China Economics: Out With the Old Three and In ...

Author: Ruby

Aug. 19, 2024

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China Economics: Out With the Old Three and In ...

China&#;s exports have seen a marked shift, with the &#;Old Three&#; of household appliances, furniture, and clothing giving way to the high-tech &#;New Three&#; three of electric vehicles, lithium-ion batteries, and solar cells.

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Thanks in part to the global green transformation, these New Three have made positive contributions to headline export growth in recent years, while the Old Three have proven to be a drag in recent months.

In the first 10 months of , China&#;s exports declined 5.7% year over year amid global weakness for goods demand, while still outperforming peers in the APAC region. But the New Three surged 30% year over year to $128 billion during that period, contributing 1 percentage point to headline exports growth. The New Three&#;s share of total exports has risen to 4.5% year to date, a figure that is still small but up from 1.5% in .

The authors note that China has established a relative comparative advantage in the New Three, and the European Union has become the largest market for these products. Exports of electric vehicles (EVs) grew 122.2% year over year in and maintained strong growth in , up 92% year over year in the first 10 months. Currently, lithium batteries&#; growth has slowed to 36.3% year over year from 79.1% in . Solar cells&#; slowdown is more obvious: a 3.0% year-over-year contraction so far in , compared to 63% growth year over year in . But that&#;s still higher than headline export growth.

By destination, the EU accounted for 44.4% of China&#;s New Three exports in . Exports to the EU grew 17.2% year over year in the January&#;October period, contributing 25.4% of the New Three&#;s overall growth, although the authors note this growth has slowed since April.

The report then explores each of the New Three in detail.

Electric Vehicles

The authors note that China appears to enjoy a solid position in the EV industry. According to the China Passenger Car Association, China exported 1.1 million EV units in , around one-third of its total auto exports; for the first 10 months of , it exported 1.4 million units. According to the U.S. Energy Information Administration, China&#;s share of global EV exports reached 35% last year compared with just 4.2% in . Chinese automaker BYD accounted for 18% of global EV sales in , topping Tesla and VW.

The rise of EVs has propelled overall automotive exports; China is now the world&#;s largest exporter of cars, having surpassed Germany and outpacing Japan. By destination, the EU holds the majority share, accounting for 47% of China&#;s EV exports in value last year; exports to Asian countries such as Thailand, the Philippines, and India have also proved strong. By contrast, the authors note that exports of China-made EVs to the U.S. fell 32% year over year in January&#;October, hampered by high taxes and U.S. restrictions. China&#;s automakers pay a 27.5% import duty to send vehicles to the U.S. compared with just 10% on cars sent to the EU.

China is increasingly integrated into global EV supply chains, with collaboration among global players and local startups gaining traction&#;witness VW&#;s recent acquisition of a 4.99% stake in Chinese EV startup Xpeng or Stellantis&#;s investment in China&#;s Leapmotor to form an international joint venture. At the same time, Chinese automakers are seeking manufacturing outside the country to better access new markets. By producing locally, Chinese automakers can benefit from government incentives, avoid tariffs and high transportation costs, and mitigate political headwinds. Most of these new investments are planned in Eastern Europe, ASEAN, and South America.

Lithium-Ion Batteries

China has emerged as a major player in the manufacturing of lithium-ion batteries, which are primarily used in EVs. According to China&#;s Ministry of Industry and Information Technology, China&#;s shipment volume of these batteries reached 660.8 gigawatt hours in , up 97.7% year over year, while its share in the global shipment volume reached 69.0%. The authors note that since batteries account for as much as 60% of a typical EV&#;s sticker price, China&#;s competitive advantage in lithium-ion battery cell production also gives its automakers an edge in terms of EV production costs. By destination, the EU is again the largest market for this New Three component, accounting for 38.4% of China&#;s total lithium-ion battery exports in .

The authors note that trade policies abroad are the major uncertainty for lithium-ion batteries, with the U.S. Inflation Reduction Act leaving vehicles made with Chinese battery components ineligible for tax credits after . The EU, meanwhile, has adopted new regulations on batteries sold in Europe.

Solar Cells

China is now the world&#;s largest producer and exporter of solar cells. According to the China Photovoltaic Industry Association, China&#;s solar-cell production capacity reached ~505.5 gigawatts in , accounting for 86.7% of the global total. In value terms, China was responsible for 66.6% of global exports of solar cells in .

This New Three component is poised to benefit from long-term policy headwinds. The EU&#;s Net-Zero Industry Act aims to more than double domestic demand for solar, wind, batteries, and other net zero technologies by . But the U.S. has banned imports of goods made in Xinjiang, a major origin point for solar cell materials. As a result, China&#;s solar cell exports to the U.S. have fallen to 0.23% of the total in January-October , down from 2.2% in .

Looking Ahead

In considering this shift from the Old Three to the New Three, the Citi Research report says China has clearly risen up the value chain and remains competitive amid a reconfiguration of the global supply chain. The shifting export drivers demonstrate progress in China&#;s industrial upgrading, although China remains a key manufacturing base for the Old Three as well as consumer electronics and machinery. This ability to manufacture a range of products from low-value consumer goods to high-tech innovative products provides resilience for China&#;s exports, and continuing upgrades to manufacturing capabilities, R&D investment, and emphasis on cost controls should help sustain its competitiveness in trade.

What lies ahead for the New Three? The Citi Research report says global demand will continue to shift toward sustainable solutions, and China should maintain its advantage in the New Three. But the global adoption curves for EVs and net-zero technologies could flatten; solar cells appear to have already seen their export momentum peak. The authors pencil in growth of New Three exports of ~15% year over year in compared with ~28% in .

The report says China needs to manage external trade policy risks carefully, especially with the EU&#;the rise of the New Three brings risks of increased protectionism in destination markets. Since the EU is the largest market for the New Three, managing relations with it will be critical. The report notes that extensive trade between the euro area and China means there should be plenty of room for negotiation, and takes recent efforts to stabilize U.S.&#;China relations as a signal of China&#;s renewed pragmatism. But given limited ability to control such risks, China&#;s efforts to diversify its trade networks by reaching out to other countries are also important.

For more information on this subject, please see the full report, first published on 22 November , here: China Economics: Shifting Export Drivers: From &#;Old Three&#; to &#;New Three&#;

Citi Global Insights (CGI) is Citi&#;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

Chapter 12 Institutional Change, Trade Composition, and ...

The main objectives of this paper are to analyze the changing composition of China&#;s trade within the context of the reform of the Chinese economy and to discuss its export supply potential with reference to the experience of other developing economies in Asia. The paper presents the following key arguments. First, the rapidly changing composition of trade in China during the past 15 years is the result of a convergence of its trade pattern toward market-determined comparative advantage. Such convergence is primarily due to institutional reform, particularly trade system reform, aimed at introducing market mechanisms into economic and trading activities. Second, China&#;s export supply potential will be very much determined by progress in further trade liberalization that leads to a dynamic change of its comparative advantage. Progress may be examined in the context of the contribution of exports to economic growth in China and its economic integration into the world economy, namely, how the scale of China&#;s expected future trade expansion will transform its stature in world trade.

Institutional Change, Trade Reform, and Patterns of Trade

The arguments put forward in this paper are based on two fundamental considerations centering on the forces that influence China&#;s comparative advantage in international trade: institutional change and trade liberalization. Both have a strong impact on China&#;s pattern of trade and therefore on China&#;s rapid integration into the world economy. At the same time, the combination of the two makes China&#;s case uniquely different from that of other developing countries that have been undergoing trade liberalization.

International trade theory tells us that a country&#;s relative factor endowment will strongly influence the focus of its comparative advantage in international trade. However, in an institutional setting such as a centrally planned economic system, a country&#;s trade patterns could deviate from its market-determined comparative advantage (judging from its pattern of resource endowments). This is mainly because, under that system, trade may be more consistent with serving a set of planned production and consumption (distribution) targets or development strategies (the heavy industry development strategy, for example) than with deliberately seeking gains from international trade by allowing market forces to allocate its resources.

The inability of a centrally planned economic system to take full advantage of international trade is due to institutional restrictions on economic activities, particularly on external economic activities, such as trade and capital flows. The key point is that when production and trade activities are subject to institutional controls or planning, there is not much incentive, from the point of view of enterprises and central planners, to reduce the costs incurred in production and trade activities. Therefore, there is no theoretical ground for seeking a country&#;s comparative advantage in international trade on the basis of an efficient allocation of resources. The motive for trade, under these circumstances, is limited to filling the production gap that emerges under state planning.1

In theory, therefore, institutional changes that are accompanied by the introduction of market forces into the operation of the economy could alter the deviation between the pattern of trade and its resource supplies and make trade patterns conform more closely to the resource structure.

The speed and scale with which a country&#;s pattern of trade conforms to the resource structure will inevitably be influenced by the degree of marketization, which has been directly determined by the institutional changes implemented under various reform programs. In other words, there is a close link between the degree of marketization and the degree of internationalization of the economy. Internationalization here refers to the degree to which a country participates in the world economy.

The increasing marketization in China resulting from the reform program can be characterized as follows: an increasing share of goods and services transactions operates through the market (price signals increasingly direct the allocation of resources); there is a rapid reduction of state planning of both production and distribution; there is a diversification of the ownership structure in the overall economy, including private and foreign ownership; the way in which the Government adjusts and controls the economy (by resorting to macroeconomic control mechanisms suitable to a market economy) has changed; and laws and regulations compatible with a market economy have been introduced.

The progress of marketization has fundamentally changed the attitude and behavior of enterprises and individuals. The incentive to make a profit has become a driving force in all kinds of business activities, including foreign trade. It is this fundamental change that provides a theoretical justification for the argument that the convergence between the pattern of trade and that of resources has taken place in China because of institutional changes.

Compared with trade reform in a market economy, changes in incentive brought about by institutional changes produced more immediate and profound changes in trading activities, which could partly explain why there was a sudden surge in exports and imports after China opened up its economy in the late s and early s. This incentive-enhancing effect, resulting from institutional changes, will exist during the entire transition period. Yet, the impact on economic activity will diminish along with the establishment of a new system. However, institutional change or the reform of the overall economic system is only one precondition for the convergence of China&#;s patterns of trade and resource endowment. To enhance the realization of this convergence, China must also formulate trade policy that addresses the incompatibility of its own trade system with the world standard on the one hand and that aims to improve efficiency in its production and trading activities on the other.

