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A “Greater China” trade Bloc?
A ‘IGREATER CHINA” TRADE BLOC? Shang-Jin Wei and Jeffrey Frankel
ABSTRACT: Over the 198Os, trade between China and Hong Kong, and between Taiwan and Hong Kong has been increasing rapidly. The three economies appear to trade three times as much as a random trio of economies in the world even after we take into account their economic size, per capita GNP and geagraphic distance. But this does not necessarily imply an emergence of a “Greater China” trade bloc. Part of the extra trade is due to the fact that they all speak Chinese. Another part resuIts from the political reality that the trade between China and Taiwan has to be rerouted through Hong Kong (or other third countries). Once we control for al1 these factors, the trade among the three economies no longer seems unusually high JEL ClassificationNumbersrFo2, Ff4, FJ5
1NTRDDUClION Increasingly, one hears talk of a “Greater China” trade bloc in formation. Two factors might have contributed to the interest in the subject. The first is the rapid growth of the Mainland Chinese economy, following three decades of rapid growth of Hong Kong, Taiwan, and other Asian NICs. Qver the 198Os,mainland China had a 9.5 percent growth rate per annum in real term, three times as fast as an average World Bank member country during the same period. China’s trade with the outside world had an even faster growth during the same period (Lardy, 1992; Sung, 1991). There is evidence that its open-door policy has contributed sig~fic~tly to its rapid growth (Wei, I993). Second, regionalization of trade and economic relations appears the trend of the day, and his caught increasing attention. The conclusion of the North America Free Trade Agreement (NAFTA) and the Single Europe Act of 1986, the Maastricht Treaty and other programs in the European Community (now called the European Union) are but the most recent examples of formation or consolidation of regional blocs. Against this general background, the increasing trade and investment relationship among East Asian economies has aroused people’s curiosity or concern regarding the potential for regional trade blocs in East Asia. The notion of a “Greater China” trade bloc suggests something special about the trading relationship among certain group of economies in East Asia. But the notion is largely vague as it has not been subject to a systematic investigation‘ The purpose of this paper is to review the evidence and examine in a relatively systematic way whether some versions of a ‘*Greater China” grouping of countries have emerged as a regional trade bloc. The paper is organized as follows. In the next section, we will spell out possible groups of countries in East Asia that can be loosely linked to either ethnic Chinese people/businessmen or Chinese culture. We will also review the trend of regionalization elsewhere in Directall corresp~n&?rn~? to: Shang-Jin Wei, Kennedy School of Gavemment, Harvard University, Cambridge, MA 02138. Jeffrey Prankel, Department
of Economics,
China Beonomic Review, Volume 5, Number 2,1994, All rights of reproduction in any form reserved.
University
of California,
pages 179-M
BerkeIey, CA 94720.
Copyright
0 I994 by JAI Press, Inc. ISSN: lO43-9slx~
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the world. In Section 2, a statistical model (gravity model) is described that will be used to investigate possible intensification of regional trade. In Section 3, we focus on the possibility of a “Greater China” bloc by systematically considering the contribution of a common language to trade, the possible presence of an EAEC trade bloc, and the implication of indirect trade between China and Taiwan. Section 4 discusses briefly the contribution of overseas Chinese to China’s growth through direct investment. Concluding remarks are provided in Section 5.
