China's foreign trade and comparative advantage : prospects, problems, and policy implications

WDP-1 41 141 - ! World Bank Discussion Papers China's Foreign Trade and Comparative Advantage Prospects, Problems, and Policy Implications AlexanderJ. Yeats  Recent World Bank Discussion Papers No. 84 Implementing Educational Policies in Ethiopia. Fassil R. Kiros No. 85 Implementing Educational Policies in Kenya. C. S. Eshiwani No. 86 Implementing Educational Policies in Tanzania. C. J. Galabawa No. 87 Implementing Educational Policies in Lesotho. T. Sohl Thelejani No. 88 Implementing Educational Policies in Swaziland. Cisco Magalula No. 89 Implementing Educational Policies in Uganda. Cooper F. Odaet No. 90 Implementing Educational Policies in Zambia. Paul P. W. Achola No. 91 Implementing Educational Policies in Zimbabwe. 0. E. Maravanyika No. 92 Institutional Reforms in Sector Adjustment Operations: The World Bank's Experience. Samuel Paul No. 93 Assessment of the Private Sector: A Case Study and Its Methodological Implications. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with fill ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. ISSN: 0259-210X Alexander J. Yeats is principal economist in the International Trade Division of the World Bank's International Economics Department. Library of Congress Cataloging-in-Publication Data Yeats, Alexander J. China's foreign trade and comparative advantage: prospects, problems, and policy implications / AlexanderJames Yeats. p. cm.-(World Bank discussion papers; 141) Includes bibliographical references. ISBN 0-8213-1960-4 1. China-Commerce. 2. East Asia-Commerce. 3. Comparative advantage (International trade) I. Title. II. Series. HF3824.Y43 1992 380.1'0951-dc2O 91-33304 CIP  iii ABSTRACT This study undertakes a detailed analysis of secular trends in the People's Republic of China's trade and 'revealed" comparative advantage for roughly two decades starting in the mid-1960s. Statistical problems associated with a lack of comparable Chinese data (over time and with other countries) are resolved using a special Trade Analysis and Retrieval System (TARS) developed by the World Bank to access United Nations trade records. This system allows one to reconstruct historical data on China's exports -- classified on the basis of the SITC system - from U.N. partner country import statistics. Similarly, data on China's imports can be derived by aggregating all partner countries' reported exports. The empirical analysis shows China has a revealed comparative advantage (RCA) in a relatively broad range of products, and that almost all of these items are labor intensive in production or require inputs of specialized natural resource materials. Aside from Japan, Singapore and Malaysia, China's RCA profile resembles those of other regional economies like Indonesia, Philippines, Thailand and Taiwan (China) which have largely built their export base on labor intensive products. These data suggest that unless intra-industry trade is accelerated the potential for regional trade conflicts is greater than that for regional integration. Separate tabulations for the EC(10), Japan and United States show that products in which China has a revealed comparative advantage often face major forms of 'bard core" nontariff barriers, particularly in textiles, clothing and processed agricultural products. By relating the shape and position of its RCA index profile to those of other countries, China's relative maturity as an exporter can be established. The results suggest that China is currently one of the least mature of the Asian economies and that its future revealed comparative advantage will likely experience a high degree of change. Several procedures for monitoring and analyzing these potential changes are suggested.   V Foreword Given the global dimensions of its lending and development programs, the World Bank has an obvious interest in major factors influencing world trade, production and growth. There are several reasons why the World Bank maintains a special interest in the People's Republic of China. China now possesses approximately one-fifth of the world's population and is also well endowed with important natural resources such as coal, petroleum, iron ore, tin and tungsten. China's recent international trade performance has also been remarkable. Between 1980 and 1987 the value of Chinese trade tripled; over the 1987-90 period the trade value doubled. With this remarkable trade expansion China, became the third largest developing country exporters of manufactures. When China's trade is combined with those areas over which it has territorial claims (Hong Kong and Taiwan (China)) its manufactured exports are twice those of Canada and about one-quarter larger than those of the United Kingdom. The main objective of this study was to develop information that provides an improved understanding of why China's trade developed along the lines it did, and also to provide some indication of its likely future composition and magnitude. While this report's primary focus in on the global implications of these trends, the regional implications of similarities (and differences) between Chinese and other South-East Asian countries' trade and revealed comparative advantage is also analyzed.. In deriving this information the report presents, statistics on Chinese trade that previously was not available to thcse without access to United Nations Comtrade Statistics. It is hoped that this material will be of considerable use to individuals currently undertaking or planning research of China. D.C. Rao Director International Economics Department   vii Table of Contents Paee Chapter 1. Introduction ...................................... 