China and its neighbors: evolving patterns of trade and investment

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China and its neighbors evolving patterns of
trade and investment

• John Weiss
• ADB Institute, Tokyo

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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

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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

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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

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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

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Specialization

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

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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

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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

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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 1995-2003

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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

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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