POSSIBLE “GREATER CHINA” BLOCS AND THE REGIONALIZATION OF THE WORLD TRADE Definitions of Potential Trade Blocs in East Asia In this paper, we will consider three sequentially nested groupings of countries in East Asia that can be loosely linked by the presence of ethnic Chinese or the influence of Chinese culture. At the most narrow level, one may think of mainland China, Hong Kong, and Taiwan as constituting a potential bloc.’ For subsequent discussions, we will call it “Bloc A.” All three economies once belonged to one sovereign country and will possibly be so again in the future, though politics and history have separated them apart thus far. A second possible grouping may add Singapore, Malaysia, Indonesia, Thailand and the Philippines to the above list. In all these economies, ethnic Chinese account for a subst~ti~ share of the ~pulation, and even larger share in the economic powers. Although these economies will likely resent to be called as part of a “Greater China” bloc, they are a group countries among which ethnic Chinese are economically influential. In this paper, we will call this group “Bloc B.” In addition to these economies, Confucian culture and (modified) Chinese language are also influential in Japan and Korea. These two economies together with all the economies in Bloc B are (perceived to be) engaging in an intimate economic relationship, and thus may constitute a potential bloc. Following the terminology proposed by Malaysian Prime Minister Mahatir, we will refer to this group as “East Asian Economic Caucus,” or EAEC for short,
Trade Regionali~atlon in the World Among various parts of the world, formal regional economic ~~gements have progressed the furthest in Europe. Within the European Community (EC), the Single European Act of 1986 resulted in the elimination of most trade barriers in 1992. Most members removed capital controls as well by 1990. Now they are emboldened to plan for an eventual unification of national currencies (the European Monetary Union, or EMU) by the end of the century. In addition to the deepening of integration among the existing members, the EC is also considering enlargements to include those of the other European countries. The first stage of enlargement is largely targeted to include the members of European Free Trade Association who wish to join. The second stage could also include countries from Central and Eastern Europe. In the Western He~sphere, the North America Free Trade Agreement (NAFTA) among the U.S., Canada and Mexico has certainly received tremendous attention in the U.S. due to a heated debate before its approval by the U.S. Congress at the end of 1993. Even before
A “GREATER CHINA” TRADE BLOC?
181
the signing of NAFTA, the Canadian-US Free Trade Agreement took effect in 1989, the countries in part of the South America agreed in 1990 to establish a free trade area (MERCOSUR) among themselves by 1994. Even the moribund Andean Pact, another group of countries in South America, went forward to implement removal of trade barriers among its members in 1991. In contrast to Europe and the Western Hemisphere, formal regional arrangements in East Asia are almost absent. One rare exception is the Australia-New Zealand Closer Economic Relationship that was advanced in 1983. It even attempts to go beyond removal of trade barriers by propositions to harmonize some of the competition policies between the two signature countries. Beyond the bilateral level, the Association of SouthEast Asian Nations (ASEAN), although slow to get off the ground, did in 199 1 endorse the idea of establishing an ASEAN Free Trade Area (AFTA) with a 15-year phasing-in period. Although Pacific Asia is less inclined to establish formal i&a-regional blocs through government actions than is the case in Europe or the Americas, de facto blocs could still emerge nonetheless in informal private-sector ways. Mainland China, Taiwan and Hong Kong (Bloc A) is becoming a “growth pole” deriving its dynamism by the rapid industrialization in the Mainland made possible by the decade-long economic reform in China. Some other East Asia countries (for example, Singapore, Malaysia, Indonesia, and other countries in Bloc B) may also trade intensively among themselves and with China, Hong Kong and Taiwan, possibly through the entrepreneurship of the Chinese diaspora. Another possible view is that Japan could be establishing a yen bloc in East Asia, not necessarily through preferential trading treaties, but through foreign direct investment, overseas development assistance and other financial flows to the rest of Asia. Such propositions should be subject to empirical investigation rather than taken for granted.
THE GRAVITY MODEL To judge whether or not a “Greater China” bloc is in emergence among a selected number of countries, the key is to establish a “norm” of bilateral trade. Only when we have this “norm” can we meaningfully say certain countries trade more among themselves than other countries in the world and thus may have formed an implicit bloc. This section discusses the framework that we use to establish the norm of trade volume. A systematic framework for measuring what patterns of bilateral trade are normal around the world is offered by the gravity model. In the model, economic size, geographic distance and other natural determinants of bilateral trade volume are considered. A dummy variable can then be added to represent when both countries in a given pair belong to the same regional grouping (for example, “Greater China” Bloc A). One can check how the level and time trend in, for example, “Greater China” Bloc A, compare with those in other groupings. The dependent variable is trade (exports plus imports), in log form, between pairs of countries in a given year. We have 63 countries in our data set, so that there are 1,953 data points (=63x62/2) for a given year.* The goal, again, is to see how much of the high level of trade within each region can be explained by simple economic factors common to bilateral trade throughout the world, and how much is left over to be attributed to a special regional effect. One would expect the two most important factors in explaining bilateral trade flows to be the geographical distance between the two countries, and their economic size. These fac-
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tots are the essence of the gravity model (and indeed are the presumed source of the name, by analogy to the formula for gravitational attraction between two masses). A large part of the apparent bias toward intra-regional trade is certainly due to simple geographical proximity. Indeed Krugman (1991b) suggests that most of it may be due to proximity, so that the three trading blocs are welfare-improving “natural” groupings (as distinct from “unnatural” trading arrangements between distant trading partners such as the United Kingdom and a Commonwealth member). Despite the obvious importance of distance and transportation costs in determining the volume of trade, empirical studies surprisingly often neglect to measure this factor. Our measure is the log of distance between the two major cities (usually the capital or economic center) of the respective countries. We also add a dummy “Adjacent” variable to indicate when two countries share a common land border. Entering GNPs in product form is empirically well-established in bilateral trade regressions. It can be easily justified by the modern theory of trade under imperfect competition.3 In addition there is reason to believe that GNP per capita has a positive effect, for a given size: as countries become more developed, they tend to specialize more and to trade more. The equation to be estimated is: log ( Tij) = a + pilog (GNPiGNPj)
+ &log (GNP/popiGNP/popj) (1)
+ &log (DISTANCE)
+ f14 (ADJACENT
+ yfBloc
-A)
+ uij.
