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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO MARCH 2004 NUMBER 200 Chicago Fed Letter Comrades or competitors? On trade relationships between China and emerging Asia by John Fernald, senior economist and economic advisor, Federal Reserve Bank of Chicago, and Prakash Loungani, assistant to the director, External Relations Department, International Monetary Fund1 What are the implications of China’s economic growth for its neighboring economies? Do the mutual benefits outweigh the costs of intensifying competition in emerging Asia? Recent research on trade between Asia and the U.S., as well as among the Asian economies, highlights the changing nature of these relationships and the attendant costs and benefits for all parties. Discussions of trade flows in Asia high- light two opposing views on the nature of trade links between China and emerging Asia.2 One view is that these economies are comrades. They share mutual benefits from the growing incomes of 1. Exports from China and emerging Asia Chinese consumers percent change and from the poten40 tial of greater integration of product 30 lines across the reChina/HK (net of internal China/HK trade) gion, both of which 20 are reflected in the expanding intra10 regional trade in Asia. The other view sees 0 China and emerging Developing Asia Asia as competitors: (excluding China and HK) -10 These economies spe1978 ’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02 cialize in producing NOTES : The black line shows recorded imports by all countries in the world from goods that are relaeither China or Hong Kong, excluding China’s imports from Hong Kong and Hong Kong’s imports from China. The blue line shows imports by all countries in the tively close substitutes world from developing Asian economies other than China or Hong Kong. SOURCE : International Monetary Fund’s Direction of Trade Statistics. and, hence, they are locked in competition for market share in major export markets such as the United States.3 This Chicago Fed Letter reports on recent research that shows that elements of both views are right.4 The first view is right in stressing many of the beneficial effects of China’s growth on the rest of Asia. China’s tremendous growth has translated into skyrocketing imports from the rest of Asia, particularly since its World Trade Organization accession was completed in December 2001. In addition, as China continues its rapid development, other economies in the region have an incentive to try to move up the value chain as their comparative advantage shifts to higher value-added, less labor-intensive industries. Taiwan, for example, is attracting more investment in high-tech research facilities as opposed to pure manufacturing, and Singapore and (to a lesser extent) Malaysia are trying to broaden the scope of their manufacturing sectors to include bio-technology and other emerging technologies. But the other view is also right in claiming that China’s increased integration into the global economy has meant that such sectoral transitions in other Asian economies are likely occurring at a faster pace than would otherwise have been the case. For example, manufacturing appears to be moving from elsewhere in Asia to China, in large part to take advantage of low labor costs and a economies shown in figure 1 is difficult to shake off. Ahearne, percent 60 Fernald, Loungani, 1989 and Schindler (2003) 2002 estimate real export 45 growth equations for Asian economies of the kind typically 30 estimated in the literature, where real 15 exports are assumed to depend on foreign demand and real ex0 change rates. When China & HK Asian NIEs ASEAN-4 China’s real export NOTES : The sum of the three groups is 100%. SOURCE : International Monetary Fund’s Direction of Trade Statistics. growth is added to these equations, the estimated coefficient growing domestic market. Asian econ- associated with this variable turns out to be positive. Allowing for changes omies therefore need to take steps to over time in the impact of China’s exease the transition of their labor force port growth on the export growth of into other sectors, perhaps including the provision of social safety nets to ease other Asian economies does not change this conclusion. the costs of adjustment. 2. Asian NIEs’ share of U.S. exports, 1989–2002 Growing together? Digging deeper Figure 1 shows that exports by China and by other Asian economies tend to move together.5 This striking co-movement suggests that common factors, particularly demand from developed economies, are probably more important determinants of Asian exports than is competition with China. The similarity in growth rates also points to the increasing vertical integration of many product markets in Asia. As an illustration of this, take the example of a small electronic device like a DVD player. The manufacturing of some components— e.g., motherboards, memory—might be handled in one or several of the ASEAN economies or the NIEs. Those components are then exported to, say, China, where they are assembled into the DVD player. The DVD player is then shipped to its final