Unlike other developing countries that have undergone substantial changes by undertaking trade liberalization, China is unique in the area of changing trade policies in the direction of market liberalization. The central issue is the possible consequences of the interaction between institutional changes under the reform program and trade policy adjustments. These possible consequences may offer the Government a wide range of policy choices (subject to changing policy environments&#;for example, the changing conditions for removing export subsidies along with the adoption of new reform measures) in deciding its future trade orientation. These choices, which may lead the country in different directions, may in turn strongly influence the pace of institutional change in China, patterns of trade, export supply potential, and general economic growth. In addition, they will also affect the welfare of the international community at large.

In choosing the pace of reform and trade liberalization, the Government must treat the two issues, namely, institutional change and changes in trade policy, comprehensively and must handle them carefully by maintaining a balance between the domestic policy agenda and the external one. Although the two should in principle reinforce each other, in practice they may not because of some short-term conflicts emerging from the changes or because of the lag in the implementation of one or the other. One example is the attempt to increase the efficiency of the state-owned export sector, which might be hindered by difficulties in reforming the whole structure of the state sector.

Because the concept of comparative advantage is itself theoretically based on an essentially market-driven economy, further establishment and promotion of an integrated, open market system in China has become key to deepening the current reform of its trade system and to further realizing China&#;s international comparative advantage, which reflects a more efficient use of its resources.

In this sense, conformity of a country&#;s comparative advantage to its pattern of resources could be used as a hypothetical measure of the extent to which domestic market distortions have been reduced. The implication is that the progress of China&#;s trade expansion so far reflects only partial marketization in China. The potential for further trade expansion along with the movement toward establishing a market system is enormous (see discussion on pp. 206&#;11).

For an economy with a high degree of protection, relatively cheap labor or the abundance of other resources cannot automatically be translated into comparative advantage in the world market. Both institutional changes and trade policy reform with market orientation will be instrumental in the realization of a country&#;s true comparative advantage. In other words, the consequences of both institutional change and changes in trade policies would be better trade performance resulting from a more efficient use of a country&#;s resources.2

A convergence of patterns of trade and resources in China has brought several immediate gains. The first one is a direct gain from trade owing to the changing composition of trade and the increasing market share of its products. The changing pattern of trade over time provides convincing support for this gain (see discussion on pp. 199&#;201). The increasing share of foreign trade in total GDP and China&#;s ever-increasing integration into the world economy are generally regarded as indications of the success of its policy to open up its economy.

The second gain is that increasing trade helps to ease the pressure of excess domestic demand generated by the rapid development of the economy. To a great extent, it cushions against inflationary pressures and thus helps to maintain the high economic growth rate and create favorable conditions for further reform. Without the realization of China&#;s comparative advantage on the world market, it would be impossible to maintain such a high level of imports to meet the ever-increasing domestic demand.

The third gain is that a convergence of patterns of trade and resource endowments has made China one of the most attractive places in the world for foreign direct investment, which in turn contributes significantly to trade expansion in China through the direct impact of investment on production and trade.

Some long-term gains are also associated with the convergence of patterns of trade and resource endowments. The first one is somewhat less obvious, but by no means less significant. It is the positive impact of trade activities (or externalities) on the process of reform, also called the &#;indirect effects&#; of trade (Myint, , p. 238). The effects are indirect because internationally accepted trading practices force enterprises in the export sector to compete in a competitive environment and consequently they have to change and adapt themselves just as firms in other countries do. Changes in the enterprise system are thereby enhanced, in particular those in the state sector in China. Consequently, substantial productivity gains can be obtained from such changes.3

The second one is the contribution of trade to economic growth, overall efficiency, and structural changes taking place in the economy.4 &#;Export-oriented policies lead to better growth performance than policies favoring import substitution. This result is said to obtain because export-oriented policies, which provide similar incentives to sales in domestic and in foreign markets, lead to resource allocation according to comparative advantage, allow for greater capacity utilization, permit the exploitation of economies of scale, generate technological improvements in response to competition abroad, and, in labor-surplus countries, contribute to increased employment&#; (Balassa, , p. 181).

Specialization for the export market also helps ease the pressure resulting from structural problems. For example, capital is relatively scarce in China, but capital in many industries is very much underutilized. Resource allocation based on comparative advantage will change industrial structures toward optimality.

The relationships between factor endowments and trade patterns change over time in a dynamic fashion, supporting the hypothesis of shifting comparative advantage, which says that shifts take place as endowments change. These shifts, subject to market restraint, create a substantial export supply potential. The implication for China of shifting comparative advantage will be discussed in the context of trade and endowment structure in East Asian economies.

The forces that advocate change through altering trading practices have contributed positively to institutional reform in general and to reform of the trade system in particular over the entire history of economic reform. This has happened largely because of changes in the perceptions of the authorities over the role of foreign trade; they have realized the gains to be made from actively pursuing China&#;s comparative advantage on the world market. As a result, further institutional reform and reform of the trade system and associated changes in trade policy have ranked high on the national reform agenda.

If the institutional framework continues to adjust and adapt in the direction of a market system and if policy, particularly trade policy, is becoming more rules based, there will be further dynamic changes in trade composition, and the gains from international trade will continue to benefit the Chinese economy.

Trade System Reform in China

This section briefly reviews the reform of the trade system and the associated changes in trade policies in China, providing evidence of institutional changes that have led to changes in its trade composition.

In the context of the overall economic reform and institutional changes that started at the end of the s, the reform of the trade system in China has gone through the following five stages, each with its own emphasis and associated problems. The reforms throughout the reform period so far have moved from being experimental to being closely in line with the requirements of the rules of the General Agreement on Tariffs and Trade (GATT).

The first stage of the trade system reform in China lasted from to , starting at the same time as the general reform of the economy. The aim of this initial stage was to explore the possibility of reforming the highly centralized trading regime inherited from the Soviet-style central planning system. Various experiments were undertaken at this stage of reform in an effort to change the old system, under which total imports and exports were centrally controlled and managed, the Central Government took responsibility for profits and losses in trading activities, and there was a disconnection between production and trade (presumably owing to rigid planning for production).

The reform experiment at this initial stage was successful in that it took the first but very important step of reforming the whole trade system. However, owing to resistance to reform, a lack of experience and the human skills needed for handling the reforms, and the problems that emerged in the process, the reform program achieved only limited results. One important outcome of this initial period of reform is that the experience made the Government realize that reforming the trade system would be a long and painful process and that it might be necessary to take a step-by-step approach, closely monitoring the results of each step and then making policy adjustments accordingly. This approach was crucial for conceiving and designing the subsequent reforms, not only in trade but also in other areas of the economy.

The second stage of reform was &#;86.5 The reform program aimed at separating government functions from those of enterprises, simplifying administrative procedures for approving imports and exports, and decentralizing power to enterprises. Under this program, experiments in reforming the planning and accounting system were also carried out. For example, attempts were made to break the planning framework in order to have more direct links between production and trade. Because of this reform, China entered a stage where compulsory planning, indicative planning, and market adjustment were all in place at the same time.

As had happened during the first stage of the reform program, the measures taken at the second stage represented one more step toward the liberalization of the trade system. However, reform at this stage also encountered some difficulties. For example, enterprises could not be truly independent because of their close relationship with the Government, and price signals could not fully function because of the operation of a two-tiered price system. As a result, enterprises were not able to be truly responsible for their profits and losses.

What the Government learned from this stage of reform was the importance and necessity of reforming the system in a comprehensive manner. But owing to various difficulties&#;particularly those existing in the relationship between the Government and enterprises&#;and, more important, because of the benefits of the reform measures&#;namely a rapid increase in trade&#;the Government decided to continue the step-by-step approach to reforming its trade system and resisted the idea of a sudden change in the whole system.

On the whole, up to this stage, the reform measures had been aimed at changing and adjusting the basic structure of the old system and not at deliberately conforming to the requirements of the GATT. However, the Government realized the potential benefits to the reform process of joining the GATT and believed that the time had come for China to apply for re-entry. Accordingly, reforming the trade system in accordance with the requirements and guidelines of the GATT became the main task of the reform program at the next stage.

The third stage started in , one year after China formally launched its application to re-enter the GATT, and ended in . The key reform measure adopted at this stage was the general implementation of the &#;contract system&#; in both trading and production enterprises in the export sector. It was also significant in the relationship between the local and central governments. The system included contracts between enterprises, trading companies, local governments, and the Central Government, in the areas of foreign exchange earnings, quotas of foreign exchange earnings handed over to the state, and the reduction of export subsidies. These reform measures touched upon the issue of operational mechanisms within enterprises. The move itself, therefore, had important implications for the Government&#;s attempts to build up a modern enterprise system to be adopted at a later stage of its reform program.

One result from this stage of reform was a rapid expansion of trade owing to the strong production and trading incentives for enterprises, trading companies, and local governments that resulted from the contract system. However, some problems were also associated with the reforms at this stage. The key problem was that a favorable environment in which fair competition could be conducted had not been created.

The fourth stage of reform covered &#;93. In line with the national policy of further opening up the economy, the objective of the reform program at this stage was to let enterprises be responsible for their profits and losses in order to equip them with a mechanism for competing both domestically and internationally on a fair basis. The measures adopted included phasing out export subsidies, narrowing the regional differences in foreign exchange retention rates, giving more power to enterprises to use foreign exchange, and using exchange rates and tariff rates to adjust trade activities. The Government&#;s intention was to create a truly competitive environment that was similar to that in which firms in other countries operated.

China also speeded up its efforts to re-enter the GATT at this stage by substantially reducing export items subject to planning, further improving the export-licensing system by increasing its transparency, and deepening reform of the enterprise system.

Another important area of reform that resulted from conforming to the requirements of the GATT was the reform of the import system, which, compared with the reform of the export system, had lagged far behind. The import system in China was closely related to the system of central planning, which used import planning, administrative approval, import licenses, import price determination, exchange controls, and import tariffs to control import activities. The general results of these measures were nontransparency in import transactions and overprotection of some domestic industries. The urgency of reforming its import system became even more obvious when China set its sights on re-entering the GATT.

