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# **B.   Export Quality over Time: Examples from Specific Sectors**

We now illustrate our export quality estimates using examples drawn from the car and apparel sectors. We focus on cars because most readers are likely to recognize the brands and have some intuition as to their relative quality. We consider apparel because it is a key export for many developing countries, particularly during the early stages of development, and typically constitutes one of the first beachheads in the manufacturing sector.

Estimates of quality in the passenger motor cars sector (SITC 7321) are intuitive and, combined with price movements, help explain developments in market shares.<sup>24</sup> The quality of U.S. exports has on average been at the world frontier, but has displayed some slight fluctuations over time (Figure 3). Meanwhile, prices oscillated around 90 percent of the world frontier, and the U.S. world export market share has been stable since the early 1990s after a long-term decline up to this point. German car exports have featured high quality and high prices throughout since the late 1970s. During the 2000s, German car exports regained much of the market share that they lost during the 1980s. Some countries boosted the quality of their car exports as they developed. For instance, Japanese cars experienced strong quality upgrading through 1990, reaching world frontier levels. Meanwhile, prices rose only moderately during this period, allowing for increases in market share. Since then prices have risen slightly higher with constant quality, possibly explaining some loss of market share to competitors. Quality of Korean cars was low until the early 1980s. Since then Korean autos have experienced ongoing and substantial quality upgrading. As Korean prices remained relatively low, their market share increased.

Analysis of the apparel sector (SITC 84) also shows how the relationship between quality and prices influences market shares. China increased its relative quality of apparel exports substantially since 1980, from 75 percent to 95 percent of the world frontier (Figure 4). This was accompanied by a similarly drastic increase in export market share, and enabled prices to rise slightly, although they remain low at 40 percent of the world frontier value. Bangladesh also recorded a strong increase in its market share, but given that quality increases were much less than in China, no price increases could be realized. India mirrors Bangladesh closely. Italy maintained world frontier quality throughout the sample period, but its market share declined as prices rose. Finally, the Republic of Korea and Thailand are examples of countries which in the past increased their market shares against a backdrop of rising quality and mostly stable prices. Subsequently, however, these countries have been diversifying away from the textile sector. They now retain higher-quality segments of the apparel market, as quality remains stable or continues to increase, but record falling market shares.

# **C.   Export Quality along the Development Path**

Overall, export quality is correlated with income per capita. This holds both at the aggregate level, and for manufacturing, agriculture, and non-agricultural commodities separately (Figure 5).<sup>25</sup> These findings are consistent with Hummels and Klenow (2005) and Sutton and Trefler (2011). They hold also when controlling for country fixed effects, so as to focus purely on within-country changes over time; in other words, export quality increases as countries grow richer. Quality increases with income particularly sharply during the early stages of development, until GDP per capita reaches $10,000. Quality convergence then continues at a diminishing rate. In contrast, unit values increase with income at a relatively constant rate: the slope of the non-parametric best-fit curve linking unit values and income is quite constant across different income levels, particularly for manufacturing (Figure 5 and Figure 6).

Among high income countries, average export quality levels only vary within a narrow band. In contrast, among and within developing countries, and in particular low-income countries, average quality levels vary

> 24 Market share is measured as a country’s exports as a percentage of total world exports of that product.

> 25 The correlation between income and unit values for non-agricultural commodities is relatively weak.