destination. Several economies in the region might thus provide value-added to a single device. Hence, as demand for DVD players fluctuates, one would expect export growth to be positively correlated across countries. It may be that effects of export competition manifest themselves not at the aggregate level but in particular geographic markets and in particular industries. Nowhere is export competition among Asian economies likely to be as intense as in the U.S. market. How have the market shares of exports of the various Asian economies changed over time? For this analysis, we classified Asian economies into one of three country groups: China (China and Hong Kong), the NIEs (Korea, Singapore, and Taiwan), and the ASEAN-4 (Indonesia, Malaysia, Philippines, and Thailand). We classified exports into 48 industries, at Statistical tests confirm that the positive association between China’s export growth and that of other Asian the three-digit industry level, using data from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). Figure 2 illustrates the dramatic changes in export shares for the three country groups between 1989 and 2002. In 1989, China and Hong Kong together accounted for about a quarter of total exports to the United States from the three groups. By 2002, their share had doubled. Conversely, the share of the Asian NIEs halved from nearly 60% of the total to 30%. The ASEAN-4 have held their own, though their share has see-sawed, rising from 17% in 1989 to 25% in 1999 before falling back to 21% in 2002. Industry-level data shed further light on the micro patterns behind this transformation in overall market shares. First, there is no doubt that China has emerged as a significant exporter across virtually the entire spectrum of industries: Its share has increased in 42 of the 48 industries. In contrast, there are only five industries in which the NIE share was higher in 2002 than in 1989, and these are all in the industrial supplies and materials category (one-digit code “1”).6 In addition, there is one industry, new and used passenger cars (industry code 300), in which the NIEs have maintained a 100% share of U.S. imports from emerging Asia since 1989. But with foreign direct investment in China’s auto sector growing rapidly, it may not be too long before China starts exporting autos. Second, market share increases for the ASEAN-4 are also quite prevalent—in 26 of the 48 industries. This means that cases in which the shares of both China and the ASEAN-4 have increased are just as likely as cases in 3. China and ASEAN-4 shares in major export industries 1989 Industry 213 400 410 411 412 China & HK 7 36 24 38 19 2002 NIEs ASEAN-4 China & HK NIEs 72 52 66 57 64 21 12 10 5 18 24 69 67 84 53 42 12 22 11 17 ASEAN-4 34 20 11 6 30 US $ billion 67.8 41.1 38.8 19.4 17.1 NOTES : NIEs are Korea, Singapore, and Taiwan. ASEAN-4 countries are Indonesia, Malaysia, the Philippines, and Thailand. HK is Hong Kong. For the five largest industries ranked by total value of imports from Asia, figure shows shares in the U.S. market by region. For each year and each industry, shares sum to 100%. SOURCE : International Monetary Fund’s Direction of Trade Statistics. overall export growth has remained quite percent robust. This raises 30 an obvious question: Exports to G-3 “Where are exports To China and Hong Kong from the NIEs go20 ing?” The answer, of course, is that China itself has emerged 10 as a major importing power, taking in 0 products from the NIEs at robust rates of growth. Figure 4 -10 1989-93 1993-2000 2000-2002 compares the average annual growth SOURCE : International Monetary Fund’s Direction of Trade Statistics. of NIE exports to the Group of 3 (the which their shares have moved in opG-3, or the U.S., the Euro area, and posite directions. Japan) with that of their exports to China. In the early years following the Overall, the results are suggestive of a opening up of the Chinese market, “flying geese” pattern, in which China growth in NIE exports to the country and the ASEAN-4 move into the prodexceeded 25% a year compared with a uct space vacated by the NIEs. This conrate of 2% growth in exports to the clusion is only reinforced if one looks G-3. The difference is accentuated at the five largest industries ranked by both by the fact that exports to China the dollar amounts of U.S. imports in were starting off from a very low base 2002. As shown in figure 3, in each of and that there was a recession in the these industries, the shares of China and United States over this period. But even the ASEAN-4 have moved in the same over the period 1993 to 2000, when the direction. So, contrary to some popueffects of both these factors had worn lar perceptions, China’s gains in maroff, NIE exports to China continued to ket share have not come about primarily grow at a double-digit annual rate and at the expense of the labor-intensive outstripped growth in exports to the ASEAN-4 economies. Instead, China G-3. The contrast in the recent period, has displaced the NIEs in industries that 2000–02, is remarkable. In this period, these more advanced economies were which again was marked by a global slowrelinquishing, particularly