China initiated the reform of its import system at the beginning of by unilaterally reducing tariff rates for a wide range of commodities, abandoning import adjustment taxes, reducing the coverage of import licensing, and reexamining internal documents for import management and control. While reforming the old import system, China aimed to establish a modern import management system, characterized mainly by reliance on tariffs and exchange rates to adjust imports, that was compatible with normal practice in other countries and consistent with the GATT rules. The measures undertaken to achieve this goal included further reduction of the coverage of mandate planning for imports, abandonment of the system of administrative approval for imports, and further improvement of the import-licensing system, which entailed increasing its transparency and fairness.

Compared with the reform program at the previous stage, the new reform program went one step further in reforming China&#;s whole trade system. More important, the reform of the trade system made it more and more consistent with the requirements of the GATT. However, structural problems existing at a deeper level remained. For example, the two-tiered currency system, where foreign exchange transactions were conducted according to both the official rate and the one prevailing in so-called foreign exchange swap centers, was still in place. This system hindered the further deepening of the reform in China&#;s trade system.

In principle, the two-tiered exchange rate system should have been abolished but in reality there were many difficulties in doing so. The system, by creating more distortions, tended to discourage exports and imports, induce more scarcity of foreign exchange, increase the secondary market price of foreign exchange, and lower real incomes (Martin, ). The main difficulty of reforming this currency system was that the system itself was tied up with the old institutional framework in which the relationship between the Government and enterprises was intrinsically linked. This meant that there were some preconditions for taking the steps necessary to reforming the system.

Although there were pros and cons for domestic enterprises&#;for example, unifying the exchange rates would end the effective subsidy given to state enterprises that were allowed to buy foreign currency at the cheaper official rate&#;the potential gains for the Chinese economy from abolishing the system could be substantial. Most important, the reform measures taken at previous stages of the reform process laid the foundation for the Government to take more dramatic measures in reforming its trade system. In other words, those preconditions have been more or less satisfied after several rounds of reforms. So reforming the two-tiered currency system became one of the most important targets of the most recent reforms of the trade system in China.

The fifth stage of reform started at the beginning of . This, characterized by its comprehensiveness in reforming taxation, finance, and the currency systems, has been the most dramatic program so far for reforming China&#;s trade system. The key measure adopted was the reform of the system of controlled exchange rates, which aimed at creating a system of managed floating exchange rates based on market forces and the gradual transformation of the yuan into a convertible currency.

The Government abandoned the former two-tiered exchange rate system&#;the foreign exchange certificate (FEC)&#;and unified the yuan&#;s exchange rates at the beginning of by cutting the official exchange rate by 33 percent and beginning to phase out FECs in an effort to bring the system up to world standards. This move, a positive step in China&#;s application to rejoin the GATT, was welcomed in foreign business circles. Previously, foreign investment was calculated in yuan at the official rate, while profits were repatriated at the swap market rate, which tended to follow the currency&#;s black market value.

With respect to the reform of the trade system, the Government plans to abolish mandatory import and export plans, exempt trading companies from turning over all their foreign currency, and modernize the management of state trading companies in order to boost trade.

To institutionalize the proposed trading practices and speed up its campaign to re-enter the GATT, China issued its first trade law in May , which is designed to fulfill the two basic demands of the GATT: transparency and uniformity. The trade law emphasizes market measures over administrative means for the management of trade. With the new trade law, a uniform, fair, and free trade policy is expected to take shape in China.

In summary, the reform of China&#;s trade system, along with the general reform program for the whole economy, has been implemented on a step-by-step basis, which gradually satisfied some of the preconditions for further reform at each stage and paved the way for the more comprehensive reform package initiated at the beginning of . All these reform measures have contributed to a trade expansion in China and led to a rapid change in its trade composition.

Convergence of the Patterns of Trade and Resources

This section provides empirical evidence of the convergence between the patterns of trade and resources in China since the reform began in the late s and then discusses the gains made from the rapid development of trade and economic integration with the world economy.

Studies show that the international distribution of China&#;s resources changed substantially between the s and the late s.6 The impact of changes in resource supplies on trade patterns of China&#;s manufactured products can be seen in its growth rate of exports in comparison with other Asian economies that have similar patterns of factor endowments, particularly with respect to labor and capital. Table 1 lists the average annual growth rates of GDP, total exports, and exports of manufactures in a group of selected Asian economies and in the United States for two periods: &#;80 and &#;90. It shows that annual real growth rates of manufactured exports in other Asian economies were considerably higher than the growth rates of total exports throughout the two periods, providing evidence for the expansion of manufacturing sectors in these Asian economies. In the case of China, both growth rates were high during both periods, although there was not much difference between the two rates.

Table 1.

Annual Real Growth Rates of GDP, Total Exports, and Manufactured Exports for Selected Asia-Pacific Economies

(In percent)

Source: GDP and trade figures were obtained from World Bank, World Debt Tables (Washington).

Notes: The growth rates of GDP are based on the constant price in the local currency; growth rates of total exports and exports of manufactures are obtained by adjusting total exports and exports of manufactures against the U.S.-dollar-based export price index (=100). Annual growth rates of both total exports and exports of manufactures are based on &#;80 for the first period for Taiwan Province of China and on &#;89 for the second period for Hong Kong.

Table 1.

Annual Real Growth Rates of GDP, Total Exports, and Manufactured Exports for Selected Asia-Pacific Economies

(In percent)

GDP Total Exports Exports to

Manufactures Country &#;80 &#;90 &#;80 &#;90 &#;80 &#;90 Hong Kong 9.27 7.13 8.41 4.29 8.50 4.31 Indonesia 7.24 5.61 7.56 3.27 13.64 34.96 Japan 4.51 4.14 9.49 4.21 9.73 4.41 Korea 8.60 9.31 22.62 11.89 24.66 12.31 Malaysia 7.86 5.99 3.88 10.51 14.20 20.12 Philippines 5.86 1.60 5.79 3.66 23.90 9.15 Singapore 8.91 7.04 4.88 8.50 11.05 11.76 Taiwan Province of China 5.77 8.92 10.01 10.45 10.02 10.96 Thailand 6.69 7.82 10.78 13.65 25.59 23.46 United States 2.74 2.90 6.64 3.06 6.24 4.57

Source: GDP and trade figures were obtained from World Bank, World Debt Tables (Washington).

Table 1.

Annual Real Growth Rates of GDP, Total Exports, and Manufactured Exports for Selected Asia-Pacific Economies

(In percent)

Source: GDP and trade figures were obtained from World Bank, World Debt Tables (Washington).

Table 1 also indicates that the more advanced an economy becomes, the narrower the gap is between the growth rate of its total exports and that of its manufactured exports. Thus, the potential for revealing comparative advantage (gaining a larger market share) in manufactured products is relatively large for developing economies. Fulfillment of this potential and the structural changes that accompany this process will have important implications for market and policy issues as these economies industrialize further.

Table 2 reports the results of changing patterns of China&#;s exports and imports by groups of commodities, which indicate clearly that China&#;s commodity compositions have changed dramatically since the beginning of the reform in the late s.

Table 2.

Patterns of China&#;s Exports and Imports by Groups of Commodities

(In percent)

Source: International Economic Databank, Australian National University.

1Revealed comparative advantage.

2Total manufacture includes both capital-and labor-intensive products.

Table 2.

Patterns of China&#;s Exports and Imports by Groups of Commodities

(In percent)

Commodity Market Commodity Market Commodity Market Commodity Market Commodity Group share share RCA1 share share RCA share share RCA share share RCA Exports Agriculture-intensive 36.1 0.5 2.00 21.7 2.3 1.50 12.4 2.4 0.93 9.2 3.0 0.71 Mineral-intensive 17.1 0.5 0.70 28.8 1.9 1.30 9.4 1.6 0.61 4.7 1.6 0.38 Labor-intensive 31.1 2.2 2.94 35.5 5.2 3.30 50.8 10.3 4.02 56.8 17.4 4.13 Capital-intensive 15.2 0.2 0.32 12.9 0.4 0.26 26.8 1.2 0.47 28.8 2.1 0.49 Total manufacture2 49.3 0.6 0.80 50.4 1.2 0.78 80.1 2.8 1.08 87.9 4.8 1.14 Imports Agriculture-intensive 29.0 1.1 1.60 10.6 1.4 0.72 16.2 1.6 1.20 10.7 1.7 0.61 Mineral-intensive 7.0 0.2 0.29 5.1 0.4 0.21 5.1 0.4 0.31 6.5 1.3 0.49 Labor-intensive 4.2 0.3 0.42 9.7 1.8 0.94 16.0 1.7 1.29 12.7 2.5 0.93 Capital-intensive 59.0 0.9 1.27 73.3 2.9 1.49 60.8 1.5 1.09 72.1 3.4 1.24 Total manufacture 65.7 0.7 1.08 86.0 2.5 1.36 82.1 1.5 1.13 88.5 3.2 1.16

Source: International Economic Databank, Australian National University.

1Revealed comparative advantage.

2Total manufacture includes both capital-and labor-intensive products.

Table 2.

Patterns of China&#;s Exports and Imports by Groups of Commodities

(In percent)

Source: International Economic Databank, Australian National University.

1Revealed comparative advantage.

2Total manufacture includes both capital-and labor-intensive products.

Commodity shares represent exports of a particular group of commodities in total exports. In , the predominant commodity shares were agriculture-intensive (36.1 percent) and labor-intensive (31.1 percent), followed by mineral-intensive and capital-intensive products. Total manufacture accounted for about half of China&#;s total exports (49.3 percent) at that time.

By , China&#;s commodity shares for exports had changed remarkably. While agriculture- and mineral-intensive products dropped, those for labor-and capital-intensive products increased substantially. Total manufacture accounted for about 88 percent of China&#;s total exports.

Commodity shares for imports also show a pattern of rapid changes. The shares for both agriculture- and mineral-intensive products declined, but the former dropped more substantially during the period. The import share for labor-intensive products increased first and then declined from the peak year of . In contrast, import shares for capital-intensive products increased rapidly. By , 72.1 percent of China&#;s total imports were capital-intensive products, accounting for about 81.5 percent of total imports of manufactures.

An increasing share of exports of labor-intensive products compared with a declining share of imports of the same products provides strong evidence that China is gaining comparative advantage on world markets in labor-intensive products. This can be demonstrated by looking at the changing market shares of these products.

