Unique Features of PRC-Japan-US Trade

Commercial relations with the PRC are important both to the US and to Japan. By 2007, the PRC was the third most important export destination and the top source of imports for the US. Similarly, the PRC was the second most important export destination and the top source of imports for Japan. Table 1 [ PDF 13.2KB | 1 page ] provides bilateral import and export values and growth rates over the 1996–2007 period. In current US dollars, the value of the PRC's exports to all destinations grew at an average annual rate of 20.9%. Exports to the US grew somewhat faster, at an average annual rate of 21.7%, while exports to Japan grew more slowly, at an average annual rate of 11.5%. In comparison to the growth of exports to the European Union (EU)⁴ (24.5%) and the Association of Southeast Asian Nations (ASEAN) countries (22.3%), the growth of PRC exports to Japan is relatively low.

The PRC's imports from all sources also grew at a rapid rate over the period, averaging growth in current US dollars of 18.3%. Imports from both the US and Japan grew more slowly, averaging 14.1% and 14.9%, respectively, only slightly below the growth of imports from the EU. Over the same period, PRC imports from ASEAN grew much more rapidly, at an annual average of 23.3%.

The relatively rapid growth of net exports to the US is reflected in the US trade deficit with the PRC, which grew at an average annual rate of 28.1% from 1996–2007. Over the same period, Japan saw rapid growth in its trade surplus with the PRC, which changed from a small deficit in 1996 to a US$31.9 billion surplus in 2007. As with Japan, the PRC's trade with ASEAN grew rapidly, with ASEAN's small trade deficit in 1996 shifting to a surplus of US$14.2 billion by 2007.

Japan and the US have been extremely important to the PRC's trade growth over the past decade. As shown in Figure 1a [ PDF 16KB | 1 page ], by 2007, the US was the most important individual-country market for PRC exports, moving up from the third largest destination in 1996. Hong Kong, China received the second largest share of exports by value, although some of these goods were reexported. ⁵ Japan received the third largest share, importing more than twice as much as the next largest importer of PRC goods, the Republic of Korea (hereafter Korea). There is some evidence of an East Asian supplier network even in these aggregate trade statistics. Japan; Korea; and Taipei,China are the PRC's largest import sources, followed by the US (Figure 1b [ PDF 15.9KB | 1 page ]). While these four countries were also the top four sources in 1996, the growth of imports from the three East Asian countries as a whole has been notably stronger than import growth from the US has been.

Processing trade, the import of goods for assembly and transformation in the PRC and their subsequent re-exporting, lies behind much of the growth in the PRC's imports and exports.⁶ Processing trade comprises a large share of total bilateral trade with the PRC for both developed partners. In 2007, 62.5% of the PRC's exports to the US and 56.6% of those to Japan were processing exports.

Figure 2a [ PDF 15.6KB | 1 page ] and Figure 2b [ PDF 14.8KB | 1 page ] illustrate the trend in processing and non-processing trade between the PRC and the US, and the PRC and Japan, respectively. Figure 2a shows the dramatic take-off of USPRC trade volumes in 2001, particularly with respect to processing trade. While there is a similar rise in the PRC's exports to Japan, the increase is much smaller. There are several factors that account for this dramatic increase in 2001. With the PRC's accession to the World Trade Organization (WTO), there was a sharp increase in FDI inflows from both the US and Japan. Between 2001 and 2002 alone, the flow of US and Japanese FDI projects grew by 29% and 35%, respectively.⁷

As will be shown below, much of the increase in the PRC's processing exports shown in Figure 2a is due to rapid growth in exports from FIEs. The PRC's WTO accession also meant the partial phase-out of textile and apparel restraints under the Agreement on Textiles and Clothing. This may account for part of the differential in growth of non-processing exports to the US relative to those to Japan, as Japan had no quantity restraints on these products.

Turning to Figure 2b, we see that the rise in PRC processing exports to the US was not matched by a rise in processing imports from the US. Japan, rather than the US, experienced a dramatic increase in its processing exports to the PRC from 2001 onward. The rapid growth in non-processing imports from both countries is likely due in part to significant reductions in consumer goods prices that resulted from the PRC's accession to the WTO (Ianchovichina and Martin 2004). As discussed below, a large part of the growth in processing imports is again due to FIEs. But the differential growth of processing imports from Japan relative to the US suggests again that Japan may be a key source of inputs for the PRC in the global supply chain.

