Spillover Effects Of China Going Global

Joseph Pelzman

• Publisher: WSPC
• Year: 2016
• ISBN:
  9789814603362
• Topic: Ciencias biológicas
• Subtopic: Ciencias en general

When the People's Republic of China (PRC) was granted Most Favored Nation (MFN) status by the United States in 1979, no one imagined the massive transformation the Chinese economy would make within a few decades. China's remarkable transi

Chapter 1

Introduction

With the granting of Most Favored Nation (MFN) status by the US and Europe to the People’s Republic of China (PRC) in the early 1980s, the trading world radically changed. The PRC’s participation in the world trading community has not only expanded beyond all expectations, it has also transformed our understanding of the importance of dynamic comparative advantage and the importance of “global value-added chains” in transforming trade in commodities into trade in skills. China’s increasing footprint in the global marketplace does not only include its merchandise exports. It also covers enormous natural resource flows from Latin America and Africa, and foreign direct investment in and out of the PRC. The major challenge to the global community of China’s participation in the global economy is the resulting “spillovers” that it creates for its major trading and investment partners. These spillovers are treated as both negative and positive-sum rather than as zero-sum in the global international trade game.

For developed-country consumers, China’s growing footprint presents the opportunity of acquiring low-cost consumer goods, across varying levels of sophistication and efficiency. Within the literature on global value-added chains, these products are generally referred to as downstream processed products, involving the flow of intermediates into China for processing and eventual exporting to developed market economies. The resulting interrelationship between the developed economies and the PRC in these products is obvious. Equally important is the demand in China for developed country merger and acquisition (M&A) partners in many high value-added industries such as autos, computers, military equipment and digital entertainment.

China’s developing-country neighbors are immediately affected by the major price and value competition that they face. India, Malaysia, Mexico, Pakistan, the Philippines, Thailand and Vietnam, among others face a reduction in exports attributable to China’s growth in exports. As the value-added chain has expanded, the same countries are beginning to benefit from the PRC “spillover” in that they gain by participating in the PRC’s product mix.

With China’s growth expanding, even at less than double digit, its demand for raw materials, intermediate products, and skilled labor also expands. Relative to Western Europe and the United States, the growth in PRC demand for raw materials and other intermediates has altered the traditional OECD Development Assistance Committee (DAC) country foreign aid to the developing world. Unlike US and other DAC country-assistance programs, the PRC has used its expanded demand for raw materials and intermediates as an entrée to providing infrastructure-development assistance to many countries in Africa and Latin America at lower than world market prices. In so doing, the PRC can acquire the necessary inputs to their industrial projects, provide employment for much of its construction and services industries and, at the same time, provide basic infrastructure development to the developing countries. The resulting “spillover” effects in Africa and Latin America can be observed in improved local highway infrastructure, improved telecommunication services, expanded schools, hospitals and port facilities.

The rapid uncontrolled industrial development in the PRC has also created a major negative “spillover” effect in its large cities and countryside — air and water pollution. These pollutants do not honor country borders and consequently spillover international borders. The environmental challenges created by China’s rapid growth and expanding international trade are both domestic and international in scope.

The goal of this volume is to investigate these “spillover” effects in depth. In Chapter 2, we present an aggregate overview of China’s export growth in order to identify its overall “global footprint.” Chapter 3 begins the process of decomposing this export growth. The first decomposition issue is — what portion of China’s exports are Chinese in origin and what portion are imported inputs. In Chapter 4, we continue the investigation by assessing China’s competitive advantage by focusing on our estimated Revealed Comparative Advantage (RCA) and Constant Market Share (CMS) Indexes. In Chapter 5, we review China’s long-term successful sectors — Textile and Apparel — in light of the new competition rules developed by the WTO in the Uruguay Round in 2005 and applied to the PRC in 2008.

The experience of China’s ten year participation in the WTO is discussed in Chapter 6. Despite the fact that the PRC gained enormously from its participation in the global economy, it endured a long process of litigation initiated by developed country WTO members who were struggling with outdated jurisprudence with respect to dumping and countervailing law and the application of countervailing duties to non-market economies. The bilateral litigation between the US and the PRC as the former struggled with domestic US trade law and WTO jurisprudence is explored in detail in this Chapter.

