Competitive Effects

Although it is clear that there is considerable scope for complementary relations between PRC and both its high income and low income neighbors, with the former supplying PRC with high technology goods and the latter primary products and raw materials, it is also the case that currently there is still significant overlap in exports to third country markets. This is particularly the case with the ASEAN economies in the important US market, where PRC has increased its share of this market very substantially often at the expense of ASEAN exporters.

Loss of Market Share

The extent of ‘threats’ in this regard can be illustrated by taking the share of a country’s exports and dividing them into various categories depending on how the country’s share of the world market is changing relative to PRC. Lall and Albaladejo (2004) conduct this exercise for the main ASEAN economies, as well as the Republic of Korea and Taipei,China. They identify five categories:

Direct threat: where PRC gains world market share and the other country loses it;
Partial threat: where both gain, but PRC gains more;
No threat: where both gain world market share, but PRC’s exports grow more slowly;
Reverse threat: where the country gains world market share and PRC loses it;
Mutual withdrawal: where both the country and PRC lose world market share.

Taking the change over the 1990’s table 6 classifies selected countries’ exports in 2000 into these five categories.

This analysis reveals how competitiveness of different countries, as measured by changes in their world market share, compares with that of PRC. It can be seen that all of the economies covered have a majority of their exports in categories in which PRC has an increasing world market share relative to the economies concerned (ie the categories of direct and partial threat are 50% or more of total exports by value). For all but the Philippines and Thailand the direct threat category (where PRC is gaining market share and the economy concerned is losing it) accounts for at least 20% of exports and in the case of Malaysia nearly 30%. The countries with the technologically most sophisticated export structures are those where proportionately the direct threat category is largest, reflecting in part the very fast growth of PRC’s high technology exports from a small base over this period. In all cases the ‘reverse threat’ category, where the country is gaining relative to PRC is small, at less than 10% and in several instances less than 5%.

This analysis gives the broad perspective on overlapping patterns of trade but it is at a fairly aggregate product level and cannot reveal the detailed nuances of shifting specialization and competitiveness. A more disaggregate approach examines changes in market share at the 4 digit level of trade classification. Weiss and Gao (2003) consider changes in import share in the US and Japanese markets for Chinese and ASEAN exports over 1995-2000. Whilst ASEAN exports grew over this period for several of the important categories there was loss of market share, particularly in the US; the important exception is the case of Electrical machinery where market share continued to grow, but at a slower rate than for PRC (a ‘partial threat’ in the previous terminology). Their analysis shows that for all ASEAN economies loss of market share has been greatest in the most specialized and therefore the most established lines of activity. This pattern holds across the full spectrum of products from the labour-intensive to high technology end of the range.

Textiles and clothing perhaps provide the most dramatic example of major shift in export market share in favour of PRC in the immediate aftermath of the ending of the quota regime at the beginning of 2005. Within months the growth of Chinese exports of these goods to the US and EU had prompted the re-imposition of restrictions to ‘safeguard’ domestic producers from market disruption. The main regional casualties from the end of the export quota regime of the Agreement on Textiles and Clothing will be Viet Nam and Cambodia, although how their industries will react to the greatly enhanced competition from PRC is unclear.

Worsening Terms of Trade

As yet less is known about the competitive terms of trade impact of PRC’s rapid growth. The modelling exercises noted above throw little light on this aspect of regional economic relations. However, there is now a widespread view that rapid growth in PRC in the last few years has alongside various supply side factors (and in the case of oil political uncertainty) contributed to push up commodity prices. For example, ADB (2005: 15) points to strong demand from PRC as a factor keeping up world prices for oil, metals and minerals. Further short-term prices increase for metals (particularly steel) and minerals are projected on the grounds of continued demand from PRC. Neighbouring economies that are net importers of these commodities will lose from this effect, but those who are net exporters will gain. However disentangling the impact of PRC’s growth from other factors impacting on the market for these commodities is complex and thus attribution of a share of a price change to PRC alone is difficult. Furthermore whilst this is a negative side to the positive demand effects discussed above that have seen rising exports from the region to PRC it is unlikely that terms of trade effects on their own will be sufficiently large to offset the positive side to the growth of PRC’s domestic market.

Foreign Direct Investment Diversion

Loss of market share in the face of a large trading partner growing quickly from a low base is not in itself cause for concern in relation to competitiveness. What will be more significant is if the underlying trends of productivity growth and technical change in the neighbouring economies fall significantly below those in PRC. However for this to be judged a serious concern we need a credible mechanism through which it might occur. In discussions of a ‘competition effect’ from PRC, either explicitly or implicitly the key role is usually given to FDI inflows. The logic is that FDI provides access to technology, management and marketing skills as well as the potential to link local firms with international suppliers and buyers in global production networks. These links will help to raise productivity in local firms that become foreign owned. In addition, there may be external benefits, for example, in terms of technology spillovers or labour training, that accrue to firms that are not recipients of the initial FDI inflow, either competitors or input suppliers. Following this analysis, if the re-emergence of PRC diverts FDI that would have gone to other countries in the region to PRC this may undermine the competitiveness of these countries.

