Chinas competitive threat to Latin America

1
Chinas competitive threat to Latin America

• Sanjaya Lall (Oxford University) and John Weiss
  (ADBI)
• 2004 LAEB ANNUAL CONFERENCE
• THE EMERGENCE OF CHINA CHALLENGES AND
  OPPORTUNITIES FOR LATIN AMERICA AND ASIA
• Beijing, 3-4 December, 2004

2
Outline

• Analytical background
• What is a competitive threat?
• Measuring the threat in third markets
• Data analysis China vs. LAC
• Global trends and regional performance
• Technological product level overlap
• Relative market share changes
• Bilateral trade
• Conclusions

3
Some LAC countries worry about the Chinese
competitive threat
The Economist (July 24, 2003), in The sucking
sound from the East says Labour costs in China
are about a quarter of their level in Mexico.
The result about 300 manufacturing plants have
moved from Mexico to China in the past two
years. The International Herald Tribune is more
gloomy In all, 500 of Mexicos 3,700 maquila
plants have shut down since 2001, at a cost of
218,000 jobs. September 3, 2003
The Economist (July 24, 2003), in The sucking
sound from the East says Labour costs in China
are about a quarter of their level in Mexico.
The result about 300 manufacturing plants have
moved from Mexico to China in the past two
years. The International Herald Tribune is more
gloomy In all, 500 of Mexicos 3,700 maquila
plants have shut down since 2001, at a cost of
218,000 jobs. September 3, 2003
4
Popular perception of a competitive threat
Rapid growth by China can also reduce access to,
or raise cost of, resources like capital (esp.
FDI) and natural resources
This leads to losses in incomes, jobs and growth
Rapid export growth by China reduces exports and
(if they are open to imports) domestic production
by other countries
5
Economists dislike this perception trade is not
a zero-sum game

• Countries do not compete like firms where gain
  for one is loss for another
• Comparative advantage theory
• Resources move between activities loss of one is
  offset by the rise of another, with greater
  welfare as a result
• Entry of low wage competitor induces others to
  move up skill/technology scale China accelerates
  upgrading elsewhere

Thus, to Krugman, competitiveness is a
meaningless word when applied to national
economies. And the obsession with competitiveness
is both wrong and dangerous. (1994)
6
But this simple trade theory is based on strong
assumptions

• It assumes efficient competitive markets, with
  perfect information, identical production
  functions, no scale economies, no learning, fully
  mobile factors within economies, full employment,
  no transport costs, etc.
• It implies the pattern of specialization does not
  matter. With no externalities, cumulative
  learning or agglomeration, all activities are
  equally beneficial. Structural change is
  automatic and instantaneous in response to
  changing factor prices

7
If these assumptions are relaxed, implications
are different

• With scale economies, cumulative learning,
  technology gaps, unemployment, risk
  uncertainty, externalities, information failures,
  immobile factors, and so on
• While there are certainly potential benefits from
  specialization trade can be non-zero sum game
• The realisation of benefits from trade depends on
  the ability of economy to create competitive
  capabilities and exploit activities that offer
  the best opportunities for growth, technology
  spillovers
• The process may not be automatic, instantaneous,
  costless or complete there are cumulative,
  path-dependent effects (leading to multiple
  equilibria)
• Strategy is necessary, given widespread market
  failures, to create capabilities and move from
  low to high equilibrium. Success breeds success

8
In this (more realistic) world

• Entry of a large, efficient low-wage competitor
  like China can involve significant adjustment
  costs
• Quantitative loss of income, employment, exports
• Qualitative decline of production/export
  structure into slower growing, technologically
  inferior activities
• The outcome depends on
• The similarity of export structures in competing
  countries (extent of competitive overlap)
• Nature of export structures in both countries
  (nature of technological specialisation)
• The speed and extent of adjustment in each
  country (ability to upgrade within and across
  competing activities, move into fast growing
  segments, reach new markets and so on)

9
If there is a possible competitive threat, how
can we measure it?

• Computable general equilibrium model (needs
  strong simplifying assumptions)
• Detailed case studies of each industry (rich but
  limited in coverage)
• Trade data analysis to gauge potential for
  competition competitive performance (needs
  careful interpretation)
• This study uses last method 1990-2002 trade data
  on market shares in world/US and bilateral trade
  by technology categories

10
Five possible combinations of relative market
share changes
11
Technological structure

• Primary products
• Manufactured products
• RB (Resource based) e.g. food, wood forestry
  products, processed minerals, petroleum products
• LT (Low technology) e.g. textiles, clothing,
  footwear, toys, sports goods, simple metal
  products
• MT (Medium technology) e.g. automotive products,
  consumer durables (incl. simple electronics),
  most industrial machinery, chemicals, steel
• HT (High technology) Advanced ICT and
  electricals, pharmaceuticals, aerospace,
  precision instruments

12
Shares of world exports by technology ()
13
Shares of developing countries in world exports
(1990-2002)
14
50 most dynamic exports in the world, 1990-2002
15
LACs manufacturing value added record (world
share, 1980-2000)
16
World market shares of LAC and East Asian exports
(1990-2002)
17
Changes in world market shares, 1990-2002
18
World market share performance in LAC and EA

• EA 8 and China perform impressively across most
  sectors, with increasing specialization in
  technology-based products.
• China outperforms rest of EA in most categories,
  suggesting a growing competitive threat within
  the region, particularly in LT products.
• But in HT there is growing complementarity within
  EA.
• LAC without Mexico does poorly, raising its world
  market share in all manufactured exports by less
  than 0.2 percentage points the weakest
  performance is by the two giant economies,
  Argentina and Brazil.
• The largest world market shares held by LAC-M are
  in primary and resource-based products and MT
  process industries
• Mexico behaves like an EA Tiger, with significant
  gains across the spectrum (primary products
  excepted).