The PRC’s search for raw materials and intermediate products altered its traditional Communist foreign aid program of the 1950’s and 1960’s. The new 21^st century tied-aid program and its mix of infrastructural development and acquisition of payment in kind is investigated in Chapter 7. Continuing with this outward expansion, Chapter 8 focuses on China’s outward investment strategy as a vehicle by which to acquire “start-up” companies in the US and Israel where the residual acquired component is new technology. Despite the attempts by the US Congress to limit PRC M&A activity on large ticket items, the PRC has been very successful in acquiring very small “start-up” companies with a clear cut agenda to introduce major innovation in its domestic market.

The question of the overall cost-benefit analysis of the spillover effect of China’s policy of going global is left to the reader. Clearly the PRC leadership has concluded that they are on the correct development path, subject to periodic adjustments.

Chapter 2

An Overview of China’s Export Growth

When the People’s Republic of China (PRC) was granted Most Favored Nation (MFN) status by the United States in 1979, no one imagined that Chinese participation in the world trading community would have such a global impact. In the early post-MFN period, most of the analysts were unable to differentiate China from other Soviet type economies. Bayard et al. [1981, 1982], Pelzman [1986a, 1986b, 1992], were an exception in that they predicted a non-Soviet type response from the PRC. In fact, they predicted an expansion in Chinese exports in a single sector driven by offshore processing — textiles and apparel. When the quota system governing textile and apparel trade was dismantled in 2005 for most of the quota bound exporters and in 2008 for the PRC, bets were placed on India rather than China as the beneficiary. As Pelzman and Reese [1989] and Pelzman and Shoham [2009a] have demonstrated, betting on India was incorrect.

The current attention to PRC’s export growth has been driven by three concerns: (1) the impact of China’s export growth on world welfare and the consequences of a reduction in Chinese growth on its international trade¹; (2) the shift in Chinese exports towards higher value-added products and (3) the bilateral imbalances created between the US and the PRC and the EU and the PRC [Lemoine and Ünal, 2012; Deer and Song, 2012].

2.1.Theoretical Modeling of the Impact of China’s Exports

An understanding of the spillover effects of international trade is best described by the recent micro-level heterogeneity theoretical trade models examined by Melitz [2003], Melitz and Redding [2014], Eaton and Kortum [2002], Bernard et al. [2003] and Arkolakis et al. [2012], where trade elasticity and the share of expenditure on trade are sufficient statistics to measure the spillover effects of international trade. Using these models, Hsieh and Ossa [2011] present empirical estimates of the spillover effects of China’s growth on its trading partners.

The starting point of this literature is the conventional CES utility functions across N countries and S industries, where it is assumed that each industry provides consumers with a continuum of differentiated products.

where

x_ijs(v_is) represents the quantity of an industry s variety originating from country i consumed in country j;

M_ijs represents is the number of industry s varieties originating from country i available in country j;

σ_s represents the elasticity of substitution between industry s varieties and assumed to be greater than 1 and

μ_js represents the share of country j’s income spent on industry s varieties.

To produce x_ijs(v_is) in country i, the literature assumes that firms will be employing a linear-production function with productivity differences governed by country specific heterogeneous technology. Labor inputs consist of both production labor and that required to deliver the end product to country j. Shipping the good to a destination requires a per-unit iceberg trade cost of τ_ijs ≥ 1.

Firms are assumed to face the following demand function:

For a particular productivity level, a perfectly competitive firm from country i incurs a marginal cost to produce variety s affected by the specific wage rate (w_j) and the number of workers or consumers (L_j).

The two prices include the delivered price of variety s in country j(p_ijs) and a price index for all industry s varieties (P_js). Perfect competition forces marginal cost pricing:

where φ is a measure of productivity and

_ijs represents the productivity of the representative firm in industry s of country i selling to country j.

The most fascinating element of these models is that regardless of the specific competition framework one assumes for the domestic or foreign firms, the models all produce identical aggregate outcomes. The models yield the same expressions for trade flows, price indexes and welfare gains from trade. Labor-market clearing results in an equilibrium where the left-hand side of Equation (2.5) presents the fraction of country i’s labor devoted to cover both fixed and variable costs and on the right-hand side the expected number of workers required to enter industry s.

The key coefficients controlling trade are CES price indexes that consumers face and trade shares. Trade shares are driven by trade costs a...