1 Chapter 2. Scope and Methodology of the Study ............................... .. . 3 Chapter 3. Secular Trends in China's Exports ................................... . 6 Chapter 4. Chinese and Asian Regional Comparative Advantage .......... . .. .. . .. . .. . . . 15 Chapter 5. The Maturity of China's RCA Profile ......................... ...... . . 26 Chapter 6. Trade Barriers and China's Comparative Advantage ....................... . 30 Chapter 7. Summary and Conclusions ...................................... 38 References ..39 Statistiscal Annex 1: Statistics on the Level, Composition and Trends in China's Exports ..... . . . . 41 Statistiscal Annex 2: Industry Level Revealed Comparative Advantage Indices for the People's Republic of China, Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Philippines, Singapore, Thailand and Taiwan (China); 1970-72 to 1986-87 ......................... . 49  viii Tables 1. Composition and Destination of the People's Republic of China's Exports, 1965 to 1987 2. Major Developing Country Exporters of Manufactures, 1965 to 1987 3. Major Developing Country Exporters of Foodstuffs, 1965 to 1987 4. People's Republic of China's Trade and Revealed Comparative Advantage in Manufactures and Processed Commodities. 5. Industries in which both China and other Asian Countries have a Revealed Comparative Advantage 6. Industries in which only Other Asian Countries have a Revealed Comparative Advantage 7. Correlation Coefficients Between China's Revealed Comparative Advantage Indices and those of Other Selected Countries. 8. Nontariff Measures Applied by the European Community(10), Japan and the United States in Two-Digit SITC Industry Groups in which China has a Revealed Comparative Advantage in one or More Major Component Products. 9. Average Post-Tokyo Round Tariffs Facing China and Other Exporters in the European Cormnunity, Japan and United States. Statistical Annex Al-i. The Destination of People's Republic of China's Total Exports (1965 to 1987) A1-2. The Destination of People's Republic of China's Manufactures Exports (1965 to 1987). A1-3. The Destination of People's Republic of China's Food Exports (1965 to 1987) A1-4. Major Three-Digit SITC Manufactured Products Exported by the People's Republic of China. Al-5. Major Three-Digit SITC Food Products Exported by the People's Republic of China. Statistical Annex A2-1. Revealed Comparative Advantage Indices for China (1970-72 to 1986-87). A2-2. Revealed Comparative Advantage Indices for Taiwan (China) (1970-72 to 1986-87). A2-3. Revealed Comparative Advantage Indices for Hong Kong (1970-72 to 1986-87).  ix TaLbles (cont'd) A2-4. Revealed Comparative Advantage Indices for Singapore (1970-72 to 1986-87). A2-5. Revealed Comparative Advantage Indices for Malaysia (1970-2 to 1986-87). A2-6. Revealed Comparative Advantage Indices for Thailand (1970-72 to 1986-87). A2-7. Revealed Comparative Advantage Indices for the Philippines (1970-72 to 1986-87). A2-8. Revealed Comparative Advantage Indices for Japan (1970-72 to 1986-87). A2-9. Revealed Comparative Advantage Indices for Indonesia (1970-72 to 1986-87). A2-10. Revealed Comparative Advantage Indices for Republic of Korea (1970-72 to 1986-87).  x Figures 1. The People's Republic of China's Changing RCA Profile, 1970-72 and 1986-87. 2. The Relative Maturity of Countries' Revealed Comparative Advantage Profiles (Japan, Taiwan (China), Philippines, People's Republic of China).  Chapter 1. Introduction 1. During the last three decades, a few relatively small newly industrialized economies (NIEs), Hong Kong, Singapore, Taiwan (China) and the Republic of Korea, rapidly expanded their exports of a diversified range of labor intensive manufactures as well as some relatively capital intensive products. The fact that part of this rapid, and to some extent unforeseen, trade expansion coincided with a worldwide recession in the 1970s made industrial countries' structural adjustment problems more difficult and also produced increased demands for protection that continued into the 1980s. In response to these pressures, governments adopted measures likes "voluntary" export restraints and orderly marketing arrangements that ran counter to GATT principles for international trade.' 2. If four relatively small NIEs could cause such major trade and structural adjustment problems, there are certainly grounds for concern about the potential influence of other (larger) developing economies. In particular, the People's Republic of China should become an increasingly important factor in world markets. China's sheer size is a consideration -- this nation accounts for over one fifth of the world's population -- and it is endowed with important diversified natural resources.2 If China were to fully and effectively utilize these human and natural resources for expanding exports (and imports), the global implications would be significant, the consequences for the East Asian region could be even more important. A key question is whether China's future trade will evolve in a manner that will primarily compete with other countries in the region, or whether it will produce opportunities for further regional integration. 3. In order to examine the available evidence on emerging secular trends, this study undertakes a detailed empirical analysis of China's trade profile from the mid-1960s to late 1980s. In particular, several measures of trade performance and comparative advantaLge are computed for China and other East and South-East Asian economies. The objective is to determine the extent to which similarities or differences exist in the comparative advantage of China and economies like Hong Kong, Thailand, Singapore, Malaysia or Taiwan (China). 