1. Chinas competitive threat toLatin America Sanjaya Lall (Oxford University) and John Weiss (ADBI) 2004 LAEB ANNUAL CONFERENCE THE EMERGENCE OF CHINA: CHALLENGES AND OPPORTUNITIES FOR LATIN AMERICA AND ASIABeijing, 3-4 December, 2004

2. Outline

Analytical background

• What is a competitive threat?

• Measuring the threat in third markets

Data analysis: China vs. LAC

• Global trends and regional performance

• Technological & product level overlap

• Relative market share changes

• Bilateral trade

Conclusions

3. Some LAC countries worry about the Chinese competitive threat The Economist (July 24, 2003), in The sucking sound from the East says Labour costs in China are about a quarter of their level in Mexico. The result: about 300 manufacturing plants have moved from Mexico to China in the past two years. TheInternational Herald Tribuneis more gloomy: In all, 500 of Mexicos 3,700 maquila plants have shut down since 2001, at a cost of 218,000 jobs. September 3, 2003 The Economist (July 24, 2003), in The sucking sound from the East says Labour costs in China are about a quarter of their level in Mexico. The result: about 300 manufacturing plants have moved from Mexico to China in the past two years. TheInternational Herald Tribuneis more gloomy: In all, 500 of Mexicos 3,700 maquila plants have shut down since 2001, at a cost of 218,000 jobs. September 3, 2003 4. Popular perception of a competitive threat Rapid export growth by China reduces exports and (if they are open to imports) domestic production by other countries This leads to losses in incomes, jobs andgrowth Rapid growth by China can also reduceaccess to, or raise cost of, resources like capital (esp. FDI) and natural resources 5. Economists dislike this perception: trade isnota zero-sum game

Countries do not compete like firmswhere gain for one is loss for another

Comparative advantage theory:

• Resources move between activities: loss of one is offset by the rise of another, with greater welfare as a result

• Entry of low wage competitor induces others to move up skill/technology scale: China accelerates upgrading elsewhere

Thus, to Krugman, competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous.(1994) 6. But this simple trade theory is based on strong assumptions

It assumes efficient & competitive markets, with perfect information, identical production functions, no scale economies, no learning, fully mobile factors within economies, full employment, no transport costs, etc.

It implies thepattern of specialization does not matter.With no externalities, cumulative learning or agglomeration, all activities are equally beneficial. Structural change is automatic and instantaneous in response to changing factor prices

7. If these assumptions are relaxed, implications are different

Withscale economies, cumulative learning, technology gaps, unemployment, risk & uncertainty, externalities, information failures, immobile factors, and so on:

• While there are certainly potential benefits from specialization & trade can be non-zero sum game

• Therealisationof benefits from trade depends on the ability of economy to create competitive capabilities and exploit activities that offer the best opportunities for growth, technology & spillovers

• The processmay not be automatic, instantaneous, costless or complete : there are cumulative, path-dependent effects (leading to multiple equilibria)

• Strategy is necessary, given widespread market failures, to create capabilities and move from low to high equilibrium. Success breeds success

8. In this (more realistic) world

Entry of a large, efficient low-wage competitor like Chinacan involve significant adjustment costs :

• Quantitative lossof income, employment, exports

• Qualitative declineof production/export structure into slower growing, technologically inferior activities

The outcome depends on:

• Thesimilarity of export structuresin competing countries (extent ofcompetitive overlap )

• Nature of export structuresin both countries (nature oftechnological specialisation )

• Thespeed and extent of adjustmentin each country ( ability to upgradewithin and across competing activities, move into fast growing segments, reach new markets and so on)

9. If there is a possible competitive threat, how can we measure it?

Computable general equilibrium model (needs strong simplifying assumptions)

Detailed case studies of each industry (rich but limited in coverage)

Trade data analysis to gaugepotential for competition&competitive performance(needs careful interpretation)

This study uses last method: 1990-2002 trade data on market shares in world/US and bilateral trade by technologycategories

10. Five possible combinations of relative market share changes E.Mutual withdrawal: no threat Both parties lose shares in export markets to other competitors.D.Direct threat China gains market share and other country loses, this may indicate causal connection unless other country was losing market shares in the absence of Chinese entry.Falling C.Reverse threat No competitive threat from China. The threat is the reverse, from the other country to China.A.No threat Both China and other country have rising market shares and latter is gaining more than ChinaB.Partial threat Both are gaining market share but China is gaining faster than other countryRising Other countrys export market shares Falling Rising Chinese export market shares Matrix of competitive interactions between China and other country in export markets 11. Technological structure