“Bloc-A” is a dummy variable for bilateral trade among Bloc-A economies (China, Hong Kong, and Taiwan). Similarly, we can add another dummy, “Bloc-B,” for common membership in Bloc B (Bloc A countries, plus Singapore, Malaysia, Indonesia, Thailand and the Philippines). Table 1 reports the basic regression results.4 We found all three standard variables to be highly significant statistically (> 99 percent level). The coefficient on the log of distance was about -0.58 for 1990, when the adjacency variable (which is also highly significant statistically) is included at the same time. This means that when the distance between two non-adjacent countries is higher by one percent, the trade between them falls by about 0.58 percent. We tested for possible non-~ne~ty in the log-distance term, as it could conceivably be the cause of any apparent bias toward intra-~gion~ trade that is left after controlling linearly for distance. It turns out that the addition of a quadratic term of the distance variable makes little difference to the key inference in the paper. The estimated coefficient on GNP per capita is about 0.28 as of 1980, indicating that richer countries do indeed trade more, though this term declines during the 1980s reaching 0.09 in 1990. The estimated coefficient for the log of the product of the two countries’ GNPs is about 0.78 in 1990, indicating that, though trade increases with size, it increases less-than-proportionately (holding GNP per capita constant). This presumably reflects the widely-known pattern that small economies tend to be more open to international trade than larger, more diversified, economies. We have added a few checks for econometric robustness of our specification. Using the non-linear maximum likelihood method, we have tried running the equation in multip~cative form, instead of log-linear, so as to allow the inclusion of pairs of countries that are reported as undertaking zero trade. (Under our log-linear specification, arty pair of coun-
183
A “GREATER CHINA” TRADE BLOC?
Table 1 “Greater China” Trade Bloc (1980-1990) 1980
1985
1990
1980
1985
1990
0.57**
0.17** (0.02)
(9.02)
0.78** (0.02)
0.76** (0.02)
0.57** (0.02)
0.78** (0.02)
GNP per capita
0.27** (0.02)
0.06** (0.02)
0.07** (0.02)
0.28** (0.02)
0.08** (0.02)
0.09** (0.02)
Distance
-0.62**
-0.41** (0.04)
-0.57** (0.03)
-0.45**
(0.04) Adjacency
0.83** (0.16)
0.92** (0.19)
1.04** (0.18)
0.87** (0.16)
0.93** (0.20)
1.06** (0.18)
Bloc A
2.48** (0.28)
1.16* (0.50)
2.83** (0.15)
0.44 (0.36)
0.88## (0.61)
1.02** (0.25)
2.18** (0.23)
0.93** (0.26)
1.91** (0.21)
1708
1343
1573
-0.62** (0.03)
Bloc B
# observations
1708
1343
1573
(0.04)
-0.58** (0.03)
SEE
1.27
1.34
1.14
1.25
1.34
1.12
adj. R2
0.68
0.46
0.74
0.69
0.47
0.75
Nores:
Heteroskedastic-consistent standarderrors are in parentheses ** denotes significant at one percent level (t ~-2.576) * denotes significant at five percent level (t => l.%) # denotes significant at 10 percent level (t => 1.645) #+ denotes significant at 15 percent level (f => 1.44) All variables except the dummies are in logarithms AU regressions have an intercept whose estimae is not reported here.
