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China: A New Power in World Trade

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1995
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AS CHINA emerges as a major trading power;other developing countries that export labor-intensive manufactured products are likely to find the competition intense. High- income countries will probably benefit, both as importers of Chinese manufactures and as exporters of capital goods to Chinese markets.

China’s economy could become the largest in the world, in terms of purchasing power, in the first quarter of the twenty-first century. Between 1980 and 2010, China’s share of world exports of manufactured goods is expected to grow by 5.6 percentage points—this compares with growth of 10.9 percentage points for the United States’ share of world exports between 1870 and 1990, and 7.8 percentage points for Japan’s share between 1950 and 1980. These projections, from the World Bank’s Global Economic Prospects and the Developing Countries 1994, are based on the assumption that China’s market reforms are allowed to spread and deepen, and are spared political discontinuities and external frictions that could disrupt natural trade patterns.

While other developing countries will find themselves competing with China for markets for labor-intensive products as well as for foreign investment flows, their exports of primary products to China are unlikely to increase significantly. The main beneficiaries of China’s emergence as a major trading power, at least in the short run, will be the industrial countries and the newly industrializing economies (NIEs) of Hong Kong, the Republic of Korea, Singapore, and Taiwan Province of China.

Impact on developing countries

Countries that export labor-intensive manufactures and low-income exporters of commodities seeking to diversify their exports will come under the most intense competition from China. This is because of China’s large revealed comparative advantage in laborintensive manufactured products, as measured by an index comparing the share of a product in a country’s exports to the same product’s share in world exports. Trade data show that, in 1991, of 46 Standard International Trade Classification categories of exports that accounted for a bigger share of China’s total exports than of total world exports (i.e., for which China’s revealed comparative advantage index is larger than one), 31 were labor intensive. A recent World Bank study found that as China has adopted market reforms in recent years, it has moved in the direction of its natural comparative advantage and its exports have become more labor intensive. Its revealed comparative advantage in labor-intensive products is similar to that of Egypt, Greece, Hungary, India, Indonesia, the Republic of Korea, Pakistan, Romania, Sri Lanka, Thailand, Turkey, and Viet Nam.

China’s competitiveness in price-sensitive, labor-intensive manufactures will probably persist into the twenty-first century, as the large inland provinces, which lag behind the coastal provinces in terms of economic development, begin to catch up and become more outward looking. Export performance and per capita incomes in China vary considerably from region to region (Table 1). The “open coastal strategy” adopted when reforms began in the early 1980s encouraged the coastal provinces to engage in international trade to a much greater extent than their inland neighbors. Nearly 80 percent of China’s exports come from 11 coastal provinces with 40 percent of the country’s population. In 1991, the value of exports from Shanghai came to $428 per capita, compared with only $13 per capita for western China. Annual per capita incomes range from $1,203 in Shanghai to $226 in western China, where 264 million Chinese live. If incomes in China’s western provinces grow at the projected national average rate of 8.5 percent annually, it will take them twenty years to reach Shanghai’s per capita income today.

Table 1Economic performance in the Chinese Economic Area is not uniform(data as of 1991)
Population

(millions)
GNP per

capita

(US dollars)
Exports

per capita

(US dollars)
Shanghai13.41,202.6428.4
Guangdong64.4519.5212.6
Other coastal provinces 1388.1363.061.2
Western China 2263.6226.513.0
Other inland provinces424.1273.221.8
Hong Kong5.713,430.05,234.4
Taiwan Province of China20.68,815.03,705.8
Sources: Almanac of China’s Foreign Economic Relations and Trade, 1992/93; China Statistical Yearbook, 1992; Hong Kong Annual Digest of Statistics, 1992; and Taiwan Statistical Data Book, 1992.Note: The Chinese Economic Area (CEA) includes China, Hong Kong, and Taiwan Province of China.

Includes Fujian, Guangxi, Hainan, Hebei, Jiangsu, Liaoning, Shandong, Tianjing, and Zhejiang,

Includes Gansu, Guizhou, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Yunnan, and Xinjiang.