1 Using two 'inventories' of nontariff barriers (NTBs) prepared prior to the Kennedy and Uruguay Round negotiations, Laird and Yeats (1990b) determined that the share of OECD countries' imports affected by NTBs was 25 percent in 1966 and about 48 percent in 1986. Agriculture, steel, textiles and clothing were sectors registering the largest expansion of nontariff barriers. Also, NTBs grew faster in the EC than in Japan or the United States largely due to the extension of the Communities' Cornimon Agricultural Policy to new countries and products. 2 Aside from being the largest producer of tungsten and antimony (with 20 to 25 percent of the world output), China provides 20 percent or more of world output of mercury, tin, graphite, magnesite, anthracite and bituminous coal. China produces between 6 percent and 8 percent of world iron ore and fluorspar and also has sizeable reserves of these minerals. China's exports of petroleum reached over $6 billion in 1985.  2 The analysis also seeks to determine whether China's export expansion is centered on traditional labor intensive products -- as Asian NIEs exports were in the 1970s and 1980s -- or whether the Chinese case is different in important respects. Differences may arise if China's exports were influenced largely by its relative abundance of some natural resources (i.e., coal, petroleum, iron ore, tin, etc.), or by its ability to shift from exports of primary commodities to processed commodities. Finally, the study will attempt to determine the extent to which protectionism in international markets has (or will) influence the natural development of China's comparative advantage.  3 Chapter 2. Scone and Methodologv of the Studv 4. A major problem one encounters when attempting to analyze trends in China's trade is that this country only reported highly aggregated statistics (i.e., two-digit SITC level) on imports and exports in terms of Revision I of the Standard International Trade Classification System to the United Nations Statistical Office for one year (1984), and for four years (1984 to 1987) for the system's Revision 2. Furthermore, attempts to fill the gaps by deriving concordances between available Chinese statistics for other years and the SITC have not been satisfactory because some trade data are incomplete or reported only at very aggregate levels. As a result, essential data are often not readily available, or are not in a format that permits direct international comparisons. 5. As an alternative to using (unavailable) C(hinese trade statistics, a special information retrieval system - the Trade Analysis and Retrieval System (TARS) - available within the World Bank was used to estimate China's export profile by utilizing partner-country trade data reported in official United Nations records.' Specifically, the computerized United Nations Series D trade tapes have been expanded to the point that they include over 100 individual countries and cover approximately 90 percent of world trade. Given the extent of the coverage of these records (which, for many countries, go back to the early 1960s), and the fact that they are all on the basis of the common SITC system, reported imports from China can be aggregated over countries and product groups and used to analyze the Chinese export performance.4 Similarly, other countries' exports can be aggregated using TARS to analyze China's import profile. 6. After estimation of China's import and export statistics using United Nations records, two measures of trade performance were computed. The first was developed by Balassa (1965) and is based on the concept of "revealed' comparative advantage. Stated simply, the revealed comparative advantage (RCA) of country i in the trade of productj is measured by the item's share in the country's exports relative to its share in world trade. That I There are several advantages and limitations with this approach. The partner country import data normally include freight and insurance charges (Canada, New Zealand, Australia and the United States are important exceptions) while national export data are normally valued on an f.o.b. basis. Furthermore, the time lag in shipment, valuation problems, classification errors and other factors could cause differences in partner country trade statistics. However, it has been suggested that import data may be more reliable than export statistics given that the former are used in the application of tariffs and other trade control measures. See Yeats (1978) (1990b) for analyses of factors producing discrepancies in partner cotntry trade data. I Since the current analysis was undertaken for a faiirly extended time frame (i.e., the mid-1960s to the late 1980s) several modifications were required in the trade data base. First, there were major gaps in the statistics for some poorer (African) countries so these nations had to be excluded from the analysis as reporters. Second, Series D records were not available for several socialist countries like the Soviet Union and German Democratic Republic so Chinese trade with these destinations is also excluded. However, the countries that were available as reporters (see the notes to Table 1 for a listing) account for about 90 percent of China's exports. A final point is that gaps appear in the 1988 Series D trade data at the time this report was being prepared so China's export profile could not be reconstructed beyond 1987.  