The Future of Asian Trade and Growth

Linda Yueh, Linda Yueh

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134207589
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book presents a comprehensive analysis of current trends of trade and economic growth in Asia, assessing how they are likely to develop in the future. It examines the evolving patterns of Asian economic development with the emergence of China, including since China's accession to the World Trade Organisation (WTO) in 2001. It is written by experts specialising in economic growth and regional and global trade/investment issues, alongside country specialists who have examined the development path of Asian economies. It discusses the significance of a export-oriented growth strategy on the Asian region, and the likely patterns of intra-regional specialisation given China's rise. The book examines the degree to which the remarkable growth of China is likely to affect other Asian countries in terms of global market share, and growth prospects. The book explores how the rise of intra-industry trade is affecting patterns of specialisation in the region, and appraises the role of multinational corporations and foreign direct investment. Informed by the latest empirical economic thinking, this book is a rigorous examination of the influence of an emerging economic superpower, and the future for economic growth in Asia. Readers interested in the implications of the rise of China, the effect on the economic development path of the most successful developing nations of our time and the lessons to be heeded from China's integration with the global economy will find this a thorough yet accessible account of the influence of an emerging economic superpower.

1
Introduction

The rise of China and the effect on Asia

The emergence of China in the global economy since the early 1990s has shaken up the existing economic order. Its rise has shifted world economic power to the East and away from the West. As such, it has also notably altered the Asian region with its reliance on exports for growth and its regional cross-border production chains that have dominated global consumer electronic goods markets.

In some ways, the rise of China should not be surprising given the size of the country, which is the world’s most populous. China alone accounts for 20 per cent of the world’s population, 37 per cent together with India, while Asia accounts for half of the 6.5 billion people in the world. On the 30th anniversary of economic reform in 2009, China translated its population size into generating a sizeable economy, which is the third largest in the world after the United States and Japan. It is quickly nearing the size of Japan, due in part to its per capita income ranking 105th in the world according to the World Bank, giving it greater potential to grow quickly than richer nations. Nevertheless, being large and poor are not the sole or even main drivers of economic growth. There are numerous factors which have been important. Market-oriented reforms which gradually dismantled the centrally planned economy and openness to international trade and investment are two which propelled China’s transformation from a poor developing country to one of the few successful transition economies.

The latter is the focus of this book. China’s rapid global integration has revamped the global economic structure, no less for its home region. Asia has been long regarded as an example of successful economic development, particularly the East Asian economies of South Korea, Singapore, Taiwan and Hong Kong, the first two of which have joined the ranks of rich countries. Their export-led strategy has served them well in driving growth since the 1960s but also poorly in terms of volatility as seen in the Asian financial crisis of the late 1990s. China’s opening was in part predicated on joining the regional production chains of manufactured goods which has characterized the export patterns of East Asia. The final markets are largely the United States and the European Union, but the supply chain is disaggregated within Asia where a part could be produced in China, largely finished in South Korea and exported from Japan. This is not to say that China’s rise is entirely complementary as its exports also exert competitive pressure on its Asian neighbours and will cause shifts in specialization as wages rise in richer countries which will lead them to lose their comparative advantage vis-à-vis China and other southeast Asian nations.

China’s population and large domestic market are also key factors in its growth. This is an issue that will also matter for its much smaller export-led neighbours. China’s attractiveness as a global destination for foreign direct investment (FDI) globally adds a further dimension to the development of the region.

China’s rapid ascendancy to become one of the largest economies in the world also holds implications farther afield. Its exports and investments will impact the world economy, global trade patterns as well as regional trade in Asia. All of which will in turn affect its own growth prospects as trade and foreign investment influence its ability to sustain its hitherto strong growth rate. The future of Asian trade and its export-led growth model will undoubtedly hinge on these developments and comprise the core issue for this volume.

This book views China’s emergence as fundamentally transforming the trade and growth patterns of the Asian region and thus also global trade and investment patterns. This thesis is explored empirically in several respects to establish those emerging patterns and shed light as to their likely developments in respect of Asia’s growth.

Structure and contents of the book

The volume is in four parts. The first examines the emergence of China, focusing on its economic growth and external sector development in terms of international trade and foreign direct investment. China’s trade policies and its relations to the major economies of the United States and the European Union are investigated as well. The second part turns to explore the ways in which China has affected the Asian region, namely, whether China has been an engine or competitor and the challenges that it poses, including to the main regional trade group of ASEAN (Association of Southeast Asian Nations). In addition to the regional impact, the third part identifies three cases of affected countries ranging from a rich one such as Singapore to a poor country like Laos as well as a major emerging economy, Russia. The final component of the volume estimates the ways in which China’s opening has altered regional and global trade patterns, particularly in terms of the prospect for regional integration and high-end manufactured exports that have been a mainstay of East Asia. The resultant implications for the export-led growth model of Asia are explored throughout the volume.