Market shares denote shares of exports and imports of particular groups of commodities in world total export and import shares of the same groups of commodities. The results show that by China&#;s share of exports of labor-intensive products accounted for 17.4 percent in world total exports and that it imported only 2.5 percent of these products from the world. China had a slightly higher market share of imports than of exports for capital-intensive products for the same year, and both shares increased very rapidly from a low base in .

Indexes of revealed comparative advantage, which measure the ratios of commodity share of a country to the world average, summarize the changing patterns of trade in China. The results show that China is losing international comparative advantage in both agriculture- and mineral-intensive products while it is gaining comparative advantage substantially in labor-intensive products during the same period. It is noted that China is also gaining a slight comparative advantage in capital-intensive products (Table 2).

Table 3 reports major commodities exported by China from to . The table supplements Table 2 and lists commodities that rank high as China&#;s major export items. The most remarkable change over the period is the export of clothing: it increased from 3.12 percent in to 4.49 percent in , to 13.35 percent in and up to 20.50 percent in , ranking as the top export item in that year. In comparison with the situation in , several items, mainly agricultural products (such as cereals) and energy-related products (such as petroleum products) disappeared from the list of major export items in or dropped to a lower position. This evidence also supports the changing patterns of China&#;s comparative advantage during the period.

Table 3.

Ranking of China&#;s Exports by Share

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 3.

Ranking of China&#;s Exports by Share

(In percent)

Rank SITC1 Commodity Share SITC Commodity Share 1 65 Textile yarn, fabric 18.33 33 Petroleum and products 13.80 2 04 Cereals and preparations 7.14 65 Textile yarn, fabric 13.60 3 05 Fruit and vegetables 5.74 04 Cereals and preparations 8.91 4 22 Oil seeds, nuts, kernels 5.48 05 Fruit and vegetables 5.29 5 29 Crude animal, vegetable matter 4.98 84 Clothing 4.49 6 26 Textile fibers 4.62 89 Misc. manufactured goods 4.04 7 00 Live animals 4.27 26 Textile fibers 3.62 8 67 Iron and steel 3.95 01 Meat and preparations 3.46 9 84 Clothing 3.12 00 Live animals 3.41 10 89 Misc. manufactured goods 3.10 29 Crude animal, vegetable matter 2.95 11 66 Nonmetal minerals 2.96 03 Fish and preparations 2.58 12 03 Fish and preparations 2.75 66 Nonmetal minerals 2.54 13 07 Coffee, tea, cocoa, spices 2.56 22 Oil seeds, nuts, kernels 2.13 14 68 Nonferrous metals 2.08 06 Sugar, honey 2.05 15 06 Sugar, honey 2.02 07 Coffee, tea, cocoa, spices 1.94 16 01 Meat and preparations 1.94 69 Metal manufactures 1.78 17 02 Dairy products and eggs 1.84 71 Machinery, nonelectrical 1.70 18 21 Undressed hides, skins, furs 1.60 68 Nonferrous metals 1.57 19 64 Paper, paperboard 1.49 51 Chemical elements 1.57 20 69 Metal manufactures 1.48 72 Electrical machinery 1.23 Total 81.45 82.67

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 3.

Ranking of China&#;s Exports by Share

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 4 lists major commodities imported by China from to , showing that the composition of China&#;s imports changed substantially during the period. For example, cereal imports ranked at the top as a proportion of total imports in but were replaced by more value-added manufactured products such as machines in . Imports of other manufactured commodities, particularly those associated with transportation and communication such as motor vehicles, aircraft, and telecommunications equipment, also rose.

Table 4.

Ranking of China&#;s Imports by Share

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

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Table 4.

Ranking of China&#;s Imports by Share

(In percent)

Rank SITC1 Commodity Share SITC Commodity Share 1 04 Cereals and preparations 25.94 67 Iron and steel 22.75 2 26 Textile fibers 12.83 71 Machinery, nonelectrical 14.05 3 71 Machinery, nonelectrical 7.71 73 Transport equipment 10.15 4 06 Sugar, honey 7.05 04 Cereals and preparations 9.08 5 67 Iron and steel 6.79 26 Textile fibers 6.43 6 51 Chemical elements 5.71 68 Nonferrous metals 6.29 7 56 Fertilizers 5.36 56 Fertilizers 5.74 8 23 Rubber, crude, synthetic 5.13 51 Chemical elements 3.77 9 68 Nonferrous metals 4.81 72 Electrical machinery 2.99 10 65 Textile yarn, fabric 2.89 06 Sugar, honey 2.77 11 72 Electrical machinery 2.63 23 Rubber, crude, synthetic 2.52 12 73 Transport equipment 1.99 69 Metal manufactures 1.90 13 86 Instruments, watches, clocks 1.86 65 Textile yarn, fabric 1.41 14 59 Chemicals 1.16 64 Paper, paperboard 1.21 15 07 Coffee, tea, cocoa, spices 0.87 58 Plastic materials 1.11 16 64 Paper, paperboard 0.84 28 Metalliferous ores 0.98 17 25 Pulp and waste paper 0.74 86 Instruments, watches, clocks 0.92 18 58 Plastic materials 0.66 25 Pulp and waste paper 0.74 19 27 Crude fertilizer 0.65 33 Petroleum and products 0.66 20 53 Dyes, tanning 0.64 07 Coffee, tea, cocoa, spices 0.51 Total 96.28 95.99

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 4.

Ranking of China&#;s Imports by Share

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

The figures reported in Tables 3 and 4 not only reflect the changing pattern of trade owing mainly to its convergence with the pattern of resources, but also indicate that China has indeed further integrated its economy with the rest of the world since the beginning of the reform. In other words, China has become more and more dependent on the world market.

Table 5 presents China&#;s geographic trade structure and reveals how China&#;s economy has been linked with the rest of the world. The figures show that about half of China&#;s imports, exports, and total trade are conducted with East Asian economies, including the Association of South East Asian Nations (ASEAN), and about 70 percent of that trade is with Asia-Pacific economies. This clearly indicates that China has strong trade relationships with the Asia-Pacific economies.

Table 5.

China&#;s Geographic Trade Structure

(In percent)

Source: International Economic Databank, Australian National University.

Table 5.

China&#;s Geographic Trade Structure

(In percent)

Export Share Import Share Total Trade Partner Newly industrializing economies (NIEs) 31.2 24.5 33.7 48.0 30.9 1.9 3.8 11.8 39.3 20.3 17.1 14.1 20.4 43.8 25.6 Hong Kong 24.6 22.4 26.2 42.9 24.2 0.6 2.9 11.2 24.6 11.5 13.1 12.5 17.1 34.1 17.6 Taiwan Province of China &#; &#; &#; 1.2 1.1 &#; &#; &#; 12.8 0.1 &#; &#; &#; 6.8 0.7 Korea &#; &#; &#; 0.7 3.1 &#; &#; &#; 0.4 5.9 &#; &#; &#; 0.6 4.5 ASEAN 5.7 4.0 2.7 2.9 2.7 1.2 2.3 2.1 3.7 3.7 3.5 3.2 2.3 3.2 3.2 Japan 13.4 20.7 22.3 14.6 17.3 32.4 26.1 35.7 12.9 25.6 22.5 23.4 30.5 13.8 21.4 East Asia 50.3 49.3 58.7 65.5 50.8 35.5 32.3 49.6 55.9 49.6 43.2 40.7 53.2 60.9 50.2 Australia 2.1 1.2 0.7 0.7 1.2 7.4 5.4 2.7 2.3 2.1 4.6 3.3 1.9 1.5 1.7 North America 1.1 5.8 9.4 9.1 19.9 7.7 23.5 14.9 13.7 13.2 4.3 14.7 12.8 11.3 16.5 New Zealand and other Pacific 0.5 0.3 0.2 0.1 0.2 0.3 0.9 0.4 0.2 0.4 0.4 0.6 0.3 0.2 0.3 Asia-Pacific 53.8 56.5 68.9 75.5 72.1 50.8 62.1 67.6 72.1 65.3 52.4 59.3 68.1 73.8 68.7 Western Europe 21.8 14.3 9.4 10.3 13.9 29.9 17.7 17.2 16.5 18.6 25.7 16.0 14.2 13.3 16.2 Rest of the world 24.4 29.3 21.7 14.2 14.1 19.2 20.2 15.2 11.4 16.1 21.9 24.7 17.7 12.8 15.1 World total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: International Economic Databank, Australian National University.

Table 5.

China&#;s Geographic Trade Structure

(In percent)

Source: International Economic Databank, Australian National University.

The rapid increase in foreign trade and the deepened market integration of the Chinese economy with other countries have changed China&#;s position in the world economy. Tables 6a and 6b show leading exporters, importers, and merchandise traders in and . China ranked twenty-fifth, twenty-third, and twenty-fourth in terms of exports, imports, and total trade, respectively, in . In , these rankings were eleventh for exports, imports, and total trade.

Table 6a.

Leading Exporters, Importers, and Merchandise Traders,

Table 6a.

