;
Baldwin and Harrigan 2011). Key to their explanation is the perhaps strong assumption that the distribution of firm productivity is bounded from above, meaning that

Gordon H. Hanson

59

in each industry there is a maximum level of productivity that a firm can attain.
Consequently, for pairs of countries in which the importer has high trade barriers
or a small market, no firm in the exporting country will be productive enough tojustify the fixed cost of shipping to that market. We will therefore observe zero tradefrom the exporter to the importer.
Returning to Figure 5, the striking fact is that smaller countries have positive
exports of fewer goods. In the Helpman, Melitz, and Rubinstein (2008) model, it is
the size of the importer’s market and not the size of the exporter’s market that predicts
zero trade. Further, in this model exports will be concentrated within industries(with more productive firms doing the lion’s share of the trade) with no obvious
pattern between industries (see Bernard, Redding, and Schott 2007, for an extension of the Melitz model that incorporates Heckscher–Ohlin features). The Melitz
model therefore does not offer an obvious account of the hyper-specialization that
we see in Figure 6.
Can the Eaton and Kortum (2002) Ricardian model explain hyper-specialization?
Similar to Melitz, the Eaton–Kortum framework allows for heterogeneous firm
productivity, but in a Ricardian setting such that country differences in technological capabilities dictate the share of import markets captured by exporting
countries. Eaton–Kortum would ascribe the patterns of sector specialization in
Figure 2 to country differences in these capabilities (Costinot, Donaldson, andKomunjer 2011). To account for the hyper-specialization seen in Figure 6, thesecapabilities would have to differ sharply across countries. The framework is silent
about where technological capabilities come from, though Chor (2010) finds thatin cross-section data these capabilities are correlated with country supplies of capitaland labor and with country institutional characteristics such as financial development and the legal environment. However, there are limits to the applicability of theEaton and Kortum approach. It predicts a smoothness to bilateral trade flows that
does not allow for the preponderance of zeros at the exporter-product level seenin Figure 5. (Eaton, Kortum, and Sotelo 2012 attempt to extend the model to allow
for zeros in trade flows.) While the Eaton–Kortum model gives us an elegant way oflinking the gravity model of trade to comparative advantage, along the way it loses
the extreme specialization of the simple Ricardian model, which matched well withtrade patterns in many emerging economies.
A second explanation for hyper-specialization comes from Rodrik (2006)
and Easterly and Reshef (2009), who suggest that exports are subject to externalities in production. The logic of external economies of scale is that when one
firm expands production in an industry, it lowers costs for other firms throughknowledge spillovers or through pecuniary externalities associated with making
inputs available at a lower cost. Externality-based explanations for the location of
production date back to Alfred Marshall’s (1920) discussion of the developmentof the English textile industry and are typically associated with understanding
where and how manufacturing begins and develops. However, the products that
dominate exports for low- and middle-income countries include many primarycommodities. It is not obvious why externalities should be important in the export

60

Journal of Economic Perspectivesof soya beans, edible nuts, aluminum ore, or copper. If they are, they have yet to
be documented in the literature.
Available theories of trade are capable of explaining specific features of global
commerce, such as why trade has a gravity structure, why countries specialize, or
why so few firms export, but they do not yet appear capable of explaining the richtableaux of trade patterns that we observe through the growing importance of lowand middle-income countries in the world economy. Countries at different income
levels produce different types of goods; specialize according to broad sector and,within these sectors, in a relatively small number of products; export many goods
not at all; and are capable of progressing rapidly up the ladder in terms of productsophistication. A model that could explain these outcomes would need prominentroles for comparative advantage, for extreme specialization even in larger countries,
and for rapid changes in specialization associated with factor accumulation or technological progress.

Final Discussion
The dramatic growth of China, India, and other middle-income nations is transforming the global economy. It is changing who trades with whom, how production
is organized across borders, and how the global gains from trade are distributed.
Research is just beginning to take stock of the emerging-economy trade boom. An
active body of work seeks to explain China’s growth (Song, Storesletten, and Zilibotti2011), its implications for global welfare (Hsieh and Ossa 2011; Levchenko andZhang 2011), and its effect on economies of high-income countries (for example,
Bernard, Jensen, and Schott 2006; Bloom, Draca, and Van Reenan 2011; Autor,
Dorn, and Hanson 2011). Other literature examines motivations for offshoring
and global production networks (for example, Yi 2003; Feenstra and Hanson
2005; Hanson, Mataloni, and Slaughter 2005; Grossman and Ross-Hansberg 2008;
Costinot, Vogel, and Wang 2011). We know less about the empirical determinants ofexport specialization, the dynamics of specialization patterns, or why South-South
trade looks so different from North-North trade.
As we look ahead to this research agenda, what are the questions that need to beanswered? I can think of at least four. First, how much of the recent growth in global
trade represents real value added? We know that for trade in manufactures, the shareof national value added in export shipments is relatively low. China’s export successis based in part on export processing plants that import parts and components andassemble them into final goods to ship abroad. Is the value-added share in exports
rising or falling over time? Is production becoming more or less fragmented acrossborders? How much of the rising share of exports to GDP in developing countries
represents a true increase in specialization for foreign markets?
Second, what explains hyper-specialization in exporting? The tendency
for countries to rely on a handful of products for most of their exports makes it
tempting to see nonconvexities at work, such as informational spillovers in learning

The Rise of Middle Kingdoms: Emerging Economies in Global Trade61

about foreign markets or industry-level distribution networks whose creation entails
substantial up-front investments. But the goods that tend to top the list of developing country exports look less like products that are information-intensive andmore like ones that require the availability of mineral reserves (copper, iron ore)or specific types of agricultural land (soya beans, tea). Is the high degree of export
specialization in developing countries consistent with comparative advantage?
Third, is China’s government pushing the country up the product ladder?
China’s rapid transition from producing shoes and dolls to laptops and cellphones
has created anxiety both in high-income countries that see their competitive advantage in high-tech goods eroding and in emerging economies that fear being left
in China’s shadow. But along with its changing export specialization, China has
increased its supply of educated labor, attracted investment by multinational firms,
and improved its transportation and communications infrastructure, making it
plausible that its advantage in electronics is natural and not induced by an industrial policy that selectively supports certain industries. Since economists know little
about the deep determinants of national export specialization patterns, we havelittle basis for saying whether or not China’s export success is unwarranted.
Finally, what effect has the global commodity boom had on living standards in
low-income countries? China’s and India’s immense demand for raw materials has
meant a sharp increase in the terms of trade for commodity exporters, including
many countries in Sub-Saharan Africa. Has the commodity export boom reduced
absolute poverty or otherwise improved the quality of life in the developingworld? Conversely, have low-income countries that are commodity importers seena decline in their material well-being? Since the 1980s, the World Bank and the
IMF have been preaching that trade liberalization is part of the path to prosperity
for developing economies. Yet the literature so far (for example, Goldberg andPavcnik 2007) has not established that lower trade barriers make the poor in thosecountries better off.

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