apparel, footdown, NIE exports to the G-3 declined, wear, and household products. This is a while NIE exports to China grew at a 7% healthy, rather than disturbing, develannual rate. Clearly, China bolstered opment. It mimics an earlier period, the performance of the Asian NIEs at when the NIEs moved into the industries a time when there were few other bright relinquished by a more advanced Japan. spots. This evidence also indicates that While the analysis here is focused on the shifting of production facilities to competition in the U.S. market, similar China from the NIEs likely has boostpatterns of displacement of the NIEs ed NIE exports of intermediate prodby China and the ASEAN-4 are also ucts to China for processing and export emerging in the major export markets of the finished goods.8 of Europe and in Japan.7 4. Asian NIEs’ export growth Conclusion Closing the circle The analysis thus far has shown that the Asian NIEs are losing market shares in the U.S. (and other) markets in almost all categories of goods, but that their Industry-level data clearly show that China is displacing the other countries of emerging Asia, particularly the Asian NIEs, in major export markets such as the United States. The changes in market shares are so sharp in many cases that it is quite likely that they require actual shifts in resource allocations, which can often be painful for those who lose out. From this perspective, China and emerging Asia are competitors. The appropriate policy response, however, would be to take steps to smooth the flow of resources across sectors. But the story doesn’t end there. There are two reasons why China and emerging Asia are also comrades. First, China itself has emerged as a major importer of goods from the countries of emerging Asia. Second, Asian countries are organizing production of goods in a way that increases the efficiency with which they can export to the markets of the industrialized countries. 1 2 3 The views expressed are the authors’ and should not be interpreted as those of the International Monetary Fund. “Emerging Asia” is used here to refer to the newly industrialized economies (NIEs) of Korea, Singapore, and Taiwan and the so-called ASEAN-4, Indonesia, Malaysia, the Philippines, and Thailand. “China” refers to China and Hong Kong. The labels “Hong Kong” and “Taiwan” are used to refer to “People’s Republic of China—Hong Kong Special Administrative Region” and “Taiwan Province of China,” respectively. See Diwan and Hoekman (1999), “Competition, complementarity and contagion in East Asia,” in The Asian Financial Crisis: Causes, Contagion and Consequences, Pierre-Richard Agénor, Marcus Miller, Michael H. Moskow, President; Charles L. Evans, Senior Vice President and Director of Research; Douglas Evanoff, Vice President, financial studies; David Marshall, Vice President, macroeconomic policy research; Daniel Sullivan, Vice President, microeconomic policy research; William Testa, Vice President, regional programs and Economics Editor; Helen O’D. Koshy, Editor; Kathryn Moran, Associate Editor. Chicago Fed Letter is published monthly by the Research Department of the Federal Reserve Bank of Chicago. The views expressed are the authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Articles may be reprinted if the source is credited and the Research Department is provided with copies of the reprints. Chicago Fed Letter is available without charge from the Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834, Chicago, Illinois 60690-0834, tel. 312-322-5111 or fax 312-322-5515. Chicago Fed Letter and other Bank publications are available on the World Wide Web at http:// www.chicagofed.org. ISSN 0895-0164 4 5 David Vines, and Axel Weber (eds.), New York: Cambridge University Press, chap. 10. See Ahearne, Fernald, Loungani, and Schindler (2003), “China and emerging Asia: Comrades or competitors?,” Federal Reserve Bank of Chicago, working paper, No. WP 2003-27. The figure shows export growth (measured in dollar values) to the world from China (defined to include Hong Kong) and from the rest of developing Asia, using trading partner statistics. Fernald, Edison, and Loungani (1999) (“Was China the first domino? Assessing links between China and the rest of emerging Asia,” Journal of International Money and Finance, Vol. 18, pp. 515–535) argue that it makes economic sense to combine data for China and Hong Kong even in the period preceding formal unification, since many goods use Chinese labor and Hong Kong management and distribution skills. It makes statistical sense to use trading-partner statistics, to avoid double-counting Chinese and Hong Kong exports. 6 7 8 They are 100 (petroleum and products), 123 (other agricultural products and textile supplies), 140 (unmanufactured steelmaking and ferro-alloying materials), 142 (crude and semifinished nonferrous metals), and 160 (unfinished nonmetals). See Fernald, Edison, and Loungani (1999). For a detailed discussion of the rise in intraregional trade in Asia, see Zebregs (2003), “Intraregional trade in Asia,” International Monetary Fund, policy discussion paper.
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