The main findings from the first part are that China’s emergence has been characterized by a high degree of global integration but still limited market opening. China’s trade and investment policies have significantly benefited its own growth and the development of its external sector is closely linked to the Asian region. The section starts off with a chapter by Yueh, who sets the scene of China’s emergence. She first details China’s growth and global integration in the past three decades. She then analyses the ‘China effect’ on the global economy and the avenues through which China has affected the global economic structure of the 1990s and 2000s and the indirect role that it played in the 2008 financial crisis. She concludes that China’s emergence and the global financial crisis raise issues pertinent to the export-led growth strategy of the Asian region as well as in respect of China’s relationship with the United States.

The next two chapters turn to examine China’s trade policy and patterns, including its relations with the European Union by Erixon, Messerlin, Sally and Wang. They view China’s emergence in the world economy as making its trade stance more systematically important than even when it joined the World Trade Organization (WTO) in 2001, and that China–EU bilateral relations forms a major plank in the world trading system. They find that China has a mixed record on WTO implementation and that it has been passive in the latest Doha round of negotiations to expand trade liberalization. In contrast, China has been very active with preferential trade agreements (PTAs), setting off a ‘domino effect’ in East Asia. And, they conclude that unilateral liberalization – the driving force of external opening in the 1990s – has slowed down and identify the ways in which the EU–China trade relationship can be developed that would help smooth China’s global integration.

Empirically, the next chapter by Ping finds that vertical specialization or intra-industry trade (which represents the presence of supply chains) rose from 14.2 per cent in 1992 to 22 per cent in 2003 of China’s exports. During the period 1992–2003, the value of imported intermediate goods and components from Japan, Korea and other East Asian countries accounted for about two-thirds of the increase in China’s exports to the world. About 75 per cent of the growth in China’s exports to the US is part of cross-border production chains linked to Japan, Korea and other East Asia countries, implying that China’s rapid increase in exports is linked to its integration into regional trade.

The final two chapters in this section are by Blake, Deng and Falvey as well as Chantasasawat, Fung, Ng and Siu which assess the patterns of foreign direct investment in China. Blake, Deng and Falvey find evidence that decades of promoting foreign direct investment have resulted in improvements in China’s growth prospects. However, they find that the top five FDI recipient industries, which are electronic and electric products (11.9 per cent), textile industry (5.1 per cent), raw chemical materials and chemical products (4.9 per cent), garments and other fibre products (4.4 per cent) and transport equipment (4.4 per cent), may not receive the most benefit from FDI spillovers which generates positive externalities for Chinese enterprises that can foster productivity improvements. Nevertheless, China’s sizeable foreign investment inflows have led to productivity gains that have translated into a growth factor for its economy.

Chantasasawat, Fung, Ng and Siu turn their focus to assess whether the origin of the inward FDI matters, and find that it does. Investment from the United States has the largest impact on China’s growth, followed by Hong Kong, Japan, Taiwan and South Korea. They also conclude that domestic investment is more important than FDI in driving national output. Together these chapters shed light on the nature of trade and inward FDI in China and are able to point to the impact on its own growth as well as how China is linked to the wider global economy and specifically connected to the Asian region. China is evidently closely tied to its Asian trade and investment partners, with positive implications for its own continuing development.

Part II concludes that China’s impact on the region has been largely favourable. Haltmaier, Ahmed, Coulibaly, Knippenberg, Leduc, Marazzi and Wilson find an increasing role of China as an independent source of growth in Asia. They also conclude that China plays an important and increasing role as a conduit for trade and investment. They show that China’s increasing presence in export markets has had a negative effect on exports of some products for some other Asian economies, but not for other products, including those of the important electronic high-technology industry. Ohno in the next chapter then examines how the nature of industrialization and export-led growth as well as the influence of China will affect the ability of Asian nations to join the ranks of rich countries as has South Korea. Concomitantly, the challenges faced by the second tier of countries such as Malaysia which have not grown as well as the early East Asian NIEs (Newly Industrializing Economies) such as Taiwan holds lessons for China as a late developer in the region. Ohno concludes that sustaining growth will require more than investing in infrastructure or liberalizing markets, but must also hinge on government leadership beyond the Washington Consensus and strong private sector dynamism, two factors that are not easily amenable to external manipulation. The final chapter in this part explores how ASEAN is affected by the emergence of China and the resultant changes in patterns of trade and investment in Asia. Low argues that the evolving Asian regional trade paradigm rests as much on small city-states like Singapore and Hong Kong, as the two entrepôt city-states play a crucial role in serving ASEAN and China, respectively.

Part III focuses on three different cases. The effect of China’s emergence is explored for a rich (Singapore), a poor (Laos) and an emerging economy (Russia) in the region. Blomqvist starts off the section by examining the impact of the rise of China on Singapore. He argues that Singapore and Southeast Asia should view China’s growing markets and its potential as a production platform as opportunities. The growth of free trade agreements in the region also harkens to the start of greater regional integration. For rich countries like Singapore, China’s rapid upgrading in the technological level of its goods poses a challenge. Singapore’s best chance is probably to be agile and specialize in high-end niche products and components, as well as services, where it has a comparative advantage. As a producer of high-end manufactures and sophisticated business services, there is every chance that the country can adapt itself successfully to the challenge of China, Blomqvist believes.