Figure 3a [ PDF 33.7KB | 1 page ] and Figure 3b [ PDF 33.7KB | 1 page ] provide the PRC's top 10 exports to and imports from the US and Japan, respectively. On first glance, the top 10 exports appear to be consistent with factor endowment similarities between the US and Japan: six of the top 10 exports and six of the top 10 imports are shared by the two bilateral flows. Particularly striking, however, is the importance of two-way trade between the PRC and the US, and the PRC and Japan, particularly in two product categories. In 2007, Harmonized System (HS) 85 (electrical machinery, sound equipment, and television equipment) and HS 84 (nuclear reactors, boilers, machinery, and parts thereof) comprised 46.4% and 35.7% of the PRC's exports to the US and Japan, respectively. These two categories also accounted for 33.5% and 50.2% of the PRC's imports from the US and Japan, respectively. Deeper exploration into these categories reveals that trade in HS 84 is predominately trade in computers and computer parts, while HS 85 trade consists primarily of mobile phones and television parts. Thus, the bilateral commercial relations are dominated by two-way trade in a narrow set of products.

The Finger-Kreinen (1979) export similarity index is a method for observing changes in the similarity of exports from any two countries to a third country. In Table 2 [ PDF 11.6KB | 1 page ], we present this index for US and Japanese exports to the PRC, as well as for other country pairs. As seen in the row labeled “Japan/US,” the similarity of exports from these two countries to the PRC increased between 1996 and 2007, with the index value rising from 0.36 to 0.42. Thus, by 2007, 42% of exports from the US to the PRC were “matched” by similar exports from Japan to the PRC. Because these calculations have been made using disaggregated (HS8) data, they confirm a high degree of overlap in the compositions of exports from these two partners to the PRC. Looking at other rows of Table 2, however, provides some perspective on these flows. US exports to the PRC are more similar to those of the EU (with 48% of flows matched), a finding suggestive of a factor-proportions view of trade patterns. Contrary to that perspective, however, Japanese exports to the PRC are significantly more similar to those of the Asian Tigers (with 52% of flows matched) than to those of the US. Further evidence of an East Asian supply network is the second last row of Table 2, which shows a dramatic increase in the similarity between Japan and ASEAN exports to the PRC during this period.

Trade mediated by FIEs operating in the PRC, many in special economic zones, is significant for both Japan and the US. Figure 4 [ PDF 18.9KB | 1 page ] shows bilateral exports and imports by firm type. In 1996, exports to both the US and Japan were split fairly evenly between exports by state-owned enterprises (SOEs) and FIEs (Figures 4a and 4b). By 2007, however, FIEs controlled over 65% of exports from the PRC to both countries, with SOEs providing a falling share. Since 2001, as private enterprises have been allowed to proliferate, the share of exports through these firms has grown, exceeding 10% of total exports to both the US and Japan by 2007. Many organizational forms are classified as private enterprises, including limited liability corporations, share-holding corporations, partnerships, and unincorporated businesses.

American and Japanese exports to the PRC show somewhat different profiles. While more than half of exports from each country were destined for FIEs inside the PRC by 2007, this form of trade was more dominant in the Japan-PRC relationship (Figures 4c and 4d). In 2007, 72% of the PRC's imports from Japan went to FIEs, compared with 58% of the PRC's imports from the US. As in the case of the PRC's exports, SOEs play a declining role in import flows while private enterprises have increased in importance.

Overall, the PRC's trade with the US and Japan looks very different from that based solely on comparative advantage. The largest share of trade is processing trade and it flows to and from FIEs operating in the PRC. This trade is highly concentrated in just two HS chapters, which include computers and telecommunications devices. Thus, the picture that emerges is of bilateral flows dominated by trade in production “fragments,” largely mediated by multinational enterprises.

Using neoclassical trade theory as a lens, observing relative factor endowments sheds little light on substantive differences between the PRC's manufacturing trade with the US and its trade with Japan. Both developed countries are abundantly endowed with capital, both physical and human, compared with the PRC. In 2007, real gross domestic product per capita in the US and Japan was US$38,338 and US$40,656, respectively.⁸ As of 2005, almost 60% of the American labor force had some form of tertiary education as did 40% of the Japanese labor force. In contrast, the PRC's 2007 gross domestic product per capita was US$1,791, and only about 7% of its labor force had tertiary education in 2005. While the US, with 0.6 hectares of arable land per person, is relatively well endowed with land compared with Japan (0.03 hectares per person) and the PRC (0.11 hectares per person), this difference cannot explain variations in the manufacturing trade compositions of the two countries with the PRC.

Reliance on theoretical guides other than neoclassical explanations is necessitated by the characteristics of bilateral trade flows we have highlighted in this section. While neoclassical models focus on trade in final goods, much of the actual flows are in intermediate goods. Equally important, neoclassical models do not explain the decision of firms to engage in foreign investment, exporting to and importing from the source country. To address these features of US-PRC and Japan-PRC trade, we next consider models that seek to explain fragmentation of the production process into distinct, vertically arranged tasks. We probe these explanations for clues to differences in the observed flows between the two trade pairs.

Download this Paper [ PDF 171.8KB| 30 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.