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China and its neighbors: evolving patterns of trade and investment

China and its neighbors: evolving patterns of trade and investment. John Weiss 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

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China and its neighbors: evolving patterns of trade and investment

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  1. China and its neighbors: evolving patterns of trade and investment John Weiss ADB Institute, Tokyo

  2. 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

  3. 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

  4. 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’

  5. 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 • China’s WTO accession and regional FTAs shown to be positive for neighbors

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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

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