It is significant that of the modelling exercises for the region surveyed here the one that indicates significant negative effects for ASEAN countries as whole from trade liberalization in PRC (McKibbin and Woo 2003) does so on the assumptions that first there is FDI diversion to PRC and that second this loss of FDI has a significant negative impact on productivity growth in ASEAN.⁸ The scale of loss in ASEAN is reduced if these economies can compensate for the loss of technology spillovers from FDI inflows by higher investment in local innovation capacity and human capital development.

The argument of the authors is that FDI diversion may occur because prior to PRC’s WTO accession its access to world markets was uncertain (its Most Favoured Nation status in the US which was critical to its export success there had to be renewed annually with the approval of the US Congress). WTO membership gave PRC the same rights as other WTO members and the removal of uncertainty regarding access to markets of WTO countries can be seen as equivalent to a reduction in the risk premium required on investment in PRC. In other words, in high risk locations FDI will only be undertaken with a higher than normal expected return on investment. If risk is lowered, so will be the return that investors look for and hence the level of FDI to the now less risky location will increase. A reduction in risk when everything else remains the same can also be interpreted as a rise in the expected value of returns on an investment. This is a familiar argument put forward by those who see trade liberalization whether through WTO or regional free trade arrangements as key to improving the investment climate in an economy. It is supported by various survey evidence that indicates that PRC is frequently cited as the preferred alternative destination should foreign investors decide to move elsewhere. There is some evidence that this is particularly the view of Japanese firms.⁹

Despite the frequency with which such arguments are raised as yet there seems little grounds for real concern, for a number of reasons both conceptual and empirical. It may be that this view overstates the role of FDI in the process of economic growth, since technical change and productivity growth can be improved by domestically funded investment, indigenous innovation and where necessary the import of technology through licensing and other means that do not involve direct investment by foreign firms. It is well known that Japan, The Republic of Korea and Taipei,China developed without a heavy FDI presence. However it is also true that more recently the ASEAN economies have used FDI much more intensively than elsewhere and that in particular cases, such as Singapore, Malaysia and to some extent Thailand, it may have been the key driver of growth.¹⁰ These economies may therefore be most vulnerable to FDI diversion to PRC.

The diversion argument is critically dependent on the view that global (or at least FDI to the region) is fixed, so that its allocation is a zero-sum gain with an increased inflow to one country at the expense of another. The theory behind is dubious. It implies that both global savings are fixed and that FDI cannot increase as a share of global investment. In principle there seems no more reason why global savings should be fixed than why national savings in an individual economy should be fixed, although globally and nationally there will always be a ceiling on the increase in savings given by minimum necessary short-term consumption. If, as the FDI diversion argument implies, the return on FDI in PRC has increased due to a reduction in risk in response to trade reform this may be sufficient either to stimulate additional global savings or alternatively to shift the use of existing savings towards increased FDI at the expense of domestic investment. In either case the fixed FDI scenario is undermined.

From an empirical perspective also there are reasons to doubt the FDI diversion case. This is partly because it is well known that official Chinese statistics exaggerate the amount of genuine FDI coming to the country as a significant proportion (anywhere between 20% and 40% according to different estimates) of recorded FDI is actually recycled domestic funds that leave PRC and re-enter principally through Hong Kong, China, the Virgin Islands and other offshore financial centres, as there are still fiscal and legal advantages to for companies to be established as foreign invested, rather than nationally owned enterprises.¹¹

In addition however the diversion case has been questioned by more formal econometric evidence. There is now a well established literature that explains FDI inflows to individual countries in terms of variables relating to market size, labour market conditions, the quality of institutions and general economic policy. For example, in general, the expectation is that economies with characteristics like a fast growing domestic market, low labour costs, a well established legal system, low corporate tax rates an open policy on foreign trade, tend to attract higher FDI inflows than economies where these features are absent. These relations can be modelled in a regression framework, whilst adding a term to reflect FDI inflows to PRC to pick up the possible diversion effect. If diversion is actually occurring in an analysis explaining FDI across its neighbors we expect a significant negative coefficient on the variable reflecting FDI to PRC.

A recent analysis along these lines by Chantasasawat et al (2004) finds that after other effects are controlled for over the period 1985-2002 the level of FDI to PRC is positively rather than negatively associated with FDI inflows elsewhere in the region. Depending upon the specification a 10% rise in FDI to PRC is associated with higher FDI inflows elsewhere of between 1% and 3%. This runs directly contrary to the diversion argument and is explicable if one accepts that a regional process of FDI creation (rather than diversion) is at work so that through production networking by international firms FDI in PRC is linked with FDI elsewhere in the region through the transfer of parts and components between different branches of global networks organized by multinational firms.¹²

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1. Kazi Iqbal Sayeed
   (posted 03 September 2005 / 07:09:19 PM)
   
   Just define the way exactly you want to fetch results from and proceed it with 100 %. That's all that makes a pattern of success. Thank you.
   - Kazi I.S.