Economics in china’s wake: has asia gained from china’s growth? by Peter e robertson Business School The University of Western Australia and Jessica y xu Australian Government The Treasury discussion paper 10. 15



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ECONOMICS


IN CHINA’S WAKE:

HAS ASIA GAINED FROM CHINA’S GROWTH?

by

Peter E Robertson

Business School

The University of Western Australia
and
Jessica Y Xu

Australian Government

The Treasury


DISCUSSION PAPER 10.15

IN CHINA’S WAKE:

HAS ASIA GAINED FROM CHINA’S GROWTH?

Peter E. Robertson*

The University of Western Australia

Jessica Y. Xu

Australian Government

The Treasury


June 2010


China’s growth has been rapid but the value of China's international trade has grown even faster. This trade-biased growth is bringing both challenges and opportunities for Asian economies that are highly integrated with Chinese trade networks. Moreover in ASEAN countries such as Indonesia and Malaysia, China’s success has been seen as a threat to its existing trade and manufacturing base. We use an historical simulation analysis to examine the impacts of China’s growth on Asian economies. We find that a decade of China’s growth has raised GDP per capita in the developed Asian economies by around 16%. The effect on the ASEAN-4 economies is not as strong but still large, the GDP of the ASEAN-4 economies increased by approximately 7%. The main source of these gains is found to be lower durable goods import costs which induce accumulation of machinery and equipment capital.


Keywords: Economic Growth, China, Trade Costs.

JEL: O4, O1, F11, F43

1. Introduction

In thinking about the impacts of China’s growth on the world economy, two facts stand out. First, China’s growth is an exceptionally high rate of growth – on par with the highest growth rates attained by Japan in the 1960s and the Newly Industrialised Economies (NIEs) of South Korea, Taiwan, Singapore and Hong Kong in the 1970s. Second, China’s growth has been extremely biased. Though GDP has increased by around 100% between 1995 and 2005, China's international trade flows have far outstripped its GDP growth. Over the same period for example exports relative to GDP grew by 62 percent (World Bank 2010).

But these two facts, China’s high rate of GDP growth and even faster export growth, are not necessarily sufficient to guarantee that China is having a dramatic impact on the global economy. Standard trade models suggest that this depends on a countries ability to affect world prices which in turn depends upon the bias in the pattern of growth and how this affects world relative supplies.1 They also suggest that the effects of China’s growth on other countries may be positive or negative depending on the similarity of their trade patterns. Thus there is considerable concern among the developing Asian economies, such as the ASEAN group, that China’s growth is having a detrimental effect on their terms of trade (Coxhead 2007).

There is, however, very little analytical work that attempts to relate China’s growth to its trade flows and to the economic impacts on China’s trading partners. Much of the work that does exist moreover is based on gravity models. These look at the effects of one countries trade flows on another countries trade flows, but do not tell us how this impacts on important economic outcomes such as wages, incomes and inequality.

The aim of this paper therefore is to undertake a quantitative assessment of the broad stylized facts regarding China's growth and trade bias focusing in particular on their impacts on the developed Asian economies of Japan and the NIEs, and the ASEAN-4 economies of Malaysia, Indonesia, Thailand and Philippines.

To do this we use a calibrated open economy growth model of the Chinese and the regional Asian economies. The model incorporates inter-temporal optimization with respect to physical and human capital accumulation, and consumption decisions. It also incorporates multiple traded and non-traded sectors. This multi-sector approach is crucial as the effects of China’s growth on other countries will be mediated through changes in trade – specifically the terms of trade. These trade-growth linkages that we wish to explore can only be analysed in a multi-sector model.

We limit our attention to comparative steady state analysis of the long run effects of China’s growth. The model is solved with exogenous productivity parameters, including traded sector specific productivity growth, in order to reproduce the stylized facts of China's growth and trade bias. Specifically, the exogenous productivity growth has the interpretation of sector specific falling trade costs. This solution is compared with a counterfactual benchmark where China’s per capita growth is only growing at the world average of around 2% per year.

