China and its neighbors: evolving patterns of trade and investment

John to edit ClickWeiss Master subtitle style ADB Institute, Tokyo

Trade and investment

Is a fast growing large neighbor opening to the world economy a good thing? Standard trade theory says definitely Demand effects Regional specialization and comparative advantage

Are there doubts?

Allowing for real world assumptions may alter the story Dynamic comparative advantage Competitive effects Overlapping exports and market share Terms of trade FDI diversion

Trade Structure

PRC structure closest to that of Taipei, China and Korea in 1990 Most different from Indonesia and Philippines 2002 Technology structure 2002 45% low tech and 24% high tech

Table 2 Technological structure of manufactured exports 2000 (%) PRC

The Republic of Korea

Taipei,China

Singapore

Malaysia

Thailand

Indonesia

Philippines

Resource Based Low technology Medium technology High technology

9.5 44.9 21.2 24.4

11.7 17.1 34.0 37.1

4.4 23.8 25.5 46.3

14.9 6.5 17.4 61.2

13.1 9.6 17.8 59.4

18.4 21.5 23.8 36.3

33.7 31.3 17.5 17.4

6.5 11.9 11.6 70.0

Source: Lall and Albaladejo (2004) table 3 (see original for explanations of categories)

Demand effects

Evidence thus far mostly supports positive case Strong import demand growth from China Modeling exercises project trade surpluses for neighbors with China, whilst US and EU have strong trade deficits Chinas WTO accession and regional FTAs shown to be positive for neighbors

Table 9a Income effects relative to baseline 2015 (% change)

Country PRC Japan PRC UNI 2.9 0.3 ASEAN plus PRC 1.4 0 -0.1 -0.3 2.5 0.2 ASEAN plus 3 4.0 1.6 3.7 -1.0 4.0 0.7

The Republic of Korea 0.6 Taipei,China ASEAN W orld 1.0 0.5 0.4

Source: Lee teal (2004) table 1.

Specialization

China importing high tech goods from Japan and Korea Food, raw materials and parts and components from ASEAN

Competitive effects

Loss of market share eg textiles and clothing, electronics Terms of trade rising oil, metal and mineral prices FDI diversion potential productivity impact

Competitiveness in third markets

PRC rise in share of world trade 1990-2002 from 1.9% to 6.4% Export-led growth Direct threat 25% of exports Korea, Singapore, Malaysia, Taipei, China Constant market share shows in most cases exports more than double if kept pace with PRC

Table 4 PRC threat to NIEs in the world market 2000 (% of total exports)
Category Singapore Taipei, China The Republic of Korea Partial threat No threat Direct threat Reverse threat Mutual withdrawal 0.7 0.4 0.7 3.5 1.3 12.2 2.4 3.4 3.4 2.9 6.3 6.1 8.9 3.6 32.0 23.5 39.3 22.9 42.2 26.2 5.0 28.7 15.9 15.1 10.7 19.9 44.3 5.8 40.4 34.0 28.0 56.5 61.6 48.3 44.0 Malaysia Thailand Indonesia Philippines

Source: Lall and Albaladejo (2004) table 6.

Competitiveness in third markets

ASEAN losing markets in their most specialized product ranges - viz RCA ratios However rising surplus with PRC triangular trade parts and components to PRC for export as finished goods supply chain Exports of precision instruments and electrical machinery from neighbors grew six-fold 19952003

FDI diversion argument

Is FDI a fixed sum? Does the theory stand up? Surveys and anecdotes but lack of objective evidence Roundtripping FDI up to 40% Econometric results imply positive not negative association Complementarity in global production chains

Conclusions

Does competitiveness matter? Only flexible firms and economies can maximize potential gains from expansion of China Technological upgrading- productivity growth to minimize competitive effect Strong potential for regional income gains