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Angel or devil? Chinese impact on Latin America. Javier Santiso Chief Economist Latin America and Emerging Markets BBVA Research Department Annual Bank Conference on Development Economics (ABCDE) Amsterdam, May 23-24th 2005. INDEX. China: a new global player

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Angel or devil chinese impact on latin america

Angel or devil?Chinese impact on Latin America

Javier Santiso

Chief Economist

Latin America and Emerging Markets

BBVA Research Department

Annual Bank Conference on Development Economics (ABCDE)

Amsterdam, May 23-24th 2005


Index
INDEX

China: a new global player

A positive impact on trade flows with Latin America

Two case studies: Mexico versus Brazil

Conclusion: A “blessing in disguise”?


Since 1978 chinese economy has grown at a high rate
Since 1978, Chinese economy has grown at a high rate

Real GDP growth rate 1978-2006f (%)

Source: BBVA

Economic history recalls that this situation is not new: in 1820 China represented a third of the world GDP (Maddison, 2001).



Low wages and competitiveness
…low wages and competitiveness rates...

Labour Costs (USD/hour)

(average 1999-2002, total industry)

Wages in China are in average four times lower than in Latin America.

Source: BBVA, EIU

However, real wages grow at a significantly higher rate than in industrialised countries.

1 data for China until 2003; 2005-6 estimates

Source: BBVA


Increasing economic liberalisation
…increasing rates... economic liberalisation

Source: BBVA, 2004

Trade openness and FDI inflows surpass those of all Latin American countries.


And large size of its domestic market
…and large size of its domestic market rates...

Interior Region

Population: 710 MM

GDP per cápita: $765

Share of national GDP: 38%

Western Region

Population: 83 MM

GDP per cápita: $773

Share of national GDP: 4%

China represents some 20% of the world´s population

The middle class accounts for only 19% in year 20031.

Its weight has been growing by 1% per annum since 1999.

Coastal Region

Population: 482 MM

GDP per cápita: $2117

Share of national GDP: 58%

1Estimate of Chinese Academy of Social Sciences. Middle class: total assets of Rmb150-300K (US$18-36K)


H ow long would this growth be sustainable
H rates...ow long would this growth be sustainable?

Real GDP per cápita PPP in constant prices

(US$, 2004-5 estimates)

Growth rate of GDP per cápita in China has been higher than in the golden years for L.A. main economies.

Real GDP per cápita PPP in constant prices

(US$, 2004-5 estimates)

Source: BBVA, 2004

However, Chinese high growth rate is not unusual in Asia.

Source: BBVA, 2004


Index1
INDEX rates...

China: a new global player

A positive impact on trade flows with Latin America

Two case studies: Mexico versus Brazil

Conclusion: A “blessing in disguise”?


China´s liberalisation has heralded fair weather for Latin America...

As of latest available data, Peru, Brazil and Argentina increased their share of total exports to China .

countries: Argentina, Brazil, Chile, Colombia Mexico, Peru, Uruguay and Venezuela

2 until Octubre (latest data available)

Source: BBVA



What data has the study been based on? America...

Panel data in 3D: 35 countries, 620 products and 5 years.

The Chinese exporting and importing structures have been compared with the one of 15 Latin American countries (plus 16 other emerging countries non LatAm, Spain, Japan and USA).

We have used the UNCTAD database that includes 620 different goods.

This database using the one and three-digit Standard International Trade Classification.

1998-2002 is the period of time considered.


What is the chinese exporting structure
What is the Chinese exporting structure? America...

Exports composition to one-digit.

Over recent years the exporting structure has changed, changing from one based on miscellaneous manufactured goods in 1998 to one based mainly on machinery and transport equipment in 2003.


What is the chinese importing structure
What is the Chinese importing structure? America...

Imports composition to one-digit.

China has developed a strong intra-industry trade.


What products does china specialize in

Specialisation Index (Balassa) America...

China

Wood products

0.46

Leather products

4.53

Chemicals

0.50

Processed food

0.60

Textiles

2.48

Minerals

0.27

Basic manufactures

1.03

Non-electronic machinery

0.49

Fresh food

0.83

Miscellaneous manufacturing

1.73

Transport Equipment

0.27

Clothing

4.16

Electronic components

1.05

IT & Consumer electronics

1.72

Source: BBVA

What products does China specialize in?

The index measures the country's specialization index in exports according to the Balassa formula.

The index compares the share of a given sector in national exports with the share of this sector in world exports. Values above 1 indicate that the country is specialized in the sector under review.


Does china compite with latin american countries
Does China compite with Latin American countries ? America...

Source: Blázquez, Rodríguez and Santiso, BBVA (2005)


Does china compite with latin american countries1
Does China compite with Latin American countries ? America...

Source: Blázquez, Rodríguez and Santiso, BBVA (2005)


Does china compite with latin american countries2
Does China compite with Latin American countries ? America...

Source: Blázquez, Rodríguez and Santiso, BBVA (2005)


What indexes of competition have we used
What indexes of competition have we used? America...

We want to see if the exports of Latin American countries coincides with Chinese export, i.e. if a potential cost exists.

Coefficient of specialisation =

Where ajt y ait are the share of good “n” over the total exports of country j e i in time t (where j is China)

Coefficient of conformity =


With the exception of mexico china does not compete with latin america

CS America...

