Changes in Competitiveness in Third Markets

PRC's dramatic export expansion is widely recognized and its total share of world trade has risen by 4.5 percentage points 1990-2002 (from 1.9% to 6.4%). Like the NIEs before it, export growth has been a critical driving force for industrial development in PRC, since the opening of the economy to foreign trade in the early 1990's.

However the role of export demand in PRC in the 1990's appears greater than even in the first and second tier NIEs at earlier stages of their development. This is illustrated by a simple demand decomposition analysis that breaks down the increase in output over a given period into growth of domestic demand, holding the import share in total supply constant, growth of exports and the import substitution effect.² Table 3 [PDF 49kb | 1 page] reports the result of this decomposition when production data are grouped by the previous technology classifications. For PRC the dominant role of export expansion is clear and its proportionate share generally exceeds that of the NIEs, for all but resource-based manufactured products from the second tier group who are typically net exporters of these products. A figure of 203% for medium-high technology exports 1995-99 means that the increase of exports over this period is a little more than double output expansion, because of the strong negative import substitution effect, as imports took a rising share of the domestic market for these goods in PRC.

This strong export growth has seen PRC's share of world trade rise by nearly five percentage points (1990-2002) and has undoubtedly eroded the position of many regional exporters in third country markets, such as the US and Japan. The most direct way of judging this competitive impact is to examine changes in market share for PRC and regional exporting economies. Lall and Albaladejo (2004) use a simple, but helpful, classification to organize the data. For any given market (or the world economy as a whole) five groupings are possible. Using the terminology of the authors these are

• partial threat: where PRC and the economy concerned gain market share, but PRC gains more;
• no threat: where both PRC and the other economy both gain market share, but with PRC growing more slowly;
• direct threat: where PRC gains market share and the other economy loses it;
• PRC under threat (or reverse threat) where this time PRC loses market share and the other economy gains;
• mutual withdrawal: where both PRC and the other economy lose market share.

Data on competition in the world market between PRC and the main NIEs is illustrated in Table 4 [PDF 54kb | 1 page] using these groupings. For each economy its total exports for 2000 are decomposed into these five categories.

From this data it appears that all economies have a majority of their exports (or very close to this in the case of the Philippines) under some form of ‘threat’ as defined here. Countries in the most direct competition by this indicator are Malaysia, Thailand and Indonesia, which tend to have the least sophisticated export structures of the group. The reverse threat, where countries are gaining relative to PRC is modest in all cases. The countries with the more sophisticated trade structures, with a high share of high technology exports, are those where the direct threat (where the country concerned is losing market share whilst PRC is gaining it) is greatest, although no causal inference can be drawn from this relative change in market shares. In fact, data in the appendix to Lall and Albaladejo (2004) indicate that only in Malaysia do a majority (77%) of goods under direct threat belong to the high technology category; elsewhere the majority of directly threatened goods come from low and medium technology and resource-based categories.

A more disaggregate examination of competition in third country markets is provided by Weiss and Gao (2003). To establish the degree of loss in market share to PRC exports, for a given country export growth for any commodity to a particular market (such as the US or Japan) can be decomposed into a share effect (assuming the country keeps a constant share of the market) and a competitiveness effect (allowing for its changing market share). If a comparator economy (in this case PRC) is introduced competitiveness can in turn be decomposed into change in the country’s market share relative PRC and the change in PRC’s market share relative to the rest of the world.³

This approach is applied to the exports of five ASEAN countries (Singapore, Malaysia, Thailand, Indonesia and the Philippines, henceforth the ASEAN5) to the US and Japan over the period 1995-2000. To illustrate the magnitude of the loss of exports in the US due to the loss of market share relative to PRC, Table 5 [PDF 49kb | 1 page] decomposes the change in exports 1995-2000 for the five two-digit SITC categories for which for the ASEAN 5 the absolute export loss relative to PRC in the US is greatest. Change in exports in each category is set at 100, so the competitiveness effect viz –a- viz PRC is a proportion of this. Columns 2 and 3 always sum to 100 as they reflect the two components of total change in exports. Competitiveness relative to PRC is one element of total competitiveness and when the third column has a negative sign the country is losing market share to PRC.