tries that shows up with zero trade must necessarily be dropped from the sample.) We find that the inclusion or omission of such countries in the multiplicative specification makes little difference to the results.5 Using weighted least square method, a correction for heteroscedasticity based on the size of the countries also makes little difference to the results. Finally, we have also added certain factor endownment variables (differences in capital/ labor ratio, skilled and unskilled labor ratio, and land/labor ratio) to the regression (only for 1980 due to data availability). The coefftcient estimates on other variables are essentially unchanged. These results are not reported to save space. ESTIMATION
OF TRADE-BLOC
EFFECTS
If there were nothing to the notion of trading blocs, then these four basic variables would soak up most of the explanatory power. There would be little left to attribute to a dummy variable representing whether two trading partners are both located in the same region. In this case the level and trend in i&a-regional trade would be due solely to the proximity of the countries, and to their rapid rate of overall economic growth. If we first look at the first columns where only Bloc-A dummy is included, we find that the it&a-Bloc-A trade is highly significant statistically and astonishingly large in magnitude. Two Bloc A economies trade over three times as much as a random pair of
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countries in the world, after taking into account distance and the other gravity variables. Fu~he~ore, comp~ng the estimates for 1980 and 1990, the i&a-Bloc-A trade has apparently become more intense towards the end of the decade than at the beginning of the decade. In calculating the distances among countries, the city of Shanghai is used as a point of reference. If we used Fuzhou, Guangzhou or any other city south of Shanghai, the intraBloc A trade bias would have been less pronounced. That is, the trading relation among the Bloc A economies would have been less a puzzle. In the last three columns, Bloc-B dummy is added to the regressions. Bioc-B dummy is sig~~c~t, vacating that economies with a large Chinese diaspora do trade more than what can be explained by economic size, development level and geographical proximity. On the other hand, the dummy, Bloc-A, loses its statistical significance (at the IO percent level) for 1980 and 1985, suggesting the intra-Bloc-A trade bias for those years could be entirely due to the extra trade tendency of economies with large Chinese populations. But in 1990, both Bloc-A and Bloc-B are positive and significant at the one percent level. ‘Ikvo Bloc-B economies tend to trade 190 percent more than the prediction of the gravity model. On top of that, Bloc A economies trade au additional 100 percent more than average countries in Bloc B . Linguistic and Colonial Links The speci~cation in Table 1 could exaggerate the extent of ink-regions trade bias among Blocs A aud B countries. For reasons economic theories have relatively little to say about but are nevertheless important, countries with common languages or historical ties tend to trade more than otherwise.6 It is possible that Bloc-A countries trade more with each other simply because they all share Chinese language, but they may not trade more than other countries that also share a common language. To investigate this possibility, we add a dummy to represent when a pair of countries speak a common language or had colonial links earlier in the century. The dummy, Common Links, indicates two countries speak at least one of the following common languages: English, Spanish, Chinese, Arabic, French, German, Japanese, Dutch, and Portuguese.’ The dummy is statistically significant and the point estimate is about 0.65 in 1980 and 1985, and 0.53 in 1990. That is, two countries that share a common language or colonial links trade about 53 percent more in 1990 than a r~dom pair in the world. The point estimates for Bloc A dummy in the first three columns and those for Bloc B dummy in the last three columns are reduced somewhat in magnitude. This suggests that part of the intra-Bloc A and intra-Bloc B biases is indeed att~butable to the fact that they speak a common language (Chinese). However, the Bloc-A and Bloc-B dummies are still statistically significant. In 1990, for example, two Bloc B countries trade 185 percent more than two random countries in the world, after taking into account of linguistic links and other gravity variables. In addition, two Bloc A economies trade an extra 70 percent more than a random pair of Bloc B countries. This appears to be a strong evidence of a de facto “Greater China” trade bloc. EAEC and Other Regional Blocs As we mentioned at the beginning of the paper, certain regional blocs in East Asia have been formally proposed if not legally implemented yet. One of them, the East Asia Eco-
185
A “TREATER CHINA” TRADE BLOC?