CC

CI

CS

CC

CI

Paraguay

0.10

0.04

0.07

Singapore

0.41

0.46

0.43

Venezuela

0.11

0.08

0.10

USA

0.44

0.44

0.44

Bolivia

0.14

0.08

0.11

Malaysia

0.43

0.48

0.46

Chile

0.16

0.06

0.11

Poland

0.46

0.45

0.46

Panama

0.14

0.09

0.11

Korea

0.47

0.49

0.48

Russia

0.17

0.08

0.12

Turkey

0.46

0.52

0.49

Honduras

0.18

0.08

0.13

Mexico

0.50

0.50

0.50

Guatemala

0.23

0.10

0.16

Rumania

0.46

0.59

0.52

Uruguay

0.21

0.12

0.17

Hungary

0.52

0.57

0.55

Peru

0.22

0.12

0.17

Thailand

0.55

0.59

0.57

Argentina

0.22

0.12

0.17

Source: BBVA (2005)

Colombia

0.25

0.15

0.20

El Salvador

0.31

0.19

0.25

Brazil

0.32

0.25

0.28

Costa Rica

0.32

0.26

0.29

Source: BBVA (2005)

With the exception of Mexico, China does not compete with Latin America

Countries less harmed by the Chinese competition

Countries most harmed by the Chinese competition

Among the 15 countries less harmed by Chinese competition, there are 14 Latin American countries.


Index2
INDEX America...

China: a new global player

A positive impact on trade flows with Latin America

Two case studies: Mexico versus Brazil

Conclusion: A “blessing in disguise”?



Mexico the dragon attacks
Mexico: The dragon attacks? America...

Chinese competition with Mexico has been increasing until 2003 (latest data available).


Competition of exports to the us market
Competition of exports to the US market America...

Chinese exports to the US grew in 2002 and 2003 at an annual rate of 26% vs. 2% for Mexican exports.

Although it is not clear that China has gained market share at the expense of Mexico exclusively.


What could mexico do

MEXICAN PESO America...

14.0

12.0

PPA average 1990-2004

10.0

8.0

6.0

4.0

Estimated

Observed

2.0

0.0

Source: BBVA

1987

1996

2002

2005

1984

1993

1990

1999

2008

1975

1978

1981

Long term

Inflation

Nominal rate

Estimated

PPA

USA

Mexico

3.64

3.67

3.45

3.4

19.2

1990-1995

8.55

8.48

7.93

2.3

22.2

1996-1999

10.11

11.58

10.82

2.5

6.0

2000-2004

12.41

11.59

2.5

3.9

2005-2008f

What could Mexico do?

A passive adjustment: Depreciation of nominal exchange

12,20


What could mexico do1
What could Mexico do? America...

Advantages of Mexico´s Geographical Location:

  • Lower Transportation and Communication Costs

  • Access to Regional Preferential Trade Agreements (FTAs)

  • Short Delivery Time

24 DAYS

4 DAYS

11,700 Km

160 Km

Ocean shipping times

Mexico´s competitive edge may be greatest on time-sensitive exports.

Proximity to US implies Latin America can use inexpensive transport by land, rather than ocean shipment.



Brazil an intermediate point
Brazil: an intermediate point America...

Brazil has the third highest competition level with China, although in a decreasing trend.


Brazil an intermediate point1
Brazil: an intermediate point America...

Fuente: SECEX

Fuente: BBVA

Brazil maintains recurrent trade surplus with China, which has become its fourth largest export market.


Brazil an intermediate point2
Brazil: an intermediate point America...

Herfindahl-Hirschmann Index for

Brazilian exports by country of destination

0.12

Brazil is diversifying its exports by country of destination to reduce geographical dependence.

0.11

concentration

more

0.10

0.09

0.08

diversificationn

more

0.07

0.06

0.05

ene-89

ene-90

ene-91

ene-92

ene-93

ene-94

ene-95

ene-96

ene-97

ene-98

ene-99

ene-00

ene-01

ene-02

ene-03

ene-04

Source: BBVA

However, the composition of Brazilian exports by sectors has barely changed.


Index3
INDEX America...

China: a new global player

A positive impact on trade flows with Latin America

Two case studies: Mexico versus Brazil

Conclusion: A “blessing in disguise”?


Chinese booming demand of metals and other commodities
Chinese booming demand of metals and other commodities America...

Source: BBVA, World Metal Statistics


Chinese booming demand of metals and other commodities1

Source: BBVA America...

Source: BBVA

Chinese booming demand of metals and other commodities

In 2003, Chinese imports of nickel were duplicated, those of copper increased 15%, of soybean 70% and of crude 30%. In addition, China consumed 50% of world cement, 30% of coal and 36% of steel.

China has become the greater consumer of copper, tin, zinc, platinum, steel and iron.


A blessing in disguise for latin america

Exports of America...

commodities/

Total exports

2004*

Venezuela

83.1%

Peru

70.7%

Chile

59.1%

Colombia

46.3%

Argentina

38.0%

Brazil

29.6%

Mexico

14.6%

Latam

31.2%

*

data until Octuber

Source:

BBVA

based on national statistics

A “blessing in disguise” for Latin America?

BBVA-MAP Latam index monitors the trading prices of commodities in the region.

Primary products account for more than a third of Latin America exports, except for Mexico and Brazil: risk of “Dutch disease”?


Angel or devil chinese impact on latin america1

Angel or devil? America...Chinese impact on Latin America

Javier Santiso

Chief Economist

Latin America and Emerging Markets

BBVA Research Department

Annual Bank Conference on Development Economics (ABCDE)

Amsterdam, May 23-24th 2005