The Product Space Revisited: China's Trade Profile

The concept of product space has encountered broad interest within the development community, as an analytical tool against which to assess countries' potential to diversify their production and export structures. It has received far less attention in the economics literature, and its assumptions and building blocks have not been put to scrutiny. In an attempt to fill this gap, this paper assesses whether exclusive reliance on export data in product space analysis may limit its value as a tool assessing country capabilities. It shows that reliance on net trade flows—to account for horizontal intra-industry trade—and on unit values—to capture within-product differentiation—changes the features of the product space and provides deeper insights with regard to countries' occupancy of it. Based on a highly detailed data set of both trade value and volume and spanning over 144 countries, the amended product space put forth in this paper shows that China has indeed expanded its trade profile to now occupy also product areas that are typically associated with higher-income countries, as the original product space analysis would suggest. However, China's remarkable success in expanding horizontally within the product space is strongly qualified by the introduction of the vertical dimension, which shows the country to be occupying mostly the low-unit value segment of product categories, more akin to the typical trade profile of a developing country.