In all of these categories there has been a strong effect from the loss of market share relative to PRC and in all but SITC 77 there is a 'direct threat' in terminology used above; for SITC the threat is 'partial.' What is measured is the loss in exports due to the fact that a country’s market share has not kept pace with that of PRC, as a proportion of actual export increase. In some categories the absolute value of the change in relative market share is several times the value of the actual export increase. For example, for office machines (SITC 75) the loss of exports due to the falling market share relative to PRC is roughly double the actual export increase achieved, whilst for telecommunications (SITC 76) it is nearly six times the actual increase. Nonetheless in all these categories, this strong loss of market share was still accompanied by rising exports from ASEAN.

The analysis of changing competitiveness relative to PRC can be extended by focusing on trends at the four-digit SITC level and explaining these in a regression framework, which links product characteristics with changing market share relative to PRC. Here the dependent variable is the value of lost exports due to change in market share relative to PRC, scaled by division by total exports in 1995 in the same category.⁴ Weiss and Gao (2003) test whether loss of competitiveness defined in this way is systematically related to the characteristics of trade categories, whether in terms of technological characteristics, or patterns of specialization. A simple model that makes competitiveness a function of the characteristics of products, as reflected in a measure of specialization, general shifts in competitiveness and changes in tastes as a demand factor, is applied. They use a measure of specialization the relative revealed comparative advantage measure (RCA) at the start of a period to explain changing competitiveness over the period.⁵ This is on the grounds that the initial RCA can be taken as a proxy for the relative output level and factor intensity of different products.

The analysis across 690 four-digit SITC categories is first conducted for the ASEAN 5 as a group and then for each economy individually. It is carried out separately for the US and for the Japanese markets. The broad results strongly support the view that not only have the main ASEAN economies have been exposed to increasing competition in both the US and Japanese markets and that their reduced competitiveness relative to PRC appears to be related systematically to particular product categories, with losses greater in the areas within these categories, where the ASEAN economies are most highly specialized relative to PRC.

Significantly, there is evidence of increased competition from PRC at both the relatively labor-intensive and the relatively high technology end of the product scale, although within a given trade category technological sophistication appears generally to offer some protection for ASEAN exporters. This latter effect is found in different products categories for different countries and appears to be most uniform for engineering products in the US. The only product category for which there is no evidence of systematic loss of competitiveness is automobile products, which is both small in value and for which there are the smallest number of observations. In no product category is there any evidence of systematic gains relative to PRC, although for a few countries and categories there is a significant cross-over rate for the RCA variable, which implies that at lower levels of specialization there is a gain of competitiveness relative to PRC, whilst there are losses at higher levels.

For the large categories of electronics and electricals and engineering (which combined are two-thirds of ASEAN exports in the US and 40% in Japan) there is a consistent pattern of loss of competitiveness, which is stronger in more specialized products, and which holds for all countries in both markets. For the other important categories of primary products, resource-based manufactures and textiles and garments, all countries show significant losses in either the US or Japan and in a majority of cases for these categories countries show a significant loss in both markets. Again this is always significantly related to the degree of specialization.⁶ It must be stressed that loss of competitiveness as defined here refers to loss of market share relative to PRC. This does not necessarily convert into an absolute decline in exports. Absolute export declines for ASEAN are found for primary products and engineering in the US and for primary products, resource-based manufactures, and textiles, garments and footwear in Japan. Hence much of the erosion of market share is in categories whose sales from ASEAN are continuing to expand, principally the very large category of electronics and electrical goods. Here losses of market share are in the product lines where ASEAN is most specialized, eroding established market positions.

The conclusion is that neighbors in the region have been exposed to strong direct competition from PRC's exports and there has been some trade diversion in the sense of relative loss of market share as a consequence. Before discussing evidence on the net overall impact of closer trade integration we turn to the FDI diversion argument.

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