Controlling 1980 0.71**
GNP
(0.02) GNP per capita
0.27** (0.02)
Distance
-O&51** (0.04)
Adjacency
0.6.5** (0.16)
Bloc A
2&i** (0.23)
Table 2 for Linguistic/Colonial
Links
1985
1980
0..58** (0.02) 0.07**
1990 0.79** (0.02) 0.08**
0.77** (0.02) 0.30**
0.10**
(0.02)
(0.02)
(0.02)
-0.47**
-0.61**
-0.55**
-0.45**
-0.57**
(0.04)
(0.03)
(0.03)
(0.04)
(0.03)
0.75** (0.19) 1.28” (0.57)
0.91** (0.18) 2.44** (0.21)
0.69*” 0.16
0.66** (0.10)
0.55** (0.09)
0.76** (0.20)
0.05
0.49
(0.30)
(0.61)
2.14**
0.67**
0.08**
0.79** (0.02)
(0.02)
(0.21)
(0.09)
0.58** (0.02)
1990
(0.02)
Bloc B
Common Links
1985
0.65** (0.10)
0.85** (0.25) 0.65** (0.10)
0.93** (0.18) 0.70** (0.26) 1.85** (0.18) 0..53** (0.W
#observations
1708
SEE
1.25
1.32
1.12
1.23
1.32
1.10
0.69
0.48
0.75
0.70
0.48
0.76
adj. R2 Nofes:
1343
1573
1708
1343
1573
Heteroskedastic-consistentstandard errors are in parentheses
** denotes significant at one percent level (r => 2.576) * denotes significant at five percent levet (I => l.%) All variables except the dummies are in logarithms “Common Links”--dummy for common linguistic or cokmial links (Geman, Japanese, Dutch, English, Spanish, Chinese, Arabic, French, and Portugese.
nomic Caucus (EAEC), proposed by the Malaysian Prime Minister Mahatir, includes all Bloc B countries plus Japan and Korea (and other smaller countries not in our sample). Although Japan and Korea do not have a large Chinese population, both have been heavily influenced by Chinese culture, particularly in the form of Confucianism and written language. Could EAEC have emerged as an implicit trade bloc? When a dummy for common membership in the EAEC is included in the regressions (together with dummies for the EC mem~rship and the WestemHe~sphere), it is significant for all three years. In 1990, for example, two EAEC economies trade 160 percent more than a random pair of countries in the world. Over the 1980s however, there is no evidence of a trend increase for the intra-EAEC trade bias. Indeed, the intra-EAEC bias declines from an estimated 2.14 in 1980 to 1.61 in 1990. The blocs that strengthened in the 1980s lay elsewhere, in the Americas and Europe. The Western Hemisphere coefficient started the decade at 0.3, and rose to 0.8. Western Europe posts a large increase in the intra-EC trade bias as well, starting from 0.25 in 1980 to reach 0.52 in 1990. Similar results have been noted by Frankel(l994) and Frankel and Wei (1994a and b). The most important results for the current paper are with respect to the estimates for Blocs A and B dummies. Basically, both dummies have lost their statistical significance in 1980 and 1985 after EAEC and other regional dummies are included in the regression. This suggests that the apparent intra-regions bias for Blocs A and B is actually due to the tendency of an intra-EAEC bias. In other words, up to late 1980s there is no “Greater China” trade bloc if one restricts attention to either Blocs A or B countries. However, in 1990, the
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Table 3 Adding the EAEC Bloc 1985
1990
1980
1985
1990
GNP
0.76** (0.02)
1980
0.56** (0.02)
0.77** (0.02)
0.76** (0.02)
0.56** (0.02)
0.77** (0.02)
GNP per capita
0.31** (0.02)
0.08** (0.02)
