John Fernald

Prakash Loungani

English

Research Papers in Economics

Chicago Fed Letter
Comrades or competitors? On trade relationships between
China and emerging Asia
by John Fernald, senior economist and economic advisor, Federal Reserve Bank of Chicago, and
Prakash Loungani, assistant to the director, External Relations Department, International Monetary Fund1
What are the implications of China’s economic growth for its neighboring economies?
Do the mutual benefits outweigh the costs of intensifying competition in emerging
Asia? Recent research on trade between Asia and the U.S., as well as among the
Asian economies, highlights the changing nature of these relationships and the
attendant costs and benefits for all parties.
ESSAYS ON ISSUES THE FEDERAL RESERVE BANK MARCH 2004
OF CHICAGO NUMBER 200
1. Exports from China and emerging Asia
NOTES: The black line shows recorded imports by all countries in the world from
either China or Hong Kong, excluding China’s imports from Hong Kong and Hong
Kong’s imports from China. The blue line shows imports by all countries in the
world from developing Asian economies other than China or Hong Kong.
SOURCE: International Monetary Fund’s Direction of Trade Statistics.
1978 ’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02
-10
0
10
20
30
40
percent change
China/HK
(net of internal China/HK trade)
Developing Asia
(excluding China and HK)
Discussions of trade flows in Asia high-
light two opposing views on the nature
of trade links between China and emerg-
ing Asia.2 One view is that these econo-
mies are comrades. They share mutual
benefits from the
growing incomes of
Chinese consumers
and from the poten-
tial of greater inte-
gration of product
lines across the re-
gion, both of which
are reflected in the
expanding intra-
regional trade in Asia.
The other view sees
China and emerging
Asia as competitors:
These economies spe-
cialize in producing
goods that are rela-
tively close substitutes
and, hence, they are
locked in competition
for market share in
major export markets such as the United
States.3
This Chicago Fed Letter reports on recent
research that shows that elements of
both views are right.4 The first view is
right in stressing many of the beneficial
effects of China’s growth on the rest of
Asia. China’s tremendous growth has
translated into skyrocketing imports
from the rest of Asia, particularly since
its World Trade Organization accession
was completed in December 2001. In
addition, as China continues its rapid
development, other economies in the
region have an incentive to try to move
up the value chain as their comparative
advantage shifts to higher value-added,
less labor-intensive industries. Taiwan,
for example, is attracting more invest-
ment in high-tech research facilities as
opposed to pure manufacturing, and
Singapore and (to a lesser extent)
Malaysia are trying to broaden the scope
of their manufacturing sectors to include
bio-technology and other emerging
technologies.
But the other view is also right in claim-
ing that China’s increased integration
into the global economy has meant that
such sectoral transitions in other Asian
economies are likely occurring at a fast-
er pace than would otherwise have been
the case. For example, manufacturing
appears to be moving from elsewhere
in Asia to China, in large part to take
advantage of low labor costs and a2. Asian NIEs’ share of U.S. exports, 1989–2002
NOTES: The sum of the three groups is 100%.
SOURCE: International Monetary Fund’s Direction of Trade Statistics.
percent
China & HK Asian NIEs ASEAN-4
0
15
30
45
60
1989
2002
3. China and ASEAN-4 shares in major export industries
1989 2002
Industry China & HK NIEs ASEAN-4 China & HK NIEs ASEAN-4 US $ billion
213 7 72 21 24 42 34 67.8
400 36 52 12 69 12 20 41.1
410 24 66 10 67 22 11 38.8
411 38 57 5 84 11 6 19.4
412 19 64 18 53 17 30 17.1
NOTES: NIEs are Korea, Singapore, and Taiwan. ASEAN-4 countries are Indonesia, Malaysia, the Philippines, and Thailand. HK is
Hong Kong. For the five largest industries ranked by total value of imports from Asia, figure shows shares in the U.S. market by
region. For each year and each industry, shares sum to 100%.
SOURCE: International Monetary Fund’s Direction of Trade Statistics.
growing domestic market. Asian econ-
omies therefore need to take steps to
ease the transition of their labor force
into other sectors, perhaps including
the provision of social safety nets to ease
the costs of adjustment.
Growing together?
Figure 1 shows that exports by China
and by other Asian economies tend to
move together.5 This striking co-move-
ment suggests that common factors,
particularly demand from developed
economies, are probably more important
determinants of Asian exports than is
competition with China. The similari-
ty in growth rates also points to the in-
creasing vertical integration of many
product markets in Asia. As an illustra-
tion of this, take the example of a small
electronic device like a DVD player. The
manufacturing of some components—
e.g., motherboards, memory—might be
handled in one or several of the ASEAN
economies or the NIEs. Those compo-
