Endnotes

¹ It should be noted that these are not the classic 'Viner definitions' from the theory of customs unions, since the latter assumes a common external tariff that can divert trade from low cost suppliers outside to high cost suppliers within the union. Trade diversion in customs union theory thus becomes a negative factor for an economy and is a cost to be offset against the gains from trade creation.

² This is based on the identity δP = d₁*δS + δX + (d₂ – d₁)*S₂ , where δP is change in output between period 1 and 2, δS is change in total supply (imports plus domestic production), δX is change in exports, d1 and d2 are the share of domestic production in total supply in periods 1 and 2 respectively, and S2 is total supply in period 2. If we divide the three terms by δP then the ratio (d₁*δS)/δP gives the share of domestic demand in total growth, (δX/δP) gives the share of export expansion and ((d₂ – d₁)*S₂ )/δP gives the effect of import substitution. A negative sign on the last term means that imports are rising as a share of domestic supply and there is negative import substitution. A negative sign on the first term means falling domestic consumption.

³ δX_ij = δQi.s_ij + s_ij.Q_i* ( δs_ij/s_ij - δs_ik/s_ik) + δs_ik/s_ik. s_ij.Q_i where X is exports and δ is the absolute change in, Q_i is total imports of commodity i in the market concerned (at the end of the period), s_ij is the initial market share of country j in imports of i and with competitor country k, s_ik is k’s market share for product i. In this expression the first term gives the share effect with market share constant, the second term gives a measure of competitiveness for country i relative to the comparator and the third term gives the competitiveness of the comparator.

⁴ Using the notation in footnote 3 competitiveness (COMP) is measured as COMP_ij = [ s_ij.Q_i* ( δs_ij/s_ij - δs_ik/s_ik) ] / X_ij where X_ij is initial exports of i from j to the market concerned. Where there is a gain in market share relative to PRC, COMP will be positive and where there is a loss it will be negative.

⁵ Relative revealed comparative advantage is defined as RCA = (X_ij /X_tj)/(X_ik/X_kj) where X refers to export value, t stands for total exports and k is the comparator economy. In principle the RCA may be related to changes in competitiveness, as defined here, either through shifts in relative factor prices or to a simple 'catching up' effect. As total trade covers a wide variety of product types to impose some pattern on the data dummies are applied for nine product categories that are sub-divisions of the Lall technology classification noted above. The use of dummy variables reflecting these nine categories implies that there is broad homogeneity within each in terms of the response of different products to the explanatory variables.

⁶ Weiss and Gao (2003) hypothesize that the link between greater specialization in ASEAN relative to PRC and loss of market share is due to shifts in the relative capital rental-wage ratios that are favorable to PRC and hence unfavorable to ASEAN. Increased domestic savings or rising FDI inflows to PRC, which increase the supply of capital and lower the capital rental-wage ratio, are simple candidates for a general explanation. Naturally, more detailed industry-specific effects as well as general catch-up trends, noted earlier, may also be at work, but the analysis does not capture these.

⁷ As there will be simultaneity in the relationship with feedback between FDI to the various countries and PRC the model is estimated as a simultaneous equation system where AFDI_it = α + âPRC_FDI_t + λx_it + µ_i + e_it (1) PRC_FDI_t = γ + σ AFDI_it + ñz_t + v + w_t (2) Here subscripts i and t refer to country i at time t; x_it is the set of determinants of FDI to the Asian economies covered, so for country i its FDI inflow is AFDI_i; z_t is the set of determinants for FDI to PRC (PRC_FDI); u_i and v are country specific terms, and e_i and w are error terms.

⁸ See ADB (2004); these figures include Hong Kong, China as a separate export source and are therefore slightly misleading.

⁹ The model is aggregated to cover 16 countries and 18 sectors. Production sectors are based on constant returns CES production functions. Macro growth is imposed exogenously from consensus forecasts and there are fixed government and balance of payments positions. The latter is set by exogenously given capital flows and is maintained by a change in the real exchange rate, which is endogenous. Productivity growth is determined partly by the imposed macro growth rate and partly endogenously, as it is assumed to be positively related to the export-output ratio by an imposed elasticity; for details see Roland-Holst (2002).

¹⁰ Modelers often respond, however, that by omitting dynamic effects relating to higher investment or capital flows these models tend to understate not overstate the gains from trade reform; see for example Lee et al (2004) footnote 17.

¹¹ This broad result is found in a number similar studies; see for example Ianchovichina and Martin (2003)

¹² For sector i intra-industry competitiveness (IIC) is IICi = (Xi – Mi)/Xi + Mi, where X and M are exports and imports respectively. This figure can be given for total trade or for bilateral trade between countries x and y, so that for sector i in trade between x and y we have IICixy = (Xi – Mi)xy/(Xi + Mi)xy.

¹³ The adjusted figure is ELT_ixy = (λ_ix X_i – λ_iy M_i)xy/(λ_ix X_i + λ_iy M_i)xy, where λ_ix is the skilled to unskilled labor ratio in value-added for commodity i in country x and λ_iy is the same for country y. Sectors are classed as import dependent if ELT_i is between –1 and –0.33, trade neutral if it is between -0.33 and 0.33, and export-oriented if it is between 0.33 and 1; see Roland-Holst and Weiss (2004).

¹⁴ One difference is the inclusion of 'trade costs' as wedge between cif and fob prices. Policy reform scenarios assume not just a removal of tariffs, but also a lowering of trade cost, in this case by 2.5%. Also in the more recent work the baseline scenario is not very explicit; it appears to be the equivalent of PRC WTO accession in the earlier papers.

¹⁵ How rapidly private sector investors emerge to take up opportunities offered by these developments on the trade front will have important implications for the actual pace and pattern of adjustment; see Kanamori and Zhao (2004) for a discussion of the evolution of the private sector in PRC. Kanamori (2004) discusses fiscal constraints.

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