The simulations show that trade biased growth has a large impact on both the developed Asian and ASEAN-4 economies. A decade of China’s growth is found to have increased GDP per capita in the developed Asian economies by about 17%. The impact on the ASEAN-4 economies is also large at 7%. Both values represent a significant contribution to regional growth. The contribution of China’s growth to Japan and the NIEs is truly remarkable, being equivalent to 1.5 percentage points of growth per year over a decade.

The remainder paper is organized as follows. Section 2 establishes some stylized facts regarding China's growth patterns and its integration with the Asian region. Section 3 describes the model structure. Section 4 discusses the experiment designs and the results are reported in Section 5. Section 6 concludes by summarizing the main findings.

2. China’s Growth and Integration with Asia



2.1 Growth in China

The structure of China’s economy has changed profoundly since the implementation of a comprehensive set of economic reforms to liberalise and open its economy to foreign trade in 1978. It has shifted from an agriculture based economy to an economy with a massive industrial sector and a large services sector. According to Bosworth and Collins (2008), over the period 1979 to 1995, China grew at 6.4% per year but in the decade 1995 to 2005 the growth rate accelerated to 8.9% per year. China is now the world’s third largest economy when its output is measured at the market exchange rates and accounts for over 7% of the global trade flows.

Though it is widely believed that growth in China will have large economic impacts on its trading partners, trade theory tells us that the impacts are ambiguous and may be completely neutral. Specifically, in a Heckscher-Ohlin model, growth that increases the output of all sectors at the same rate, will have no impact on the terms of trade, and hence no impact on other countries.

It is important therefore that, as noted above, China’s export sector grew much faster than GDP with the exports to GDP ratio rising by 59% over the decade 1995 to 2005 (Harris et al. 2010). Moreover, the composition of China’s exports has diversified away from light manufacturing commodities towards capital- and skill-intensive products. The exports of China were mainly concentrated on labour intensive products in the early 1990s but since then a growing proportion of exports has become more capital- and skill-intensive. This is shown in Table 1 which reports the changes in China’s export bundle over time. It shows that, between 1990 and 2005, the share of durables goods more than doubled whereas the shares of all other sectors declined. As emphasized by Schott (2006), Rodrik (2006), and Amiti and Freund (2008), China's export bundle has become increasingly sophisticated.

[Table 1 about here]

Part of this expansion for both the changing level and pattern of trade is likely to be due to falling trade barriers. Rumbaugh and Blancher (2004) report that the average (unweighted) tariff rates in China fell from 55.6% in 1982 to 12.3% in 2002. At the same time, the Chinese government has also reduced the non-tariff barriers and introduced special privileges for export processing firms including all foreign owned and jointly owned firms.

Nevertheless, the exceptionally strong growth in the durables sector points to some form of sector specific, or export specific, technological change. Indeed, there is some evidence that productivity growth has been higher in the export sectors (Perkins 1997; Amighini 2005). One possible source of this is the falling trade costs and the rise of global fragmentation of the production process which has been pronounced in the Asian region (Athukorala 2009; Branstetter and Lardy 2006). Unfortunately, as noted by Anderson and van Wincoop (2004), the evidence on how trade costs have fallen over time and the relationship to global fragmentation is very limited. According to Branstetter and Lardy (2006) and Lardy (2003), foreign investment has been largest in the durable goods sector, suggesting that international technology spillovers have been important.

2.2 Regional Integration

The impacts of China’s growth on other countries depend on the strength of their international trade linkages. Since we are concerned with historical Chinese growth between 1995 and 2005, the relevant measures of integration are those that existed at the start of this period in 1995. Table 2 provides a summary of the level of integration between China and its Asian neighbours as it existed then. Columns 1 and 2 report the shares of China destined exports from the two Asian regions. Exports to China accounted for 10.6% of all exports from Japan and the NIEs (including intra-regional trade). Exports to China accounted for 3.5% of ASEAN-4’s exports. Thus, the former region is much more integrated with China in terms of its export markets. ASEAN-4’s main export to China is low-tech manufacturing goods whereas for the developed Asian region, durable goods sector is the main export category.

