Demand Effects

The strong growth of PRC’s economy is now well established with official statistics giving an average annual growth of around 8% over the last 15 years. In addition the Chinese economy has become considerably more open to foreign trade since the beginning of trade policy reform in the mid-1990’s culminating in WTO accession in 2001.² This has meant a strong growth in regional exports to PRC and a growing trade deficit between PRC and its neighbors as its imports from them rise more than its exports to them. Rising exports to PRC have provided a major boost to demand in its neighbors and internationally there is a close empirical relationship between growth of exports and growth of national income.

Tables 1 [ PDF 69.6KB | 1 page ] and 2 [ PDF 67.1KB | 1 page ] summarize the trade balance and export and import growth for PRC, the US (its largest export market) and its three main partners in the region, Japan, the Republic of Korea and Singapore. Trade grew very quickly in the first half of the 1990s as the economy opened up to foreign trade. Since then a clear pattern has emerged of a rising trade surplus with the US and a rising deficit with the neighbouring countries. In the recent period 1995-2003 PRC’s imports from Japan grew by 17% annually, from Singapore by 19% annually and from the Republic of Korea by as much as 40% annually. These are historically very high growth rates, which show little sign of slackening as yet.

Disentangling the effect of rising incomes in PRC and the process of regional trade liberalization on imports requires a form of economic modelling and there have been many such exercises. The standard approach is now to apply a form of ‘computable general equilibrium model’. Typically such models cover a range of countries and sectors and are based on so-called market-clearing assumptions (so that flexible prices equate demand and supply in all markets and macro imbalances are assumed away).³ Critics argue that such models, which are based on very restrictive assumptions, often omit some of the key dynamic considerations noted earlier. However although their results and the projections derived from them should be treated as suggestive rather than definitive, they do have the advantage of being able to isolate the possible impact of a particular policy change. A baseline version of the model reflecting the status quo can be run and compared with an alternative version where a key policy has changed, thus allowing a counterfactual comparison of ‘with and without’ policy scenarios.

Effects of Trade Liberalization

In this spirit the effects of PRC’s WTO entry on the region were examined in a number of models and more recently the impacts of different free trade area configurations, such as PRC joining ASEAN, and a wider East Asian Free Trade Area (ASEAN plus three) have also been assessed. The broad conclusion is that the rising trade surpluses of its neighbors with PRC observed at present will grow significantly in the future as trade is liberalized and rising trade will in turn create rising income. To illustrate Table 3 [ PDF 50.7KB | 1 page ] shows the projected trade balances with PRC in 2020 and the impact of WTO accession found in one such study. It indicates a strong long-term trade surplus for the main regional economies in their trade with PRC, whilst the US and EU have strong trade deficits.

PRC’s trade reform accompanying its accession to WTO accounts for a significant proportion of this surplus for Japan, the Republic of Korea and Taipei,China. Table 4 [ PDF 51.4KB | 1 page ] shows the estimated change in income for various countries due respectively to PRC’s WTO accession, its joining ASEAN and the wider ASEAN plus 3 (PRC, Japan and the Republic of Korea).

Table 4 [ PDF 51.4KB | 1 page ] shows estimates of changes in income in 2015 as a result of various trade policy changes relative to what income would be in 2015 under the scenario of PRC’s WTO accession but no further policy reform. The first option is where PRC unilaterally removes all barriers to trade remaining as part of the package agreed with WTO. The second scenario is where PRC joins ASEAN and the third is where Japan and the Republic of Korea also join. As is expected in this type of modelling exercise the more countries that join a free trade area the greater are the benefits for those included. Hence the ASEAN plus3 scenario gives the greatest benefit to all regional economies apart from Taipei,China, which is assumed to be excluded.

There are other estimates, which give the same broad conclusion but different numerical results. For example, Urata and Kiyota (2003) find the East Asian Free Trade Area brings smaller benefits to Japan, the Republic of Korea and PRC, compared with the figures in Table 4 [ PDF 51.4KB | 1 page ], but much larger benefits to some ASEAN countries. For example gains to Thailand are nearly 16% of income in the baseline, and those to Viet Nam are 8%. However the baseline used and a range of other assumptions vary between the studies.

The precise results of such exercises need top be treated with caution but they serve to underline the positive interpretation conventional trade theory puts on the combined impact of PRC’s growth and trade liberalization.

Download this Discussion Paper [ PDF 152.4KB| 16 pages ].

Comment(s)

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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.