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People’s Republic of China: 2011 Spillover Report—Selected Issues

Author(s):
International Monetary Fund
Published Date:
July 2011
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V. IMPACT OF CHINA’S COMPETITION: BRAZIL AND MEXICO1

This chapter assesses the impact of China’s competition on the main export market shares of Bra and Mexico. It finds some evidence that these countries lost competitiveness vis-à-vis China, but the impact is moderate. A portion of the loss can be attributed to exchange rate valuations, particular for Mexico, whose export structure is more similar to China’s.

1. Context. There has been concern that China’s competitiveness in export markets, while built on structural advantages such as the low cost of labor, has been boosted by a distorted exchange rate and other factor costs, such as the cost of capital. The claim is that this competitiveness has adversely impacted the ability of other developing and emerging market countries to compete in third markets. This paper assesses the claim by looking at the impact China’s competition on two Latin American emerging markets, Brazil and Mexico. In particular, looks at how these countries have been affected in their largest markets, the U.S. and European Union for Brazil and the U.S. for Mexico.

2. Exports in third markets. Brazil and Mexico gained market shares in their respective main markets, but this process stopped in the 2000s, with somewhat different timings for each For Brazil, it stopped in the mid-2000s, but for Mexico, it was 2001, around the time China entered the WTO. Excluding China’s exports reveals higher market shares in remaining exports suggesting competition with China may have led to losses in market share.

Brazil: Market Share in the U.S.

(2001 = 100)

Brazil: Market Share in the E.U.

(2001 = 100)

Mexico: Market share in the U.S.

3. Competitiveness gain index. To measure more precisely the impact of China’s competition on Brazil’s and Mexico’s competitiveness, the first step was to construct a “competitiveness gain” index using constant market share analysis (CMS) at a 4-digit SITC product level (see Appendix I). The index was constructed with and without China for both the U.S. and the European Union markets in the case of Brazil and for the U.S. market in the case of Mexico. The index shows that, in both the U.S. and European Union markets, Brazil experienced competitiveness gains in the first part of the 2000s, but suffered losses in competitiveness in the last part of the decade (see charts below); these losses were especially strong in the U.S. market. For Mexico, the loss of competitiveness started in 2001 after gaining for 15 years. Repeating the exercise for China shows it continuously gaining competitiveness since the mid-1980s, with a boost taking place after its entry into the WTO.

Competitiveness Gain in the U.S.

(In percent of exports to the U.S.)

Competitiveness Gain in the E.U.

(In percent of exports to the E.U.)

Competitiveness Gain in the U.S.

(In percent of exports to the U.S.)

4. China effect. These competitiveness gain indices can in turn form the basis for constructing a counterfactual: what would have happened to Brazil’s and Mexico’s competitiveness in third markets had China not been active in these markets? This was done by first calculating competitiveness gains of Brazil and Mexico with and without China in a third market (solid line and dash line, respectively, in the charts on competitiveness gain shown above), and then by taking the difference between these two indices. The difference can be thought of as a measure of a pure “China effect” on Brazil or Mexico. The same exercise was repeated for China by including and excluding Brazil’s or Mexico’s exports to construct a Brazil or Mexico effect (for China). Finally, a China effect was constructed for a few other countries. The following facts emerge (see charts below):

  • The China effect on Brazil and Mexico has almost always been negative in the third market. On the other hand, the Brazil or Mexico effects have been fairly small.
  • The China effect was small before 2001 but widened afterwards. The large negative impact appears to be diminishing after 2005, following the appreciation of the RMB.
  • The overall magnitude of the China effect does not appear to be very large. The peak impacts on Brazil and Mexico, both of which occurred in 2005, are about 2 percent and 3 percent of their exports to the U.S. (slightly less in the E.U. market for Brazil).

This analysis thus suggests a role for a China effect on Brazil’s and Mexico’s manufacturing market share in third markets, but this effect appears to be moderate. Other factors, such as potentially internal competitiveness factors and the shift of the supply chain, could play a key role in driving the dynamism of the manufacturing tradable sector in Brazil or Mexico.

The China Effect and the Brazil Effect

(In percent of exports to the U.S.)

The China Effect

(In percent of exports to the U.S.)

The China Effect and the Brazil Effect

(In percent of exports to the E.U.)

Competition with China and Loss in Market Share

The China effect on Mexico’s exports

(in percent of exports to the U.S.)

5. Exchange rates. The flexibility of exchange rates in Brazil and Mexico and the relatively rapid appreciation of the renminbi against the U.S. dollar during 2005–2008 generated significant variations in both the bilateral nominal and real exchange rates between China and Brazil or Mexico. These variations can be used to estimate the impact of China’s exchange rate on Brazil’s or Mexico’s competitiveness.

6. Results. Regression analysis shows that exchange rates played a role in determining Brazil’s or Mexico’s competitiveness. In these regressions, the China effect (whose increase indicates that Brazil’s competitiveness improves) was regressed on the annual change in the bilateral nominal and real exchange rates (subject to the usual caveat that these regressions capture correlations and not causality). The main results are as follows:

  • The regression was first estimated by pooling together all the products (first table below, first column for Mexico; second table below for Brazil). As expected, an appreciation of the real or the peso is estimated to push the China effect more into negative territory—that is, it reduces Brazil’s or Mexico’s competitiveness. Every 10 p.p. depreciation of the renminbi against the real or the peso would reduce Mexico’s exports by around 0.5 p.p. The effect on Brazil’s exports is smaller (about one-quarter of the effect on Mexico).
  • Results for sub-groups of products reveal that the effect of the exchange rate has been stronger and statistically significant on products where Brazil and Mexico have traditionally enjoyed a comparative advantage over China, medium-low and medium-high technology goods, while the effect on resource-based, low-technology and high-technology good is either weak or statistically less significant (first table below, second through fifth column, for Mexico; third table below for Brazil). This finding thus lends support to the view that undervaluation in China’s currency may be contributing to eroding competitiveness in those goods where Brazil or Mexico and China are increasingly competing, medium-tech goods.
Mexico: Exchange Rate and the China Effect (2002-2009) 1/
All ProductsResource-

based low tech
Low-techMedium-techHigh-tech
CPI-Based REER-0.050 ***0.023-0.048**-0.060**-0.032
(0.017)(0.052)(0.024)(0.027)(0.061)
Constant-0.184*0.087-0.209-4.715-0.312
(0.097)(0.198)(0.153)(3.856)(0.326)
Fixed EffectYYYYY
OBS354316413381762266
R-Sq0.080.130.160.050.05
Source: UN COMTRADE; Fund staff estimates.

An increase in the REER indicates an appreciation of the peso against the renminbi; thus, a negative sign for the exchange rate coefficient means that Mexico gains competitiveness when the peso depreciates against the renmimbi. Robust standard error reported in parentheses. ***, **, *, represent 1 percent, 5 percent, and 10 percent signficance levels, respectively.

Source: UN COMTRADE; Fund staff estimates.

An increase in the REER indicates an appreciation of the peso against the renminbi; thus, a negative sign for the exchange rate coefficient means that Mexico gains competitiveness when the peso depreciates against the renmimbi. Robust standard error reported in parentheses. ***, **, *, represent 1 percent, 5 percent, and 10 percent signficance levels, respectively.

Brazil: Exchange Rate and the Overall China Effect
USAEUUSAEU
Nominal exchange-0.006-0.015***
rate(0.004)(0.003)
Bilateral real-0.008**-0.013***
exchange rate \1(0.004)(0.003)
Constant-0.417***-0.360***-0.422***-0.261***
(0.016)(0.005)(0.016)(0.013)
Fixed EffectYYYY
OBS5950597659505976
R20.0020.00630.0010.006

Bilateral nominal and real exchange rates are used in the regressions; increases in the exchange rate denote an appreciation of the real against the renminbi. Thus, a negative sign for the coefficients indicates that Brazil gains competitiveness when the real depreciates against the renminbi.

Bilateral nominal and real exchange rates are used in the regressions; increases in the exchange rate denote an appreciation of the real against the renminbi. Thus, a negative sign for the coefficients indicates that Brazil gains competitiveness when the real depreciates against the renminbi.

Brazil: Panel Regressions of China Effect by Product on Brazil’s Exchange Rates -- By Product Subgroup
United StatesEuropean Union
Resource

based/low tech
Low-techMedium-

low tech
Medium-

high tech
High-techResource-

based/low tech
Low-techMedium-

low tech
Medium-

high tech
High-tech
Nominal-0.029-0.004-0.008**-0.005-.003-0.029-0.011***-0.013***-0.018***-0.016
exchange rate \1(0.030)(0.007)(0.004)(0.007)(0.004)(0.026)(0.0038)(0.004)(0.007)0.019
Constant-0.562***-0.516***-0.276***-0.339***-0.203***-0.429-0.382***-0.381***-0.302***-0.40***
(0.080)(0.029)(0.021)(0.038)(0.0192)(0.018)(0.007)(0.011)(0.016)(0.015)
Fixed EffectYYYYYYYYYY
OBS407222816061199340390226416221210340
R20.0080.0010.0020.0060.0070.01120.0040.0090.0060.010
Resource-

based/low tech
Low-techMedium-

low tech
Medium-

high tech
High-techResource-

based/low tech
Low-techMedium-

low tech
Medium-

high tech
High-tech
Bilateral real-0.003-0.004-0.010**-0.011-0.001-0.0343413-0.006**-0.013***-0.016**-0.01805
exchange rate \1(0.006)(0.006)(0.004)(0.007)(0.040)(0.029)(0.003)(0.005)(0.007)(0.022)
Constant-0.526***-0.526***-0.259***-0.383***-0.240***-0.241**-0.313***-0.263***-0.199***-0.278***
(0.028)(0.028)(0.023)(0.034)(0.021)(0.090)(0.013)(0.023)(0.034)(0.068)
Fixed EffectYYYYYYYYYY
OBS407222816061199340390226416221210340
R20.0090.0010.0020.0070.0110.0120.0030.0100.0060.010

Bilateral nominal and real exchange rates are used in the regressions; increases in the exchange rate denotes an appreciation of the real against the renminbi. Thus, a negative sign for the coefficients indicates that Brazil gains competitiveness when the real depreciates against the renminbi.

Bilateral nominal and real exchange rates are used in the regressions; increases in the exchange rate denotes an appreciation of the real against the renminbi. Thus, a negative sign for the coefficients indicates that Brazil gains competitiveness when the real depreciates against the renminbi.

Appendix I. The Competitiveness Gains Index

1. Calculation. For a given product, the index denotes whether competitiveness is increasing or decreasing: it is computed as the difference between a country’s export of this product to a particular market in a given year relative to what would have been expected if this country had maintained the same market share for the product in this market as in the previous year and given its total imports of this product. A positive value indicates that the country’s competitiveness is increasing in this product. The sum across all products (normalized by the country’s total exports in the previous year) gives a summary index of the overall competitiveness gains. The methodology controls for two effects that change a country’s export share in global markets without underlying changes in competitiveness. The first is the terms of trade effect: if the prices of the products exported change, it is likely that the exporter’s market share may also change regardless of its “competitiveness”. The second is the composition effect: if a country specializes in goods that are in strong demand, its export market share may rise even without any gains in productivity.

1Prepared by Roberto Benelli (SPR) and Kai Guo (SPR).

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