Home Market Effects of Foreign Trade in China's Manufacturing Sector: Analysis Using International Standard Industry Classification Panel Data

Abstract In this paper, we use 2002–2008 International Standard Industry Classification two‐digit bilateral trade panel data for manufacturing industries in China and the OECD countries to test for the existence of home market effects. We find that significant home market effects exist in 8 out of 12 industries. These industries include the food, beverage and tobacco industry, wood products, the paper products and printing industry, chemical products, other non‐metallic mineral products, machinery and equipment, transport equipment, and miscellaneous products and waste resources recycling industry. Textile, clothing and leather manufacturing, oil refining and nuclear fuel manufacturing, rubber and plastics, and basic metals and fabricated metal products industries do not exhibit home market effects. Indeed, strong reverse home market effects occur for oil refining and nuclear fuel manufacturing and for the rubber and plastics industry. The empirical results reveal that certain industries benefit from new export opportunities due to the expansion of domestic demand in China.