Leading Exporters, Importers, and Merchandise Traders,

Country Exports

(billion

U.S. dollars) Share

(percent) Country Imports

(billion

U.S. dollars) Share

(percent) Country Total

Trade

(billion

U.S. dollars) Share

(percent) World 2,007.9 100.0 World 2,069.1 100.0 World 4,077.0 100.0 United States 220.8 11.0 United States 257.1 12.4 United States 477.9 11.7 Germany, former Fed. Rep. of 192.9 9.6 Germany, former Fed. Rep. of 188.0 9.1 Germany, former Fed. Rep. of 380.9 9.3 Japan 130.4 6.5 Japan 141.3 6.8 Japan 271.7 6.7 France 116.0 5.8 France 134.9 6.5 France 250.9 6.2 United Kingdom 110.1 5.5 United Kingdom 115.7 5.6 United Kingdom 225.8 5.5 Saudi Arabia 103.4 5.2 Italy 99.5 4.8 Italy 177.2 4.4 Italy 77.7 3.9 Netherlands 78.1 3.8 Netherlands 152.0 3.7 Netherlands 73.9 3.7 Belgium-Luxembourg 71.8 3.5 Belgium-Luxembourg 136.5 3.4 Canada 67.8 3.4 Canada 67.1 3.2 Canada 134.8 3.3 Belgium-Luxembourg 64.7 3.2 U.S.S.R., former 45.8 2.2 Saudi Arabia 133.6 3.3 U.S.S.R., former 48.4 2.4 Switzerland 36.4 1.8 U.S.S.R., former 94.2 2.3 Iraq 31.3 1.6 Spain 34.1 1.7 Switzerland 66.0 1.6 Sweden 30.9 1.5 Sweden 33.4 1.6 Sweden 64.3 1.6 Switzerland 29.6 1.5 Saudi Arabia 30.2 1.5 Spain 54.8 1.3 Nigeria 26.2 1.3 Singapore 26.5 1.3 Singapore 46.9 1.2 Libya 22.4 1.1 Brazil 25.0 1.2 Brazil 45.1 1.1 Australia 22.0 1.1 Austria 24.4 1.2 Australia 44.3 1.1 Indonesia 22.0 1.1 Hong Kong 22.4 1.1 Iraq 43.8 1.1 United Arab Emirates 21.8 1.1 Australia 22.3 1.1 Austria 41.9 1.0 Kuwait 20.8 1.0 Korea 22.3 1.1 Hong Kong 41.7 1.0 Spain 20.7 1.0 Poland 21.2 1.0 Nigeria 40.7 1.0 Singapore 20.4 1.0 Taiwan Province of China 20.2 1.0 Taiwan Province of China 40.0 1.0 Brazil 20.1 1.0 China 19.8 1.0 Korea 39.8 1.0 Taiwan Province of China 19.9 1.0 Mexico 19.5 0.9 China 39.3 1.0 China 19.5 1.0 Denmark 19.4 0.9 Poland 38.6 1.0 Hong Kong 19.3 1.0 Norway 16.9 0.8 Denmark 36.4 0.9 Table 6a.

Leading Exporters, Importers, and Merchandise Traders,

Source: International Economic Databank, Australian National University.

Table 6b.

Leading Exporters, Importers, and Merchandise Traders,

Country Exports

(billion

U.S. dollars) Share

(percent) Country Imports

(billion

U.S. dollars) Share

(percent) Country TotalTrade

(billion

U.S. dollars) Share

(percent) World 3,710.1 100.0 World 3,887.4 100.0 World 7,597.5 100.0 United States 461.6 12.4 United States 597.1 15.4 United States 1,058.7 13.9 Germany, former Fed. Rep. of 366.2 9.9 Germany, former Fed. Rep. of 328.7 8.5 Germany, former Fed. Rep. of 694.9 9.2 Japan 362.2 9.8 Japan 240.0 6.2 Japan 602.2 7.9 France 207.9 5.6 United Kingdom 205.1 5.3 France 407.8 5.4 United Kingdom 180.4 4.9 France 199.9 5.1 United Kingdom 385.5 5.1 Italy 164.3 4.4 Canada 148.0 3.8 Italy 310.2 4.1 Canada 141.6 3.8 Italy 145.9 3.8 Canada 289.7 3.8 Hong Kong 133.4 3.6 Hong Kong 144.8 3.7 Hong Kong 278.2 3.7 Netherlands 114.5 3.1 Netherlands 132.9 3.4 Netherlands 247.5 3.3 Belgium-Luxembourg 97.3 2.6 Belgium-Luxembourg 125.4 3.2 Belgium-Luxembourg 222.8 2.9 China 91.3 2.5 China 91.1 2.3 China 182.4 2.4 Taiwan Province of China 88.1 2.4 Korea 84.7 2.2 Taiwan Province of China 166.3 2.2 Korea 75.1 2.0 Spain 82.2 2.1 Korea 159.8 2.1 Singapore 71.3 1.9 Singapore 81.2 2.1 Singapore 152.5 2.0 Switzerland 63.3 1.7 Taiwan Province of China 78.2 2.0 Spain 145.0 1.9 Spain 62.8 1.7 Mexico 65.2 1.7 Switzerland 124.1 1.6 Sweden 49.4 1.3 Switzerland 60.8 1.6 Mexico 112.2 1.5 Saudi Arabia 48.0 1.3 Austria 48.7 1.3 Sweden 91.7 1.2 Malaysia (IMF data) 47.5 1.3 Australia 46.6 1.2 Malaysia (IMF data) 89.5 1.2 Mexico 47.0 1.3 Thailand 45.4 1.2 Australia 89.3 1.2 Australia 42.8 1.2 Sweden 42.3 1.1 Austria 88.6 1.2

Source: International Economic Databank, Australian National University.

Table 6b.

Leading Exporters, Importers, and Merchandise Traders,

Country Exports

(billion

U.S. dollars) Share

(percent) Country Imports

(billion

U.S. dollars) Share

(percent) Country TotalTrade

(billion

U.S. dollars) Share

(percent) World 3,710.1 100.0 World 3,887.4 100.0 World 7,597.5 100.0 United States 461.6 12.4 United States 597.1 15.4 United States 1,058.7 13.9 Germany, former Fed. Rep. of 366.2 9.9 Germany, former Fed. Rep. of 328.7 8.5 Germany, former Fed. Rep. of 694.9 9.2 Japan 362.2 9.8 Japan 240.0 6.2 Japan 602.2 7.9 France 207.9 5.6 United Kingdom 205.1 5.3 France 407.8 5.4 United Kingdom 180.4 4.9 France 199.9 5.1 United Kingdom 385.5 5.1 Italy 164.3 4.4 Canada 148.0 3.8 Italy 310.2 4.1 Canada 141.6 3.8 Italy 145.9 3.8 Canada 289.7 3.8 Hong Kong 133.4 3.6 Hong Kong 144.8 3.7 Hong Kong 278.2 3.7 Netherlands 114.5 3.1 Netherlands 132.9 3.4 Netherlands 247.5 3.3 Belgium-Luxembourg 97.3 2.6 Belgium-Luxembourg 125.4 3.2 Belgium-Luxembourg 222.8 2.9 China 91.3 2.5 China 91.1 2.3 China 182.4 2.4 Taiwan Province of China 88.1 2.4 Korea 84.7 2.2 Taiwan Province of China 166.3 2.2 Korea 75.1 2.0 Spain 82.2 2.1 Korea 159.8 2.1 Singapore 71.3 1.9 Singapore 81.2 2.1 Singapore 152.5 2.0 Switzerland 63.3 1.7 Taiwan Province of China 78.2 2.0 Spain 145.0 1.9 Spain 62.8 1.7 Mexico 65.2 1.7 Switzerland 124.1 1.6 Sweden 49.4 1.3 Switzerland 60.8 1.6 Mexico 112.2 1.5 Saudi Arabia 48.0 1.3 Austria 48.7 1.3 Sweden 91.7 1.2 Malaysia (IMF data) 47.5 1.3 Australia 46.6 1.2 Malaysia (IMF data) 89.5 1.2 Mexico 47.0 1.3 Thailand 45.4 1.2 Australia 89.3 1.2 Australia 42.8 1.2 Sweden 42.3 1.1 Austria 88.6 1.2

Source: International Economic Databank, Australian National University.

A rapid expansion of trade requires that China continue to open its markets to products from its trading partners. This is because rapid expansion of trade also causes market saturation, which in turn will lead to severe structural adjustments in many countries of the world.

One solution to this mounting pressure on the world market is to gradually open up China&#;s domestic market to imports. In fact, &#;the continued growth of China&#;s economy and trade in line with its comparative advantage would, of course, also create valuable opportunities for others&#; (Drysdale and Elek, , p. 13).

As China&#;s exports have gained international competitiveness, its imports have also increased. Table 7 reports China&#;s share of total world imports of those commodities (averages for &#;89 and &#;92) that constitute major import items for China. Although imports of wheat accounted for only a small proportion of China&#;s total imports, its share in total world imports was very high. Other commodities of great importance on the world import market are machinery for producing textiles and leather, woven textiles, and iron and steel products. There was a notable increase in the share for aircraft.

Table 7.

China&#;s Share of Selected Major Imports in World Trade

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 7.

China&#;s Share of Selected Major Imports in World Trade

(In percent)

SITC1 Commodity &#;89 &#;92 041 Wheat, unmilled 13.15 12.31 512 Organic chemicals 2.10 2.02 581 Plastic materials 4.19 3.69 651 Textile yarn and thread 2.42 3.48 653 Woven textiles, noncotton 3.16 5.32 674 Iron, steel, plate, sheet 8.06 4.26 714 Office machines 0.74 0.67 717 Textile, leather, machinery 8.03 8.94 718 Machinery for special industries 2.76 2.95 719 Machinery, nonelectrical 3.73 3.31 722 Electric power machines 1.91 2.11 724 Telecommunications equipment 3.31 2.82 729 Electrical machinery 1.84 1.81 732 Motor vehicles 1.38 1.43 734 Aircraft 1.66 2.14

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Table 7.

China&#;s Share of Selected Major Imports in World Trade

(In percent)

Source: International Economic Databank, Australian National University.

1Standard International Trade Classification.

Increases in both its exports and imports have made China more dependent upon the world economy. Table 8 reports import and export dependence ratios of the Chinese economy from to . Both ratios increased very rapidly, particularly after the reform started in the late s. It is noted that, except for a few years during the mid-s, China&#;s export dependence ratios are higher than its import dependence ratios, indicating the competitiveness of China&#;s export products on the world market.