Next, Kokko, Andersson and Engvall examine the impact of China on a poor country, Lao PDR. The huge Chinese market is within reach of many Lao producers and could potentially swallow any amount of exports from Laos, at the same time as Chinese exports pose a threat. They find that trade with China has contributed significantly to the economic development of Laos, but the Chinese footprint has looked different in different parts of the country. In the north, local markets are increasingly integrated with the Chinese market, and the low transaction costs for trade with China mean that the effects are widely dispersed across the regional economy. In the south, China is considered a distant trade partner that is mainly of interest for some sectors where Laos holds a strong comparative advantage. While the experience of northern Laos is probably hard to replicate elsewhere (except perhaps in some of the other less developed countries bordering China), the situation in southern Laos may be similar to that of many other developing countries. China is an important potential market for some commodities, but substantial investment is required to realize this potential and the benefits will not be distributed equally across the population.

This section concludes with an analysis of large emerging economies, in the region, focused on Russia. Ianchovichina, Ivanic and Martin examine the joint effect of rapid growth of China and India on a third emerging economy, Russia. They find that Russia’s main benefit will derive from terms-of-trade improvements whereby higher energy prices will raise export prices relative to import costs. This is quite a different channel of effect than for many other developing countries which gain primarily through expanded trade with these emerging economies. However, the expansion of the energy sector and the contraction of manufacturing and services are a sign of a Dutch disease effect which will increase the importance of policies to encourage adaptation to the changing world environment.

The final part of the book turns to explore the resultant patterns of regional and global trade from China’s rise. Roland-Holst, Verbiest and Fan likewise examine the effect of both China and India. They find that the economic emergence of the world’s two most populous countries is transforming the economic landscape of East and South Asia and contributing to fundamental shifts in global economic relations. While Asia’s traditional trade with the Western OECD (Organization for Economic Cooperation and Development) continues to expand and intensify, intra-Asian trade is accelerating as the most dynamic economies provide growth leverage for their neighbours. They argue that regional integration in Asia can accelerate growth and expand its basis, particularly for lower income countries in Asia. ASEAN has the most to gain from greater integration because it can emerge as a growth bridge between the larger economies of China and India.

The next two chapters focus on two key aspects of regional trade: the evolution of electronics trade and product quality in Asia with the emergence of China. Gangnes and Van Assche find that China’s role as a key player in the global electronics industry has ignited concerns among its neighbours. But, they find that China’s effect on regional trade and production patterns is consistent with international production fragmentation in East Asia rather than as a competitor. They conclude that Japan and the NIEs have a more sophisticated electronics sector due to their specialization in high-sophistication components, while China and the better-performing ASEAN countries focus on medium-sophistication computer assembly. These latter countries, however, are upgrading their electronics industries more rapidly. Similarly, Azhar, Elliott and Liu find that China’s rise has so far been a net benefit to the region and that trade is complementary between the production structures of these East Asian neighbours even if it has led to increased competition in foreign markets. It appears that due to the process of fragmentation, by each country specializing in different quality finished goods allows this group of countries to capture market share which leads to agglomeration effects, lower costs of production and finally higher regional growth. Their results also support the notion that while China may be crowding out the exports of consumer goods from Asian countries, this is more than compensated for by the increase in demand for intermediate inputs.

The final chapter is by Athukorala, who examines the changes in the global pattern of trade with China’s rise. Analysing trade flows of China in conjunction with that of Asia, he finds clear evidence that network-related trade in components has strengthened Southeast Asia’s trade links with China, opening up new opportunities for the expansion of component production/assembly within vertically integrated global industries. However, these trade links with China have not lessoned the dependence of these Asian countries on the global economy; the dynamism of regional cross-border production networks depends inexorably on China’s trade in final goods with North America and the European Union.

Conclusion

This volume analyses the impact of the emergence of China as the world’s second-largest exporter and third-largest economy on the Asian region. It has presented a collection of papers that have examined this question in four different respects. China’s growth is indeed associated with a high degree of global and regional integration despite a mixed stance on opening and its emergence has been largely positive in affecting the development prospects of its neighbours. At the same time, its success has altered the calculus for Asia by raising numerous challenges, such as coping with China as a link in global production chains, as a competitor, and as a final market, with implications not only for trade but also the future economic development of Asia. Related issues such as greater regional integration in Asia and managing relations with the US and EU were explored. Also, case studies of Singapore, Laos and Russia provide an illustrative view of China’s likely impact on rich, poor, and other major emerging economies in the area. Finally, detailed analysis of regional and trade patterns, particularly in the electronics industry, shed light on the likely evolution of Asia’s exports and the export-oriented growth model.

The future of Asian trade, and also growth, will be significantly tied to China, which has experienced remarkable growth in the past three decades. The evidence shows that China has been a complementary part of the Asian trade structure and also offers a potential final market. Trade and associated investment from Asia as...