Sources: Almanac of China’s Foreign Economic Relations and Trade, 1992/93; China Statistical Yearbook, 1992; Hong Kong Annual Digest of Statistics, 1992; and Taiwan Statistical Data Book, 1992.Note: The Chinese Economic Area (CEA) includes China, Hong Kong, and Taiwan Province of China.

Includes Fujian, Guangxi, Hainan, Hebei, Jiangsu, Liaoning, Shandong, Tianjing, and Zhejiang,

Includes Gansu, Guizhou, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Yunnan, and Xinjiang.

Uri Dadush,

a French national, is Chief of the International Economic Analysis and Prospects Division of the World Bank’s International Economics Department.

Dong He,

a Chinese national, is a Financial Economist in the World Bank’s Industry, Trade, and Finance Division. Country Department 1, Europe and Central Asia Office.

This suggests that China’s exports will shift away from labor-intensive manufactures only slowly, as incomes rise. In fact, because the less developed regions have much larger populations than the richer ones and are likely to produce a greater share of China’s exports as the “regional tilt” policies are gradually phased out, it is possible that China’s exports of labor-intensive products will continue to increase for many years, even if per capita income grows more rapidly in China than in its trading partners. Analyses of determinants of growth in several Chinese cities suggest that the key factor is the amount of foreign investment, and there is evidence that foreign investment in the inland regions has increased in recent years, which will lead to more openness and increased trade. At the same time, regional disparities in income levels may also enhance the potential for interregional trade within China.

Chinese exports appear to have made inroads in markets of the member countries of the Organization for Economic Cooperation and Development (OECD) in recent years, often at the expense of exports from other countries—in particular, other East Asian countries. For example, China’s rising share of clothing sales in OECD markets is matched by falling shares for Hong Kong, the Republic of Korea, and Taiwan Province of China. The story is similar for footwear, except that Korea appears not to have lost market share to China yet. But these countries have developed other export avenues—for example, in consumer electronics.

To the extent that the labor markets in China’s coastal and inland regions are segmented and that there are large differences in technological skills and know-how between regions, a dual pattern of comparative advantage may persist, with the more developed coastal regions competing directly for trade and investment with the NIEs. In the not- too-distant future, China may become an important producer and exporter of middle- technology products, such as ships, stripped- down and off-road vehicles, and consumer durables.

Some developing countries and Asian NIEs are likely to lose out to China in attracting inflows of foreign capital. More than one third of the estimated growth in net flows of foreign direct investment in 1991–93 went to China, making it the biggest recipient of such flows. Much of this foreign investment is stimulated by a desire to exploit China’s potentially large market; some is driven by a search for a low- cost production base, however, and this is likely to be the case for some time, as pressure to contain costs mounts in the wake of multilateral trade liberalization. China is already competing directly with other low- and middle-income countries for this type of investment. For instance, from 1990 to 1991, foreign direct investment by NIEs in Indonesia, Malaysia, the Philippines, and Thailand—four members of the Association of Southeast Asian Nations (ASEAN)—declined by nearly two thirds, whereas foreign direct investment flows from NIEs to China increased by more than one third. The diversion of foreign direct investment to China is likely to have been even more pronounced during 1992–93.

Contrary to a commonly held view, China’s growth as an importer will not necessarily benefit exporters of primary commodities—except, in the short term, the oil-producing countries. Since 1980, the share of primary products in China’s imports has dropped 50 percent in terms of value and 25 percent in terms of volume. As its economy has expanded, China has exploited its natural resources more efficiently, especially in agriculture, the first sector to be subject to the market reforms that began in 1978. As a result, China appears to have become more self-sufficient in food, nonfood crude materials, and nonferrous metals. Recent reports have indicated that oil reserves in western China may be enormous; in the coming century, China could once again become a net exporter of oil.