SITC Commodity Share SITC Commodity Share 33 Petroleum and products 24.72 84 Clothing 20.50 84 Clothing 13.35 89 Misc. manufactured goods 15.79 65 Textile yarn, fabric 13.08 72 Electrical machinery 11.12 89 Misc. manufactured goods 5.54 65 Textile yarn, fabric 7.75 26 Textile fibers 4.24 85 Footwear 6.74 05 Fruit and vegetables 3.31 83 Travel goods, handbags 3.84 04 Cereals and preparations 2.43 71 Machinery, nonelectrical 3.29 51 Chemical elements 2.32 33 Petroleum and products 2.97 72 Electrical machinery 1.94 86 Instruments, watches, clocks 2.56 07 Coffee, tea, cocoa, spices 1.72 69 Metal manufactures 2.23 69 Metal manufactures 1.72 05 Fruit and vegetables 2.14 83 Travel goods, handbags 1.64 51 Chemical elements 1.68 29 Crude animal, vegetable matter 1.63 66 Nonmetal minerals 1.64 22 Oil seeds, nuts, kernels 1.48 03 Fish and preparations 1.52 03 Fish and preparations 1.35 04 Cereals and preparations 1.15 85 Footwear 1.21 67 Iron and steel 1.02 00 Live animals 1.08 73 Transport equipment 1.00 27 Crude fertilizer 1.08 82 Furniture 0.98 66 Nonmetal minerals 1.06 29 Crude animal, vegetable matter 0.87 01 Meat and preparations 1.01 26 Textile fibers 0.84 85.91 89.63 SITC Commodity Share SITC Commodity Share 33 Petroleum and products 24.72 84 Clothing 20.50 84 Clothing 13.35 89 Misc. manufactured goods 15.79 65 Textile yarn, fabric 13.08 72 Electrical machinery 11.12 89 Misc. manufactured goods 5.54 65 Textile yarn, fabric 7.75 26 Textile fibers 4.24 85 Footwear 6.74 05 Fruit and vegetables 3.31 83 Travel goods, handbags 3.84 04 Cereals and preparations 2.43 71 Machinery, nonelectrical 3.29 51 Chemical elements 2.32 33 Petroleum and products 2.97 72 Electrical machinery 1.94 86 Instruments, watches, clocks 2.56 07 Coffee, tea, cocoa, spices 1.72 69 Metal manufactures 2.23 69 Metal manufactures 1.72 05 Fruit and vegetables 2.14 83 Travel goods, handbags 1.64 51 Chemical elements 1.68 29 Crude animal, vegetable matter 1.63 66 Nonmetal minerals 1.64 22 Oil seeds, nuts, kernels 1.48 03 Fish and preparations 1.52 03 Fish and preparations 1.35 04 Cereals and preparations 1.15 85 Footwear 1.21 67 Iron and steel 1.02 00 Live animals 1.08 73 Transport equipment 1.00 27 Crude fertilizer 1.08 82 Furniture 0.98 66 Nonmetal minerals 1.06 29 Crude animal, vegetable matter 0.87 01 Meat and preparations 1.01 26 Textile fibers 0.84 85.91 89.63 Table 8.

Import and Export Dependence Ratios

Source: International Economic Databank, Australian National University.

Table 8.

Import and Export Dependence Ratios

Imports Exports GDP Import

Dependence

Ratio Export

Dependence

Ratio Year (billion U.S. dollars) (percent) 1.39 1.64 168.00 0.82 0.98 1.51 1.91 192.25 0.79 0.99 1.50 1.80 180.04 0.83 1.00 1.30 1.66 171.39 0.76 0.97 1.39 1.82 195.74 0.71 0.93 1.67 1.77 233.11 0.71 0.76 1.64 2.09 251.34 0.65 0.83 2.11 2.70 283.38 0.75 0.95 3.87 4.45 346.97 1.12 1.28 5.91 5.73 356.47 1.66 1.61 5.96 6.30 400.66 1.49 1.57 4.68 6.56 372.12 1.26 1.76 5.56 7.17 423.57 1.31 1.69 8.77 9.12 482.72 1.82 1.89 12.60 12.54 574.02 2.19 2.19 17.07 17.48 655.47 2.60 2.67 16.35 20.66 626.98 2.61 3.30 14.69 20.66 657.44 2.23 3.14 16.42 20.95 738.41 2.22 2.84 22.80 24.87 830.45 2.75 2.99 35.62 27.93 977.81 3.64 2.86 33.68 32.59 943.12 3.57 3.46 36.62 43.16 851.46 4.30 5.07 48.26 56.09 972.89 4.96 5.77 48.95 69.67 1,099.39 4.45 6.34 45.92 84.16 1,156.31 3.97 7.28 58.64 106.09 1,197.87 4.90 8.86 76.80 129.25 1,265.19 6.07 10.22 97.71 146.40 1,372.73 7.12 10.67

Source: International Economic Databank, Australian National University.

Table 8.

Import and Export Dependence Ratios

Source: International Economic Databank, Australian National University.

Table 9 provides further evidence of China&#;s increasing dependence on the world market by presenting the shares of exports in production and of imports in the domestic consumption of textiles, clothing, and leather products. By , China exported more than half of its production of textiles, clothing, and leather products, and imports of the same groups of products became increasingly important to China&#;s domestic consumption.

Table 9.

Trade Dependence of China&#;s Textile, Clothing, and Leather Industries

(In percent)

Source: International Economic Databank, Australian National University.

Note: Trade dependence is based on International Standard Industrial Classification (ISIC) 32 (textile, clothing, and leather industries) because production data are not available for ISIC 322.

Table 9.

Trade Dependence of China&#;s Textile, Clothing, and Leather Industries

(In percent)

Year Export/Production Import/Consumption 11.1 3.0 19.7 6.7 48.8 16.8 62.4 26.5

Source: International Economic Databank, Australian National University.

Note: Trade dependence is based on International Standard Industrial Classification (ISIC) 32 (textile, clothing, and leather industries) because production data are not available for ISIC 322.

Table 9.

Trade Dependence of China&#;s Textile, Clothing, and Leather Industries

(In percent)

Year Export/Production Import/Consumption 11.1 3.0 19.7 6.7 48.8 16.8 62.4 26.5

Source: International Economic Databank, Australian National University.

Note: Trade dependence is based on International Standard Industrial Classification (ISIC) 32 (textile, clothing, and leather industries) because production data are not available for ISIC 322.

The results in this section show that China&#;s trade patterns have indeed conformed more closely to its resource structure, and there has been a dynamic change in China&#;s comparative advantage (an increasing trend of exporting capital-intensive products) in recent years. This change has some implications for China&#;s export supply potential.

China&#;s Export Supply Potential

China&#;s export supply potential will depend very much upon the following factors: the pace and measurement of further trade liberalization, future trade orientation, changing patterns of dynamic comparative advantage&#;both internationally and domestically&#;and conditions on the world market.

The central issue is the pace and measurement of further trade liberalization based on previous reforms. These issues are important in that the implementation of already formulated trade reform measures and the design of future reforms will continue to contribute to trade expansion in China. The problem, however, is that adjustment costs and subsequent changing policy environments will have some impact (both positive and negative) on policy implementation and the reform process. For example, further trade liberalization, particularly in reforming the import system, will lead to greater structural adjustments in industries with a high level of protection and a low level of efficiency. This problem has been complicated by China&#;s difficulties in reforming its enterprise system. In that sense, the pace of trade liberalization will be very much determined by the pace of reform of the enterprise system, particularly the state sector.

SITC Commodity Share SITC Commodity Share 71 Machinery, nonelectrical 18.21 71 Machinery, nonelectrical 17.47 67 Iron and steel 15.94 72 Electrical machinery 12.34 72 Electrical machinery 14.03 65 Textile yarn, fabric 10.47 73 Transport equipment 12.11 73 Transport equipment 9.16 65 Textile yarn, fabric 5.98 67 Iron and steel 5.52 58 Plastic materials 3.31 58 Plastic materials 5.35 86 Instruments, watches, clocks 2.86 89 Misc. manufactured goods 3.93 89 Misc. manufactured goods 2.81 86 Instruments, watches, clocks 3.34 26 Textile fibers 2.69 33 Petroleum and products 2.82 68 Nonferrous metals 2.56 51 Chemical elements 2.35 51 Chemical elements 2.38 26 Textile fibers 2.35 04 Cereals and preparations 2.19 68 Nonferrous metals 2.26 56 Fertilizers 1.39 04 Cereals and preparations 2.10 24 Wood lumber and cork 1.27 64 Paper, paperboard 1.98 69 Metal manufactures 1.27 61 Leather, dressed fur 1.57 64 Paper, paperboard 1.23 56 Fertilizers 1.44 93 Special transactions 0.94 28 Metalliferous ores 1.37 28 Metalliferous ores 0.94 93 Special transactions 1.36 23 Rubber, crude, synthetic 0.78 63 Wood, cork manufacture 1.31 66 Nonmetal mineral 0.68 69 Metal manufactures 1.22 93.57 89.70 SITC Commodity Share SITC Commodity Share 71 Machinery, nonelectrical 18.21 71 Machinery, nonelectrical 17.47 67 Iron and steel 15.94 72 Electrical machinery 12.34 72 Electrical machinery 14.03 65 Textile yarn, fabric 10.47 73 Transport equipment 12.11 73 Transport equipment 9.16 65 Textile yarn, fabric 5.98 67 Iron and steel 5.52 58 Plastic materials 3.31 58 Plastic materials 5.35 86 Instruments, watches, clocks 2.86 89 Misc. manufactured goods 3.93 89 Misc. manufactured goods 2.81 86 Instruments, watches, clocks 3.34 26 Textile fibers 2.69 33 Petroleum and products 2.82 68 Nonferrous metals 2.56 51 Chemical elements 2.35 51 Chemical elements 2.38 26 Textile fibers 2.35 04 Cereals and preparations 2.19 68 Nonferrous metals 2.26 56 Fertilizers 1.39 04 Cereals and preparations 2.10 24 Wood lumber and cork 1.27 64 Paper, paperboard 1.98 69 Metal manufactures 1.27 61 Leather, dressed fur 1.57 64 Paper, paperboard 1.23 56 Fertilizers 1.44 93 Special transactions 0.94 28 Metalliferous ores 1.37 28 Metalliferous ores 0.94 93 Special transactions 1.36 23 Rubber, crude, synthetic 0.78 63 Wood, cork manufacture 1.31 66 Nonmetal mineral 0.68 69 Metal manufactures 1.22 93.57 89.70

One policy suggestion is to let the export sector have a more positive effect on the industrial sector by implementing trade liberalization faster than the overall reform of the enterprise system. This move will enhance the entire reform process in China and will eventually boost further trade liberalization. Therefore, the move helps to create an environment in which economic reform programs and reform of the trade system reinforce each other in order to overcome the constraints on further trade liberalization. The importance of this kind of positive effect (externalities) from the export sector and a strong demonstration effect through more frequent international transactions cannot be underestimated.

When adopting reform measures for further trade liberalization, the Government should also consider the balance between trade liberalization and exchange rate policy. The issue is important because implementing different policies may lead to conflicting results in obtaining gains from trade.7 In future liberalization attempts, &#;exchange rate policies and anti-inflation programs should be better designed so that they do not lead to overvalued exchange rates and loss of export competitiveness.&#; In other words, &#;trade liberalization must also be accompanied by a competitive exchange rate&#; (Congdon, , p. 241).