Primary products

Manufactured products

• RB ( Resource based):e.g. food, wood & forestry products, processed minerals, petroleum products

• LT(Low technology):e.g. textiles, clothing, footwear, toys, sports goods, simple metal products

• MT(Medium technology):e.g. automotive products, consumer durables (incl. simple electronics), most industrial machinery, chemicals, steel

• HT(High technology):Advanced ICT andelectricals, pharmaceuticals, aerospace, precision instruments

12. Shares of world exports by technology (%) 13. Shares of developing countries in world exports (1990-2002) 14. 50 most dynamic exports in the world, 1990-2002 15. LACs manufacturing value added record(world share, 1980-2000) 16. World market shares of LAC and East Asian exports (1990-2002) 17. Changes in world market shares, 1990-2002 18. World market share performance in LAC and EA

EA 8 and China perform impressively across most sectors, with increasing specialization in technology-based products.

China outperforms rest of EA in most categories, suggesting a growing competitive threat within the region, particularly in LT products.

But in HT there is growing complementarity within EA.

LAC without Mexico does poorly, raising its world market share in all manufactured exports by less than 0.2 percentage points; the weakest performance is by the two giant economies, Argentina and Brazil.

The largest world market shares held by LAC-M are in primary and resource-based products and MT process industries

Mexico behaves like an EA Tiger, with significant gains across the spectrum (primary products excepted).

19. Export dynamism: % dynamic products in manufactured exports 20. Technological similarity of export structures, China and LAC 21. Structural stability of exports(181 three-digit manufactured products) 22. Correlation of Chinese and LAC export structures, 1990 & 2000 23. Measuring the competitive threat by relative WMS changes 100.0% 100.0% 325,978.5 117,403.4 Total14.5% 32.0% 47,253.8 37,538.4 Mutual Withdrawal 14.6% 12.1% 47,648.8 14,229.0 China under Threat 11.4% 30.5% 37,142.1 35,809.9 Direct Threat 31.5% 10.8% 102,644.9 12,661.4 No Threat 28.0% 14.6% 91,288.9 17,164.8 Partial Threat 2002 1990 2002 1990 Distribution (%) Values ($ m.) Competitive threat from China for LAC 18 24. Chinese competitive threat by LACcountry in 2000(% of manufactured exports) 25. 26. Some implications

Most threatened LAC countries are C Rica, El Salvador, Chile.

In Chile it reflects the large share of its exports in copper, where China gains WMS while Chile loses (direct threat). Its fish exports are partially threatened because China gains more WMS

In C Rica the Chinese threat is largelypartial: China gains greater WMS in electronics, instruments, apparel and processed foods.

In El Salvador, direct and partial threat in textiles and clothing

Mexico faces the greatestpotentialthreat from China, but because of its very rapid gains in WMS it has notactuallyfaced a significant threat over 1990-2002.

Brazil faces a larger competitive threat (30% direct and 31% partial threat in 2002) but the direct threat declines from 60% in 1990. The largest threatened exports by Brazil are in the partial threat category: telecoms and footwear. But its largest single export, aircraft, faces no threat from China.

EA faces much greater direct and partial threat than LAC.The unweighted average for EA 8 is75.2%,much higher than LACs total of39%.

However, these results have to be interpreted with care (e.g. Chinese threat to Chile in copper). And past is not good guide to future (e.g. threat to Mexico)

27. Bilateral trade patterns 28. Technology breakdown of bilateral trade between LAC & China86.33% 89.22% 90.08% 60.45% 23.85% 17.64% 21.64% 33.85% 'Pure' manufactures13.67% 10.78% 9.92% 39.55% 76.15% 82.36% 78.36% 66.15% Primary + RB 2.66% 2.37% 2.68% 2.42% 0.90% 1.53% 0.58% 0.13% Other HT 11.75% 10.11% 3.20% 0.41% 5.69% 5.04% 0.17% 0.11% Electronics 14.41% 12.48% 5.88% 2.83% 6.58% 6.57% 0.75% 0.24% High technology 16.51% 18.50% 21.40% 20.10% 2.10% 1.22% 2.75% 0.48% Engineering 7.28% 7.48% 6.25% 3.97% 4.25% 3.36% 5.10% 21.93% Process 2.64% 2.44% 3.30% 3.17% 2.65% 0.51% 2.90% 0.91% Automotive 26.43% 28.42% 30.94% 27.24% 9.00% 5.09% 10.75% 23.31% Medium technology 12.67% 16.23% 18.36% 10.88% 2.83% 0.80% 3.99% 8.59% Other LT 32.82% 32.09% 34.90% 19.49% 5.44% 5.18% 6.15% 1.71% Fashion cluster 45.49% 48.32% 53.26% 30.37% 8.27% 5.98% 10.15% 10.30% Low technology 10.11% 8.82% 7.84% 10.04% 20.37% 20.31% 16.52% 8.87% Mineral-based 0.39% 0.45% 0.42% 0.48% 13.26% 8.50% 37.14% 22.97% Agro-based 10.50% 9.27% 8.26% 10.52% 33.63% 28.81% 53.66% 31.84% Resource based 96.83% 98.49% 98.34% 70.97% 57.48% 46.45% 75.31% 65.68% Manufactured 3.17% 1.51% 1.66% 29.03% 42.52% 53.55% 24.69% 34.32% Primary Products 2002 2000 1995 1990 2002 2000 1995 1990 China's exports to LAC 18LAC 18 exports to China Distribution of bilateral exports between LAC and China (% of total exports) 29. Bilateral trade of big three 30. Some findings on the big three