19
Export dynamism dynamic products in
manufactured exports
20
Technological similarity of export structures,
China and LAC
21
Structural stability of exports (181 three-digit
manufactured products)
22
Correlation of Chinese and LAC export structures,
1990 2000
23
Measuring the competitive threat by relative WMS
changes
24
Chinese competitive threat by LAC country in
2000 ( of manufactured exports)
25
(No Transcript)
26
Some implications

• Most threatened LAC countries are C Rica, El
  Salvador, Chile.
• In Chile it reflects the large share of its
  exports in copper, where China gains WMS while
  Chile loses (direct threat). Its fish exports are
  partially threatened because China gains more WMS
• In C Rica the Chinese threat is largely partial
  China gains greater WMS in electronics,
  instruments, apparel and processed foods.
• In El Salvador, direct and partial threat in
  textiles and clothing
• Mexico faces the greatest potential threat from
  China, but because of its very rapid gains in WMS
  it has not actually faced a significant threat
  over 1990-2002.
• Brazil faces a larger competitive threat (30
  direct and 31 partial threat in 2002) but the
  direct threat declines from 60 in 1990. The
  largest threatened exports by Brazil are in the
  partial threat category telecoms and footwear.
  But its largest single export, aircraft, faces no
  threat from China.
• EA faces much greater direct and partial threat
  than LAC. The unweighted average for EA 8 is
  75.2, much higher than LACs total of 39.
• However, these results have to be interpreted
  with care (e.g. Chinese threat to Chile in
  copper). And past is not good guide to future
  (e.g. threat to Mexico)

27
Bilateral trade patterns
28
Technology breakdown of bilateral trade between
LAC China
29
Bilateral trade of big three
30
Some findings on the big three

• Argentina is overwhelmingly an exporter of
  primary products, with its share of RB declining
  significantly. It has no noticeable exports of HT
  products to China. Its imports from China are
  predominantly LT, but with large and growing
  shares of MT and HT products. Argentina runs a
  trade surplus with China, 763 m. in 2002, most
  of it in primary products, with a smaller surplus
  in agro-based RB products.
• Brazil also raises its exports of primary
  products but maintains a very large share for RB.
  It has a small, growing share for HT but a
  sharply falling one for MT. Chinas exports to
  Brazil span all categories, with all manufactured
  categories growing at the expense of primary
  products. The largest category by far is HT
  products. Brazil runs a trade surplus with China,
  823 m., mostly in primary products and RB
  manufactures (both mineral and agro-based
  products). Its largest deficit is in HT products,
  followed by MT engineering products.
• Mexico exports few primary or resource-based
  products to China, and makes a massive shift from
  MT to HT products. Chinese exports to Mexico
  have HT as the largest category. This suggests
  growing integration of electronics production in
  the 2 economies, similar to EA.
• The values of Mexican HT exports to China are far
  smaller than Chinese HT exports to Mexico. In
  2002, the figures are 320 million and 2.1
  billion, respectively. Overall, Mexico runs a
  huge 5.7 billion trade deficit with China. It
  also runs a deficit with China in every single
  category of trade, including primary products

31
To sum up on bilateral trade

• There is a rapid structural transformation of
  LACs trade pattern with China in the course of a
  relatively few years.
• This transformation is undesirable in
  technological terms.
• To the extent that this influences LACs future
  competitiveness patterns in bilateral trade or
  exports to third countries, it can be damaging

32
But bilateral trade so far is very small
33
Conclusions

• Some LAC countries are benefiting from growing
  imports of primary and RB products by China
• China remains a relatively small market for LAC
  (but China overtook Japan as import supplier in
  2003).
• The trade structure of most LAC is more
  complementary than competitive with that of China
  
• The main exceptions are Mexico and Costa Rica,
  but in HT they may benefit from intra-industry
  trade with China within MNC production networks
• WMS analysis suggests that all threatened exports
  (direct partial) in LAC are well below
  comparable figure for EA. Goods in the more
  serious direct threat category are only 11 of
  exports
• This suggests low competitive impact of China

34
But there are caveats

• Past is not good guide to future, in particular
  for Mexico
• LAC is suffering massive downgrading of
  comparative advantage in bilateral trade not a
  good portent for future
• China may reinforce LAC poor export performance
  in third markets, pre-empting dynamic segments.
  Different export structures may be sign of LAC
  weakness if it means specialisation in
  slow-growing and technologically unrewarding
  products