Based on the discussion in the section on institutional change, trade reform, and trade patterns (pp. 190&#;95), one important consideration for the Government in adopting reform measures is to rely mainly on incentive policies or schemes that work through the market mechanism. This is consistent with the argument of market-driven conformity between patterns of trade and resources.

Second, the issue of future trade orientation is related 2to the question of whether it is preferable for a large developing country like China, which has a huge domestic market, to rely heavily on an export-oriented development strategy.8 It can be argued that China is far from realizing its full potential for developing its external economy and will continue to gain from deepening the international integration of its economy for many years to come.9

Third, relationships between factor endowments and trade patterns change over time in a dynamic fashion. These changes, subject to market restraint, create substantial export supply potential. The implication for China of shifting comparative advantage can be discussed in the context of trade and endowment structure in East Asian economies. The structure of factor endowments in East Asian economies has two notable characteristics. One is that rapid increases in capital accumulation were observed in these economies from the s to the s. As Table 10 shows, average annual growth rates of capital stock from to in a group of selected Asian economies were much higher than the world average in terms of capital per worker (6.8 percent compared with 3.1 percent). As a result, the capital per worker ranking of most of these economies rose substantially during this period.

Table 10.

Capital per Worker Endowments in Selected Countries and Areas

Source: Song ( ).

Table 10.

Capital per Worker Endowments in Selected Countries and Areas

Capital per Worker Annual Growth Rate (U.S. dollars) (percent) Rank Rank Rank &#;74 &#;88 &#;88 Asia China 147 44 554 44 1,357 42 15.8 6.6 10.1 Hong Kong 6,020 25 9,660 25 20,234 22 5.4 5.4 5.4 India 449 42 571 43 883 44 2.7 3.2 3.0 Indonesia 361 43 718 42 2,332 39 7.9 8.8 8.4 Israel 14,776 16 19,665 19 18,096 23 3.2 &#;0.6 0.9 Japan 9,118 20 22,795 15 37,071 4 10.7 3.5 6.3 Korea 1,008 39 3,036 35 9,221 28 13.0 8.2 10.1 Malaysia 2,863 32 3,812 34 7,259 31 3.2 4.7 4.1 Myanmar 82 45 77 45 179 45 &#;0.7 6.2 3.4 Philippines 1,268 38 1,622 39 1,938 41 2.8 1.3 1.9 Singapore 4,392 29 13,812 22 28,872 14 13.6 5.4 8.5 Taiwan Province of China 1,792 36 4,937 31 9,589 27 11.9 4.8 7.6 Thailand 645 41 1,278 40 2,062 40 7.9 3.5 5.2 Turkey 1,342 37 2,311 37 3,582 37 6.2 3.2 4.4 North America Canada 19,987 8 21,881 16 30,369 12 1.0 2.4 1.8 Mexico 4,576 27 7,101 28 7,351 30 5.0 0.2 2.1 Panama 4,127 30 7,014 29 6,107 32 6.1 &#;0.9 1.7 United States 19,815 10 21,318 17 24,068 18 0.8 0.9 0.8 South America Argentina 10,874 19 13,147 23 10,501 26 2.1 &#;1.6 &#;0.1 Brazil 2,547 34 4,174 33 4,983 34 5.6 1.3 3.0 Chile 5,049 26 6,301 30 5,187 33 2.5 &#;1.4 0.1 Colombia 2,689 33 2,825 36 3,896 36 0.5 2.3 1.6 Peru 6,074 24 4,681 32 3,964 35 &#;2.8 &#;1.2 &#;1.8 Africa Egypt 851 40 992 41 3,023 38 1.7 8.3 5.7 Ghana 2,231 35 1,709 38 1,013 43 &#;2.8 &#;3.7 &#;3.3 Europe Austria 14,002 18 26,333 12 32,555 11 7.3 1.5 3.7 Belgium-Luxembourg 16,721 13 29,743 9 33,842 8 6.6 0.9 3.1 Denmark 20,805 7 32,108 8 27,739 16 4.9 &#;1.0 1.2 Finland 17,820 12 28,217 10 33,540 10 5.2 1.2 2.8 France 19,170 11 32,114 7 35,138 6 5.9 0.6 2.7 Germany, former Fed. Rep. of 22,507 6 32,209 6 34,752 7 4.1 0.5 1.9 Greece 4,488 28 10,911 24 11,846 25 10.4 0.6 4.3 Iceland 27,044 5 35,011 5 35,707 5 2.9 0.1 1.2 Ireland 8,307 22 16,005 21 20,626 21 7.6 1.8 4.0 Italy 16,617 14 25,289 13 28,506 15 4.8 0.9 2.3 Netherlands 28,855 3 37,444 4 33,579 9 2.9 &#;0.8 0.7 Norway 35,307 2 44,305 2 50,310 2 4.2 0.9 2.2 Portugal 4,119 31 8,704 27 9,188 29 8.7 0.4 3.5 Spain 8,532 21 18,808 20 20,796 20 9.2 0.7 3.9 Sweden 27,217 4 40,466 3 39,598 3 4.5 &#;0.1 1.6 Switzerland 36,447 1 45,869 1 54,024 1 2.6 1.2 1.7 United Kingdom 14,534 17 20,083 18 21,814 19 3.7 0.6 1.8 Yugoslavia, former 6,205 23 8,819 26 15,120 24 4.0 3.9 3.9 Oceania Australia 19,939 9 27,223 11 29,067 13 3.5 0.5 1.7 New Zealand 15,291 15 23,898 14 24,617 17 5.1 0.2 2.1

Source: Song ( ).

Table 10.

Capital per Worker Endowments in Selected Countries and Areas

Source: Song ( ).

The other characteristic is that, as shown in Table 11, the average annual growth rates for skilled labor in these economies during the period were almost the same as world average annual growth rates in terms of the share of skilled labor in total labor (3.6 percent compared with 3 percent). As a result, with respect to skilled labor as a percentage of total labor, the ranking of about half of the Asian economies in had worsened compared with , while the remaining economies had increased their ranking only slightly. (China, Hong Kong, and Taiwan Province of China were the exceptions.) These data may indicate that these economies were on average doing a better job of accumulating physical capital than of producing highly skilled labor from to .

Table 11.

Skilled Labor in Selected Countries and Areas

Source: Song ()

Table 11.

Skilled Labor in Selected Countries and Areas

Percent of

Total Labor Annual Growth Rate

(percent) Country Rank Rank Rank &#;74 &#;88 &#;88 Asia China 0.3 45 1.2 45 5.1 39 18.0 10.9 13.6 Hong Kong 5.1 23 5.3 32 7.4 31 0.4 2.4 1.6 India 1.7 43 2.7 42 2.7 44 5.3 0.0 2.0 Indonesia 2.2 42 2.2 44 2.9 43 0.0 2.0 1.2 Israel 11.4 2 19.0 2 22.8 3 5.8 1.3 3.1 Japan 5.5 21 7.8 20 10.3 23 3.9 2.0 2.8 Korea 2.6 38 3.2 41 6.3 37 2.3 4.9 3.9 Malaysia 4.8 25 4.5 35 7.6 29 &#;0.7 3.8 2.0 Myanmar 2.2 41 4.0 38 2.4 45 6.9 &#;3.6 0.4 Philippines 3.3 34 5.4 31 5.1 38 5.6 &#;0.4 1.9 Singapore 4.7 26 10.2 15 11.1 21 9.0 0.6 3.8 Taiwan Province of China 4.6 27 4.9 33 6.9 34 0.7 2.4 1.8 Thailand 1.3 44 2.6 43 2.9 42 8.0 0.8 3.5 Turkey 2.2 39 4.0 37 4.7 40 6.9 1.2 3.4 North America Canada 10.6 4 13.7 8 16.6 7 2.9 1.4 2.0 Mexico 3.6 32 6.2 27 7.3 32 6.2 1.2 3.1 Panama 4.5 28 6.8 26 10.3 24 4.7 3.0 3.7 United States 10.8 3 13.9 7 15.3 10 2.8 0.7 1.5 South America Argentina 6.1 19 7.5 22 7.5 30 2.3 &#; 0.9 Brazil 3.1 36 4.8 34 6.9 35 5.0 2.6 3.5 Chile 4.9 24 5.6 30 7.1 33 1.5 1.7 1.6 Colombia 3.9 31 4.5 36 9.7 26 1.6 7.1 4.9 Peru 3.3 35 7.4 24 7.6 28 9.4 0.2 3.7 Africa Egypt 4.4 29 6.1 28 11.3 19 3.7 4.5 4.2 Ghana 2.2 40 3.7 39 4.0 41 5.9 0.6 2.6 Europe Austria 6.8 17 8.7 19 13.7 16 2.8 3.3 3.1 Belgium-Luxembourg 8.0 13 17.3 3 15.7 9 8.9 &#;0.7 3.0 Denmark 9.5 7 12.2 10 21.4 5 2.8 4.1 3.6 Finland 8.2 12 15.0 5 23.1 2 6.9 3.1 4.6 France 9.1 10 11.4 12 14.1 13 2.5 1.5 1.9 Germany, former Fed. Rep. of 7.6 16 9.8 17 14.0 14 2.9 2.6 2.7 Greece 3.4 33 5.7 29 11.7 17 5.9 5.3 5.5 Iceland 6.4 18 11.1 14 11.1 20 6.3 &#; 2.4 Ireland 7.8 15 9.3 18 14.3 12 2.0 3.1 2.7 Italy 5.3 22 7.3 25 11.5 18 3.6 3.3 3.4 Netherlands 9.2 9 13.3 9 21.5 4 4.2 3.5 3.8 Norway 8.0 14 16.3 4 21.3 6 8.2 1.9 4.3 Portugal 2.7 37 3.6 40 6.7 36 3.2 4.4 4.0 Spain 4.1 30 7.4 23 8.5 27 6.8 1.0 3.2 Sweden 15.1 1 22.1 1 27.3 1 4.3 1.5 2.6 Switzerland 8.6 11 12.1 11 15.1 11 3.9 1.6 2.5 United Kingdom 9.6 6 11.1 13 15.9 8 1.6 2.6 2.2 Yugoslavia, former 5.6 20 7.6 21 9.9 25 3.4 1.9 2.5 Oceania Australia 9.3 8 10.1 16 10.6 22 0.9 0.3 0.6 New Zealand 10.2 5 14.1 6 14.0 15 3.7 &#;0.1 1.4

Source: Song ()

Table 11.

