A Chinese Threat?

Pasta made its way from China to the Middle East through the Silk Road a century before Christ, whilst wine was being ferried in the opposite direction. What better combination than pasta and wine to demonstrate the advantages of globalization?

This century, China’s growing global presence has also opened up opportunities for other countries. The chart shows that exports from Latin American countries to the Middle Kingdom, as a proportion of their total exports, were negligible in 1990. However, by 2004 and with the exception of Mexico, this proportion had become significant – for example, over 12% of Peru’s total exports were destined for China.

Whilst exports from Latin America to China have grown, so have imports from that country, causing local industries to complain about the competition from Chinese manufacturers.

So what’s next? Is trade a source of opportunity or a threat to industry and jobs? Studies from the IDB claim that, with the exception of Mexico, complaints regarding China’s competition in Latin America are groundless. This conclusion is based on indices of similarity between Latin American and Chinese exports

Professor Rhys Jenkins, from the University of East Anglia in the UK, says that the IBD figures are wrong. The indices used to measure the effects of competition from China, which are based on calculations regarding the similarity of a country’s exports compared to China’s, result in a significantly skewed outlook. He believes that assuming a measure of competition based on the similarity of the export structures between the two countries in question implies a single value in both directions. If China’s competition threatened Honduras’ exports then, according to the export similarity index, Chinese exports would be equally threatened by Honduran exports. One cannot seriously use this index for cases in which Chinese exports are much greater and more varied than those of the country against which it is being compared.

Jenkins has developed alternative indices, one of which, his Dynamic Index of Competitive Threat (DITC), identifies the product exports by China that have grown at a rate faster than world trade between 1990 and 2002 (discounting those where China’s share of the world trade is less than 2%) and calculates the share of these product exports in a given country’s total exports.

The biggest discrepancies between the Export Similarity Index (ESI) and the DITC occur in cases involving small countries with less diverse exports. Bangladesh and Mozambique, which according to the ESI appear not to suffer competition from Chinese exports, are highlighted as two of the countries which suffer the most when using the DITC. In the case of countries with greater and more varied exports, the discrepancies between the two indices are smaller.

Jenkins also shows how much of the US market Latin American companies have lost to competition from China. China’s competitive threat is not limited to Mexico and its effect has been felt to a significant degree since 2001. Between 2001 and 2006, Latin America lost an average of 9% of its total exports to the US due to competition from China. The loss of share in this market has been even more pronounced for the export of manufactured goods. However, some countries have more than made up for this loss through trade with the Middle Kingdom. Peru, for example, has made inroads into the Chinese market, in addition to maintaining its share of the US market.

Between 2001 and 2006, China has taken over almost 11% of Brazilian exports of manufactured goods to the US. Worse still is that Brazil continues to ignore the problem whilst trying to protect its internal market, responding to the challenge from China by imposing antidumping surtaxes or demanding certificates that increase the costs and clearing times of imports. Neither of these barriers acts upon the root of the problem. Facing up to competition from China requires tax cuts, better infrastructure and a cut in public spending, which will clear the space for more competitive trade.

image00210.gif

7 Responses to "A Chinese Threat?"

  1. Anna Martins Fontes   September 19, 2007 at 11:24 am

    Your position is still unclear to me. Early in the piece you seem to agree with the ADB arguments that China is not a competitor to Latin countries. Later in the piece you argue that on the need to foster infrastructure in Brazil. Do you think Brazil can compete with China?

  2. Vitoria Saddi   September 19, 2007 at 1:36 pm

    Dear Eliana, Great piece. Thanks. Some people argue that one of the reasons that the US subprime crisis have not had significant impact on EM like Brazil is related to China. That is given that the Chinese equities were unnaffected by the turmoil China’s real activity kept going on as if nothing happened. In turn, b/c Brazil and other countries in the region trade with China they were also less affected. Do you think that the trade link with China is positive or negative for Latin America?

  3. Eliana   September 19, 2007 at 4:33 pm

    Anna, early in the piece the argument is that trade is good. Comtetition too. China is a great competitor to judge from the indices in the paper. And the way Brazil should compete is by reforming and get infrastructure in place.

  4. Eliana   September 19, 2007 at 4:39 pm

    Vitoria, thank you. Too early to say that China’s (or Brazil’s) real activity will be unaffected by the turmoil in the US. On balance, the trade link with China is positive for Brazil: the increase in the price of commodities resulted in a very positive terms of trade shock for Latin America.

  5. Anonymous   September 21, 2007 at 8:20 am

    Does Brazil also need a currency depreciation to regain competitiveness? It seems like…

  6. Eliana   September 23, 2007 at 7:23 pm

    real depreciation would do some good if it came from a tighter fiscal policy…

  7. Lucio Castro   September 28, 2007 at 3:56 am

    Dear Eliana, As I discussed to Prof. Jenkins in recent UN Conference in Helsinki, his simple index calculations do not imply whatsoever any relationship of causality between the decreasing share of LAC’s exports in the US market and China.   Such a reduction could be the result of other forces, such as a dimished competitiviness of LAC’s exports, mostly due to domestic causes (red tape, overvalued exchange rates, low investment rates, etc), or simply changes in the preferences of the US consumers, recession in the US, among other factors.  Specifically, a recent paper by Hanson and Robertson (2006) tries to econometrically disentangle the causes behing the decreasing shares of Mexico’s exports in the US: http://irpshome.ucsd.edu/faculty/gohanson/IDBChinaMexico.PDF  Would be useful and interesting to replicate this analysis to other LAC economies to see whether China is really behing the changes in their export shares in the US.