nents are then exported to, say, China,
where they are assembled into the DVD
player. The DVD player is then shipped
to its final destination. Several econo-
mies in the region might thus provide
value-added to a single device. Hence,
as demand for DVD players fluctuates,
one would expect export growth to be
positively correlated across countries.
Statistical tests confirm that the posi-
tive association between China’s ex-
port growth and that of other Asian
economies shown in
figure 1 is difficult
to shake off. Ahearne,
Fernald, Loungani,
and Schindler (2003)
estimate real export
growth equations for
Asian economies of
the kind typically
estimated in the lit-
erature, where real
exports are assumed
to depend on foreign
demand and real ex-
change rates. When
China’s real export
growth is added to
these equations, the
estimated coefficient
associated with this variable turns out
to be positive. Allowing for changes
over time in the impact of China’s ex-
port growth on the export growth of
other Asian economies does not change
this conclusion.
Digging deeper
It may be that effects of export compe-
tition manifest themselves not at the
aggregate level but in particular geo-
graphic markets and in particular indus-
tries. Nowhere is export competition
among Asian economies likely to be as
intense as in the U.S. market. How have
the market shares of exports of the
various Asian economies changed over
time? For this analysis, we classified
Asian economies into one of three coun-
try groups: China (China and Hong
Kong), the NIEs (Korea, Singapore, and
Taiwan), and the ASEAN-4 (Indonesia,
Malaysia, Philippines, and Thailand). We
classified exports into 48 industries, at
the three-digit industry level, using data
from the U.S. Department of Commerce’s
Bureau of Economic Analysis (BEA).
Figure 2 illustrates the dramatic changes
in export shares for the three country
groups between 1989 and 2002. In 1989,
China and Hong Kong together account-
ed for about a quarter of total exports to
the United States from the three groups.
By 2002, their share had doubled. Con-
versely, the share of the Asian NIEs
halved from nearly 60% of the total to
30%. The ASEAN-4 have held their own,
though their share has see-sawed, rising
from 17% in 1989 to 25% in 1999 before
falling back to 21% in 2002.
Industry-level data shed further light on
the micro patterns behind this trans-
formation in overall market shares.
First, there is no doubt that China has
emerged as a significant exporter across
virtually the entire spectrum of indus-
tries: Its share has increased in 42 of
the 48 industries. In contrast, there are
only five industries in which the NIE
share was higher in 2002 than in 1989,
and these are all in the industrial sup-
plies and materials category (one-digit
code “1”).6 In addition, there is one in-
dustry, new and used passenger cars
(industry code 300), in which the NIEs
have maintained a 100% share of U.S.
imports from emerging Asia since 1989.
But with foreign direct investment in
China’s auto sector growing rapidly, it
may not be too long before China starts
exporting autos. Second, market share
increases for the ASEAN-4 are also quite
prevalent—in 26 of the 48 industries.
This means that cases in which the shares
of both China and the ASEAN-4 have
increased are just as likely as cases inMichael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research; Douglas
Evanoff, Vice President, financial studies; David
Marshall, Vice President, macroeconomic policy research;
Daniel Sullivan, Vice President, microeconomic policy
research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
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Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
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ISSN 0895-0164
4. Asian NIEs’ export growth
SOURCE: International Monetary Fund’s Direction of Trade Statistics.
percent
1989-93 1993-2000 2000-2002
-10
0
10
20
30
Exports to G-3
To China and Hong Kong
which their shares have moved in op-
posite directions.
Overall, the results are suggestive of a
“flying geese” pattern, in which China
and the ASEAN-4 move into the prod-
uct space vacated by the NIEs. This con-
clusion is only reinforced if one looks
at the five largest industries ranked by
the dollar amounts of U.S. imports in
2002. As shown in figure 3, in each of
these industries, the shares of China and
the ASEAN-4 have moved in the same
direction. So, contrary to some popu-
lar perceptions, China’s gains in mar-
ket share have not come about primarily
at the expense of the labor-intensive
ASEAN-4 economies. Instead, China
has displaced the NIEs in industries that
these more advanced economies were
relinquishing, particularly apparel, foot-
wear, and household products. This is a
healthy, rather than disturbing, devel-
opment. It mimics an earlier period,
when the NIEs moved into the industries
relinquished by a more advanced Japan.
While the analysis here is focused on
competition in the U.S. market, similar
patterns of displacement of the NIEs
by China and the ASEAN-4 are also