Table 2 also shows China’s export patterns (Columns 3 to 6). As destination countries, Japan and the NIEs accounted for 31.0% of China’s exports. Around one-third of this is low-tech manufacturing goods. ASEAN-4 accounted for a much smaller fraction of China’s exports. Columns 5 and 6 report the same Chinese export values, but this time expressed as a fraction of world exports to each region. Thus, they correspond approximately to the Chinese sourced import shares for developed Asian and ASEAN-4 economies. It can be seen that for example 8.4% of world exports to developed Asia are from China whereas only 3.9% of world exports to the ASEAN-4 economies are from China. Thus, circa 1995, Japan and the NIEs were much more integrated with the Chinese economy than the ASEAN-4 economies.

[Tables 2 & 3 about here]

The trade structure of China and the ASEAN-4 economies are similar. Table 3 shows the distribution of exports by commodity sectors for China, developed Asia and the ASEAN-4 economies. The composition of exports for the developed Asian region have remained relatively unchanged during 1990 to 2005, exports were dominated by the durables sector. Both China and the ASEAN-4 economies observed a decline in the importance of the low-tech manufacturing sector in exports while that of the durables sector increased between 1990 and 2005.

2.3 Policy Debates

China’s rapid growth has given rise to concern among the Asian economies that China has been crowding out their manufacturing export industries (Lall and Albaladejo 2004; Eichengreen et al. 2007). China’s export share for the US market, for example, increased from 3.1% in 1990 to 15.0% in 2005, whereas the market shares of Japan and the NIEs have fallen. The concern over world trade and investment shares seems to be particularly acute for Asian economies that have lower income levels and a trade structures that are less complementary to that of China (Weiss and Gao 2003; Chia 2006; Ravenhill 2006; Coxhead 2007).

Lall and Albaladejo (2004) attempt to classify the exports of China’s neighbours into five levels of “threat”.2 According to their definition, most of the exports of the NIEs and the ASEAN-4 economies are under some form of threat from China’s exports. A more sophisticated approach is to employ the gravity model to measure the partial effect of China’s exports on other countries export patterns. Ahearne et al. (2003), Eichengreen et al. (2007), Greenaway et al (2008) and Athukorala (2009) examine the effects of China’s export growth on the exports of other Asian countries using this approach. Ahearne et al. (2003) find no significant effects but Eichengreen et al. (2007) and Greenaway et al (2008) find that China’s exports tend to “crowd out” the exports of Asian neighbours in third country markets. The crowding out is felt more strongly in the developing Asian economies than in the industrialised Asian economies. Eichengreen et al. (2007) also find that China’s growth has a positive effect on the exports high income Asian economies, that are significant exporters of capital goods, and a strong negative effect on low income Asian countries that are dependent on the production and exports of consumer goods. A more recent study by Athukorala (2010), however, finds little evidence to indicate that increases in China’s exports reduce the market shares of other Asian economies in third country markets. To the contrary, he finds that China’s exports to third country markets have had complimentary effects on Asian exports.

These mixed results are also reflected in simulation studies that have looked at the effects of China’s WTO accession on other regional Asian economies, for example Ianchovichina and Walmsley (2005) and Roland-Holst and Weiss (2005). There is some evidence from these studies that developed Asian countries stood to gain from China’s WTO accession with an expansion in their trade and an improvement in their terms of trade. But developing countries with an endowment structure similar to China, such as Southeast Asia, face keener competition in their exports and lower prices for their products. Roland-Holst and Weiss (2005), however, dismiss the apprehension of China’s growing world trade shares arguing that there is no convincing evidence that China’s trading partners are losing comparative advantage in higher value added or more skill-intensive activities.

As yet, there has been no analysis of the long run effects of China’s growth per se. China’s accession to the WTO, for example, is only a very small part of China’s overall reform process. Moreover, the changes in trade patterns and increased trade flows arising from China’s growth miracle, vastly exceed the changes implied by trade reforms alone. Though the gravity model literature recognises the impact of changes in countries GDP on trade flows, these studies only explain trade flows and fall short of telling us how changes in China’s growth affect incomes, consumption and wages in other countries. The weak theoretical foundations of these models mean that that it is difficult to make any inferences regarding economic policy responses from these results.

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