4 is, if xi. is the value of country i's exports of j, and Xt. is the country's total exports, its revealed comparative advantage index is: (1) RCA.. = (xIXiXti* (Xiw /Xtw) where the w subscripts refer to world totals. The index RCA i has a relatively simple interpretation. If it takes a value of less than unity (which indicates that the share of product j in i's exports is less than the corresponding world share) this implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity this implies that the country has a revealed comparative advantage in the item.5 7. In some studies equation (1) has been used with a supplemental index of trade performance. Specifically, the relationship between a country's exports and imports of a product can be accounted for by a measure (nx..) of net exports as a percentage of total trade: (2) nx. =(X.- M..) (Xi + M.) (-1 < nxi. . 1) where X and M denote export and import values respectively. This index ranges between two extreme values of - 1 (characterizing items that are imported but not exported) and 1 (for products exported but not imported).6 The interpretation of equation (2) as a measure of comparative advantage is subject to criticism, however, because the 5 The standard methodological approach is to examine the RCA indices of a given country for different industries. However, Yeats (1985) shows that additional useful information can be derived by analyzing these results by industr across countries. Specifically, this approach distinguishes between industries where a broad range of countries has developed a comparative advantage as opposed to those where only a few countries predominate. It also allows one to determine if particular types of countries (high income, low income, resource endowed, etc.) are likely to develop a comparative advantage or disadvantage in the sector. 6 Questions may arise as to whether the RCA or net trade concept is appropriate for analyzing the revealed comparative advantage of a country like China with a substantial government presence in trade. The same concern relates to applications of the RCA approach in developing countries where government policies have, to varying degrees, affected trade (see UNIDO 1982). The key question for China is whether government involvement produced a major change in the composition of exports from that which otherwise would have occurred. Statistics generated in this study do not appear to support such a contention (see Table A2-2). Also, according to Martin (1990, p.2) 'a major thrust of the reforms in China's economy since 1978 has been to decentralize economic decision making away from central planning toward producing enterprises." According to Naughton (1985) and Wong (1985) this process has substantially increased the use of markets as a means of allocating resources. The World Bank (1988) also documents the substantial progress that has been made in decentralizing the foreign trade sector.  5 level and structure of imports may be very sensitive to national protection. Nevertheless, it can shed some light on trade performance if it is employed in connection with the standard RCA index.7 8. In order to determine the extent to which China's RCA follows lines predicted by factor proportions theory, labor intensity indices were computed for the same goods for which RCA indices were derived.8 The factor intensity index for industry j (L.) is defined as, J (3) L. = (V. - N.)V x 100 Where V. and V represent value added in industry j and all United States manufacturing respectively, while N. and J j N represent the number of workers in the industry and all manufacturing activity.' The index takes a value of 100 for industries whose labor intensity is average for the United States, with lower values indicating more labor intensive products. This approach identified some 119 three--, four- and five-digit SITC products (see Lary (1968) or Yeats (1990a) that were labor intensive in their production characteristics.'" 7 In general practice, RCA indices have been computed only for processed goods or manufactures because trade in agricultural products is so distorted by export incentives and trade barriers that they are likely to obscure whether a country has a real comparative advantage or disadvantage in these goods. The present analysis does not attempt to derive revealed comparative advantage indices for agricultural products and other primary commodities. See the annex for a full list of the products for which RCA indices were computed. I Factor intensity indices for 1965 were drawn directly from Lary (1968) or were computed from United States Census data for various years through 1982. See Yeats ('1990a) for details. The use of United States data is appropriate for identifying labor intensive products if these items are generally produced by similar processes in other countries. Lary (1968, Appendix D) analyzed U.S.-U.K., U.S.-Japan and U.S.-India production data and determined this was generally the case. However, based on these comparisons several additional products were added to the list derived from United States data. I This index was employed by Lary (1968) in a major NBER study of developing countries' manufactures exports. The reader should note that there is an inverse relation between the numeric value defined in equation (3) and the labor intensity of a product. That is, the lower the wumeric value of the index the hi2her the labor intensity. It follows that products with very high index values are calpital intensive in production. '