emerging in the major export markets
of Europe and in Japan.7
Closing the circle
The analysis thus far has shown that the
Asian NIEs are losing market shares in
the U.S. (and other) markets in almost
all categories of goods, but that their
overall export growth
has remained quite
robust. This raises
an obvious question:
“Where are exports
from the NIEs go-
ing?” The answer, of
course, is that China
itself has emerged
as a major importing
power, taking in
products from the
NIEs at robust rates
of growth. Figure 4
compares the aver-
age annual growth
of NIE exports to
the Group of 3 (the
G-3, or the U.S., the Euro area, and
Japan) with that of their exports to
China. In the early years following the
opening up of the Chinese market,
growth in NIE exports to the country
exceeded 25% a year compared with a
rate of 2% growth in exports to the
G-3. The difference is accentuated
both by the fact that exports to China
were starting off from a very low base
and that there was a recession in the
United States over this period. But even
over the period 1993 to 2000, when the
effects of both these factors had worn
off, NIE exports to China continued to
grow at a double-digit annual rate and
outstripped growth in exports to the
G-3. The contrast in the recent period,
2000–02, is remarkable. In this period,
which again was marked by a global slow-
down, NIE exports to the G-3 declined,
while NIE exports to China grew at a 7%
annual rate. Clearly, China bolstered
the performance of the Asian NIEs at
a time when there were few other bright
spots. This evidence also indicates that
the shifting of production facilities to
China from the NIEs likely has boost-
ed NIE exports of intermediate prod-
ucts to China for processing and export
of the finished goods.8
Conclusion
Industry-level data clearly show that
China is displacing the other countries
of emerging Asia, particularly the Asian
NIEs, in major export markets such as
the United States. The changes in
market shares are so sharp in many
cases that it is quite likely that they re-
quire actual shifts in resource alloca-
tions, which can often be painful for
those who lose out. From this perspec-
tive, China and emerging Asia are
competitors. The appropriate policy
response, however, would be to take
steps to smooth the flow of resources
across sectors. But the story doesn’t
end there. There are two reasons why
China and emerging Asia are also com-
rades. First, China itself has emerged
as a major importer of goods from the
countries of emerging Asia. Second,
Asian countries are organizing produc-
tion of goods in a way that increases
the efficiency with which they can ex-
port to the markets of the industrial-
ized countries.
1 The views expressed are the authors’ and
should not be interpreted as those of the
International Monetary Fund.
2 “Emerging Asia” is used here to refer to
the newly industrialized economies (NIEs)
of Korea, Singapore, and Taiwan and the
so-called ASEAN-4, Indonesia, Malaysia, the
Philippines, and Thailand. “China” refers
to China and Hong Kong. The labels “Hong
Kong” and “Taiwan” are used to refer to
“People’s Republic of China—Hong Kong
Special Administrative Region” and “Tai-
wan Province of China,” respectively.
3 See Diwan and Hoekman (1999), “Com-
petition, complementarity and conta-
gion in East Asia,” in The Asian Financial
Crisis: Causes, Contagion and Consequences,
Pierre-Richard Agénor, Marcus Miller,David Vines, and Axel Weber (eds.), New
York: Cambridge University Press, chap. 10.
4 See Ahearne, Fernald, Loungani, and
Schindler (2003), “China and emerging
Asia: Comrades or competitors?,” Feder-
al Reserve Bank of Chicago, working pa-
per, No. WP 2003-27.
5 The figure shows export growth (measured
in dollar values) to the world from Chi-
na (defined to include Hong Kong) and
from the rest of developing Asia, using
trading partner statistics. Fernald, Edison,
and Loungani (1999) (“Was China the
first domino? Assessing links between
China and the rest of emerging Asia,”
Journal of International Money and Finance,
Vol. 18, pp. 515–535) argue that it makes
economic sense to combine data for China
and Hong Kong even in the period pre-
ceding formal unification, since many
goods use Chinese labor and Hong Kong
management and distribution skills. It makes
statistical sense to use trading-partner
statistics, to avoid double-counting
Chinese and Hong Kong exports.
6 They are 100 (petroleum and products),
123 (other agricultural products and tex-
tile supplies), 140 (unmanufactured steel-
making and ferro-alloying materials), 142
(crude and semifinished nonferrous met-
als), and 160 (unfinished nonmetals).
7 See Fernald, Edison, and Loungani
(1999).
8 For a detailed discussion of the rise in in-
traregional trade in Asia, see Zebregs (2003),
“Intraregional trade in Asia,” International
Monetary Fund, policy discussion paper.

Comrades or competitors? on trade relationships between China and emerging Asia

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Comrades or competitors? on trade relationships between China and emerging Asia

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