Skilled Labor in Selected Countries and Areas

Source: Song ()

How have the resource patterns described above affected the development of trade, particularly in manufactured products, in these economies? The question can be approached using the three propositions most commonly put forward with respect to shifts in comparative advantage. These propositions are based on changes in commonly used but broadly defined capital-labor ratios as indicators of changes in resource supplies.10

The first proposition is that an increase in the ratio of capital to labor will lead to an increase in the size of the manufacturing sector as a proportion of the total economy. The second proposition is that a further increase in this ratio will enhance production of more capital-intensive products within the manufacturing sector. The third proposition is that an increase in the ratio of skilled labor to workers, together with an increase in the capital-labor ratio, will be conducive to more sophisticated manufacturing production with greater value added.

In a dynamic context, these three propositions can be considered as three stages of structural change in the development process (overlapping between stages may exist), and they can thus be used to examine trade development in these Asian economies based on the characteristics of their resource patterns.

Rapid increases in capital-labor ratios from the s to the s led to a continuous expansion of the manufacturing sectors of these Asian economies. In most cases, expansion took place in sectors where labor-intensive manufactured goods were being produced, partly because &#;the process of capital accumulation and rising per capita incomes forces changes in the industrial composition of manufacturing activity through its effect on the wage level&#; (Garnaut and Anderson, , p. 386).

The impact of changes in resource supplies on trade patterns of manufactured products in these economies can be seen in the growth rate of exports. Table 10 lists the average annual growth rates of GDP, total exports, and exports of manufactures in a group of selected Asian economies and in the United States for the periods &#;80 and &#;90.

The table shows that annual real growth rates of manufactured exports in these economies were considerably higher than the growth rates of total exports throughout the two periods, providing further evidence of the expansion of the manufacturing sector in these Asian economies. It has been observed that the more advanced an economy becomes, the narrower the gap between the growth rate of its total exports and that of its manufactured exports. Thus, the potential for revealed comparative advantage (gaining in market share) in manufactured products is relatively large for less developed economies. Fulfillment of this potential and the structural changes that accompany this process will have important implications for the Chinese economy. &#;Over time, as the per worker endowment of capital increases, the comparative advantage within the manufacturing sector will shift towards more capital-intensive activities&#; (Anderson and Smith, , p. 296).

All except Japan ranked low in terms of capital per worker in (Table 10). In , Korea and Taiwan Province of China had improved their rankings of capital per worker, and by , both had become net exporters of capital-intensive manufactured products. Taiwan Province of China&#;s progress was even more obvious in , by which time it had become a net exporter of labor-intensive, capital-intensive manufactured products and machinery after rapidly improving its capital per worker ranking (Song, , chap. 4).

The third proposition is that, within its manufacturing sector, a country tends to specialize in the production and export of more sophisticated manufactured products with high value added, such as machinery and chemicals, and that this is mainly attributable to an increase in the country&#;s skilled labor endowment together with an increase in its capital-labor ratio. This proposition in the context of East Asian economies also has important implications for China&#;s export supply potential.

Relatively high growth rates in physical capital and semiskilled rather than skilled labor indicate that much of the change in trade structure (reflected in rapid increases in labor-intensive and capital-intensive manufactured products) in these economies during the period under study was driven by the accumulation of physical capital and semiskilled labor. This is reflected in the changing structure of trade in manufactured products, particularly machinery and chemicals, in these economies and suggests the huge potential these economies can realize by increasing skilled labor as physical capital increases.

Table 12 presents manufactured commodity shares for the Asia-Pacific economies. The figures show that China almost doubled its manufactured commodity share from to . The estimated share in was still lower than that of Hong Kong, Japan, Korea, and Taiwan Province of China but was much higher than that of many economies in the region and also above the average for the countries of the Asia-Pacific Economic Cooperation (APEC).

Table 12.

Manufactured Commodity Shares of Total Exports

(In percent)

Source: International Economic Databank, Australian National University.

1Asia-Pacific Economic Cooperation.

Table 12.

Manufactured Commodity Shares of Total Exports

(In percent)

Country APEC countries1 55.30 63.80 64.40 78.32 80.70 Australia 14.55 18.87 26.26 36.15 35.51 Brunei Darussalam 0.02 0.07 0.01 13.57 11.25 Canada 36.68 51.21 48.48 63.65 64.18 Chile 4.12 4.44 9.70 12.64 15.24 China (estimated) 45.79 45.07 48.72 80.01 85.42 China (official) &#; &#; &#; 73.46 79.25 Hong Kong 93.56 95.91 96.51 95.80 95.29 Indonesia 3.70 1.41 2.43 35.46 47.53 Japan 91.14 93.29 95.74 97.44 97.53 Korea 59.43 76.57 89.91 93.58 92.89 Malaysia 6.04 7.40 19.04 54.16 64.96 Mexico 16.42 32.53 28.08 43.51 52.43 New Zealand 5.42 11.00 20.18 24.93 26.54 Papua New Guinea 9.57 4.77 3.32 11.16 12.03 Philippines 5.66 7.60 36.83 68.80 72.96 Singapore 34.20 30.50 53.95 72.80 78.04 Taiwan Province of China 41.47 76.10 87.92 92.65 91.94 Thailand 3.05 8.01 28.08 64.32 67.92 United States 65.41 70.15 67.79 78.14 80.45

Source: International Economic Databank, Australian National University.

1Asia-Pacific Economic Cooperation.

Table 12.

Manufactured Commodity Shares of Total Exports

(In percent)

Source: International Economic Databank, Australian National University.

1Asia-Pacific Economic Cooperation.

Further industrialization requires the continual injection of large quantities of capital into an economy. Thus, capital flows on a larger scale and in various forms can be anticipated within the Asian economies. A combination of highly skilled labor and physical capital will definitely lead to production of highly sophisticated products. This in turn will generate demand for a highly skilled labor force along the path of further industrialization in these Asian economies.

If the issues of market competition, enhancing international and regional capital flows, and facilitating the movement of skilled labor in the region are resolved, shifts in comparative advantage in the Asian region can be facilitated in such a way that its resources are used most efficiently. A natural consequence of this would be that the degree of integration in the region would increase.

In addition, the accumulation of human capital in these economies lagged behind the accumulation of physical capital during the period under study. Therefore, there is a huge potential for the East Asian economies to gain more competitive edge by producing more sophisticated manufactured products through greater investment in human capital development through education, training, and diffusion of knowledge and technological know-how. A more efficient use of their labor force, particularly the skilled labor force, through better management and encouragement of labor flows, will also help these economies gain more competitive edge.

These changes, based on the shift of comparative advantage in an international context, are particularly relevant for China. As a latecomer and one of the world&#;s most rapidly developing economies, China is accumulating both physical capital and human capital on a large scale, which provide great opportunities for China to increase its export supplies not only of labor-intensive but also of capital-intensive products on the world market.

However, market issues remain. As Rana () says, &#;shifts in comparative advantage are &#; not smooth and could involve considerable frictions in adjustment&#; (p. 244). Market constraints on the development process have been aggravated by structural adjustment in industrial countries and could lead to a resurgence of trade protectionism. Any such movement would undoubtedly affect the development process. As economies become more integrated, the sustained growth of the world economy depends very much upon whether countries can properly settle this market issue.

China&#;s economic reform in general and the changes in trade policy in particular since the beginning of the reform process in the late s have made China&#;s patterns of trade conform more closely and dynamically to its patterns of resource endowment. The challenge is, however, that, owing to the size of China&#;s economy and the increasing scale of its foreign trade, both China and its trading partners have to cope with China&#;s dynamic realization of its comparative advantage. The issue of China&#;s membership in the recently formed World Trade Organization (WTO) becomes important in this context.

In a domestic context, endowment structure and wide regional differences in terms of level of development provide China with much leeway to expand its trade activities. There exists a ladder of comparative advantage owing to these regional and structural differences within China, which leads to a shift of comparative advantage domestically. The shift can be expected to last for quite a long time because of wide regional differences in terms of endowment structure and level of development. When shifts of comparative advantage take place domestically, they demonstrate different patterns of comparative advantage within a single economy and therefore indicate a wide scope for developing trade. This will overcome the economy&#;s growth limits as set out in the traditional theory of comparative advantage.

The size of an economy makes a considerable difference in terms of domestic shifts of comparative advantage, because large countries tend to have different factor endowments and levels of development across regions. There are also some benefits in these shifts of comparative advantage within a country. For example, domestic trade barriers are relatively easier to overcome than those between countries.

One challenge posed by the large size of an economy, however, is that domestic shifts of comparative advantage like those in the international setting require a well-developed domestic market. In other words, shifts in comparative advantage are contingent on a market foundation for defining the relationship between patterns of trade and resource endowment. In this sense, the current market reform in China will enhance both types of shifts of comparative advantage, widening the scope for trade development in China. Domestic shifts in comparative advantage will not compromise China&#;s external trade as long as such shifts do not lead to an expansion of import-competing industries relative to the country&#;s export sector.

Concluding Remarks

China has handled the sequencing and timing of its reform program well. The whole reform process is heading in the right direction, namely, toward gradual trade liberalization and reform of the economic system. Market-oriented institutional change raises the degree of marketization of the economy; marketization causes a convergence of the pattern of trade and resource endowment, thereby generating trade expansion. In a transition economy, marketization has differential effects on the export sector and nonexport sectors (owing to a quicker response in the export sector to the changing incentive scheme resulting from market-oriented reform measures), causing export expansion to contribute more to general economic growth. A dynamic shift of comparative advantage both internationally and domestically raises China&#;s prospects for further increasing its export supplies and enhancing the contribution of export expansion to economic growth in China. This historical process started in the late s, and its potential will continue to be realized for many years to come.

Future studies could focus on a more detailed analysis of policy-induced structural changes that lead to trade expansion and on theoretical explanations for, and the character of, shifts in comparative advantage in a domestic setting.

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