Argentinais overwhelmingly an exporter of primary products, with its share of RB declining significantly. It has no noticeable exports of HT products to China. Its imports from China are predominantly LT, but with large and growing shares of MT and HT products. Argentina runs a trade surplus with China, $763 m. in 2002, most of it in primary products, with a smaller surplus in agro-based RB products.

Brazilalso raises its exports of primary products but maintains a very large share for RB. It has a small, growing share for HT but a sharply falling one for MT. Chinas exports to Brazil span all categories, with all manufactured categories growing at the expense of primary products. The largest category by far is HT products. Brazil runs a trade surplus with China, $823 m., mostly in primary products and RB manufactures (both mineral and agro-based products). Its largest deficit is in HT products, followed by MT engineering products.

Mexicoexports few primary or resource-based products to China, and makes a massive shift from MT to HT products. Chinese exports to Mexicohave HT as the largest category. This suggests growing integration of electronics production in the 2 economies, similar to EA.

Thevalues of Mexican HT exports to China arefar smaller than Chinese HT exports to Mexico. In 2002, the figures are $320 million and $2.1 billion, respectively. Overall, Mexico runs a huge $5.7 billion trade deficit with China. It also runs a deficit with China in every single category of trade, including primary products

31. To sum up on bilateral trade

There is arapid structural transformation of LACs trade pattern with Chinain the course of a relatively few years.

This transformation is undesirable in technological terms.

To the extent that this influences LACs future competitiveness patterns in bilateral trade or exports to third countries, it can be damaging

32. But bilateral trade so far is very small 5.9% 2.2% 1.8% 6,941 7,500 5,787 Japan 24.2% 11.3% 11.7% 28,707 38,433 38,481 EEC153.7% 2.1% 2.6% 4,436 7,277 8,676 East Asia ( excl. China & Japan )12.8% 14.7% 13.2% 15,216 49,852 43,299 LAC total39.1% 59.5% 58.7% 46,305 202,024 192,619 United States 0.7% 1.1% 1.9% 864 3,691 6,224 China 100.0% 100.0% 100.0% 118,428 339,671 328,301 World 1990 2000 2002 1990 2000 2002 Distribution (%) Export values (US$ million)LAC18's export to9.6% 15.3% 14.8% 5,932 38,230 48,256 EEC1514.5% 16.7% 14.9% 9,011 41,654 48,434 Japan 52.6% 31.7% 32.3% 32,670 79,051 105,242 East Asia ( excl. China & Japan )8.3% 20.9% 21.5% 5,175 52,156 70,050 United States 1.1% 2.2% 2.4% 661 5,594 7,742 All LAC100.0% 100.0% 100.0% 62,091 249,203 325,596 World 1990 2000 2002 1990 2000 2002 Distribution (%) Export values (US$ million)China's export toExports destinations of China and LAC18 33. Conclusions

Some LAC countries are benefiting from growing imports of primary and RB products by China

China remains a relatively small market for LAC (but China overtook Japan as import supplier in 2003).

The trade structure of most LAC is more complementary than competitive with that of China

The main exceptions are Mexico and Costa Rica, but in HT they may benefit from intra-industry trade with China within MNC production networks

WMS analysis suggests that all threatened exports (direct + partial) in LAC are well below comparable figure for EA. Goods in the more serious direct threat category are only 11% of exports

This suggests low competitive impact of China

34. But there are caveats

Past is not good guide to future, in particular for Mexico

LAC is suffering massive downgrading of comparative advantage in bilateral trade not a good portent for future

China may reinforce LAC poor export performance in third markets, pre-empting dynamic segments. Different export structures may be sign of LAC weakness if it means specialisation in slow-growing and technologically unrewarding products