High-income countries

Who, then, will be the main beneficiaries of China’s emergence as a trading power? The high-income countries, including the Asian NIEs, are likely to enjoy the biggest gains. Since these countries are proportionally the largest importers of labor-intensive manufactured products, as well as the leading exporters of sophisticated capital goods and high-quality consumer products, they are China’s natural trading partners at this stage of its development. The recent explosion of investment in China by transnational companies reinforces this conclusion. Foreign direct investment in China in 1993 is estimated at $25 billion (although this figure may be inflated because of the recycling of funds through Hong Kong and other financial centers). The bulk of this investment originates in high-income countries, disproportionately the Asian ones.

An important factor spurring the expansion of Chinese exports is the growing integration of trade and investment in what is called the Chinese Economic Area (CEA), which comprises China, Hong Kong, and Taiwan Province of China. The CEA’s share of world exports of manufactures is projected to rise from 3.3 percent in 1980 to 9.8 percent in 2010, making it the largest exporter in the world. Of the Group of Seven (G-7) countries, Japan and the United States are currently in a better position than Europe, geographically and in terms of revealed comparative advantage, to benefit from the emergence of the CEA (Table 2). To some extent, this is because the European countries trade disproportionately with each other. European trade with the CEA, however, should not be underestimated: exports to the CEA, expressed as a percentage of GNP, are nearly as important to Europe as they are to the United States.

Table 2Trade between the G-7 and the Chinese Economic Area is growing
Share of exports to CEAShare of imports from CEA
199019911992199019911992
(percent)(percent)
Canada1.92.32.33.43.84.1
France1.71.71.82.12.62.7
Germany1.71.82.23.43.93.8
Italy1.92.12.51.82.22.4
Japan12.113.715.89.811.012.3
United Kingdom2.12.12.43.03.53.8
United States5.86.46.99.710.711.5
Source: The authors compiled the table based on data from UN COMTRADE.Note: The Chinese Economic Area (CEA) includes China, Hong Kong, and Taiwan Province of China. The figures represent the proportional share of exports to, and imports from, the CEA in the national totals for exports and imports of the G-7 countries.
Source: The authors compiled the table based on data from UN COMTRADE.Note: The Chinese Economic Area (CEA) includes China, Hong Kong, and Taiwan Province of China. The figures represent the proportional share of exports to, and imports from, the CEA in the national totals for exports and imports of the G-7 countries.

Gains outweigh losses

Will the expansion of China’s trade lead to a large adjustment problem in the labor-intensive sectors of high-income countries and inhibit the exports of other developing countries? The impact on other countries needs to be kept in perspective. Only in a small number of sectors does China have a significant share of OECD imports—namely, clothing, footwear, toys and sporting goods, and telecommunications equipment. China’s share of exports in 20 other large categories of laborintensive goods that are relatively free from nontariff barriers in industrial countries is under 5 percent. In these sectors, China’s competitors are mainly middle-income developing economies such as the Republic of Korea, Malaysia, Mexico, and Taiwan Province of China. Even if China’s market share for these products were to triple by 2010, that would represent annual growth of its market share equivalent to less than 1 percent of the total market. The annual job displacement in high- income countries resulting from this increase would be only about one sixth of the displacement caused by the historical rate of productivity improvement in manufactures in the OECD countries.

To the extent that China, as is expected, runs modest current account deficits, progressively liberalizes imports and reduces tariffs, and relies on foreign direct investment for external financing, adjustment in its trading partners will be easier. The potentially wide dispersion of China’s export structure in labor-intensive manufactures is also likely to facilitate adjustment in both importing and competing countries. Although there is bound to be some trade friction as China elbows its way into the world market, the accelerated growth of world income and trade should benefit all countries in the long run. F&D

Suggestions for further reading: Paul Armington and Uri Dadush, “The Fourth Growth Pole,” International Economic Insights, May/June 1993; Andres Boltho, Uri Dadush, Dong He, and Shigeru Otsubo, China’s Emergence: Prospects, Opportunities, and Challenges, Policy Research Working Paper No. 1339, World Bank, Washington, DC, August 1994; Alexander J. Yeats, China’s Foreign Trade and Comparative Advantage, World Bank Discussion Paper No. 141, 1991.

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Uri Dadush and Dong He

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