0.11** (0.02)
0.31** (0.02)
0.08** (0.02)
0.11** (0.02)
-0.51**
-0.31**
-0.51**
-Q.51**
-0.31**
-0.51**
(0.04)
(0.04)
(0.04)
(0.04)
(0.04)
(0.04)
Adjacency
0.69** (0.16)
0.75** (0.18)
0.80** (0.16)
0.69** (0.16)
0.75** (0.18)
0.79** (0.16)
WH2
0.29* (0.13)
0.34# (0.17)
0.79** (0.16)
0.29* (0.13)
0.34# (0.17)
0.80** (0.16)
EAEC2
2.20** (0.15)
1.07** (0.18)
1.86** (0.14)
2.14** (0.19)
1.10** (0.22)
1.61** (0.19)
EC2
0.25* (0.10)
1.56** (0.14)
0.52** (0.10)
0.25* (0.10)
1.56** (0.14)
0.52** (0.10)
Bloc A
0.14 (0.26)
0.59 (0.59)
1.01** (0.28)
0.10 (0.29)
0.61 (0.61)
0.85** (0.30)
0.10 (0.27)
-0.04 (0.32)
0.42 (0.26)
Distance
Bloc B Common Links
0.62** (0.09)
0.66** (0.09) 1343
0.45** (0.09)
1708
0.66** (0.09) 1343
0.45** (0.09) 1573
#observations
1708
SEE
1.21
1.28
1.08
1.21
1.28
1.08
0.71
0.51
0.77
0.71
0.5 1
0.77
adj . R2 Notes:
1573
0.62** (0.09)
Standard mm arein parentheses ** denotessignificant at one percent level (t => 2.576) * denotes significant at five percent level (t => 1.96) All variables except the dummies are in logarithms “Common Links”4wmny for common linguistic or colonial links (Ge-, nese, Arabic, French, and Portagese.
Japanese, Dutch, English, Spanish, Chi-
intra-Bloc-A bias (0.85) is statistically significant at the one percent level, even after the inclusion of the EAEC variable. Furthermore, the point estimates of the i&a-Bloc A trade bias increase steadily over the course of the 1980s. Hence, a “Greater China” trade bloc appears to have emerged around 1990. We have also tested whether ASEAN has emerged as a trade bloc (not reported here). A dummy for common membership in ASEAN is significant if the EAEC dummy is not included, but no longer significant once the EAEC dummy is in the regression.
The Hong Kong Connection: Indirect Trade between China and Taiwan There is one more correction we have to make. The trade between Mainland China and Taiwan is offkially recorded as zero. However, the two sides do trade, typically through Honk Kong, less frequently through other third countries. This indirect trade via Hong Kong implies that the same amount of trade is recorded twice (as China-Hong Kong and Taiwan-Hong Kong trade). This could greatly exaggerate the degree of intra-Bloc A trade bias.
187
Adjusting
Table 4 for Indirect Trade between China and Taiwan via Hong Kong 1985
1990
1980
1985
1990
0.74** (0.02)
1980
0.54** (0.02)
0.71** (0.02)
0.74** (0.02)
0.54** (0.02)
0.76** (0.02)
0.30** (0.02)
0.07** (0.02)
0.08** (0.02)
0.30** (0.02)
0.07** (0.02)
(0.W
-0.54**
-0.37** (0.05)
-o.so** (0.05)
-0.53**
-0.35**
-os4**
(0.04)
(0.W
(0.W
(0.04)
Adjacency
0.45** (0.18)
0.65** (0.20)
0.72** (0.18)
0.70*x (0.17)
0.70** (0.18)
0.79** (0.16)
WI-E
0.35’ (0.15)
0.39* (0.19)
0.78 (0.15)
0.33’ (0.16)
0.38* (0.18)
0.81** (0.16)
EAEC2
0.84** (0.26)
-0.25 (0.28)
0.71** (0.17)
(0.24)
-0.29 (0.22)
0.71* (0.17)
EC2
0.27** (0.10)
1.5.5** (0.19)
0.55** (0.18)
0.27** (0.10)
1.58** (0.15)
0.55** (0.10)
APEC2
1.29”* (0.18)
1.39** (0.20)
1.18** (0.11)
1.28** (0.12)
1.39** (0.14)
1.19** (0.11)
Common Links
o.so** (0.08)
0.54** (0.10)
0.5 1**
(0.09)
(0.09)
0.52** (0.09)
0.34** (0.08)
-1.36 (1.27)
2.19** (0.20)
0.13 (0.62)
GNP per capita Distance
0.35**
Bloc A #observations
1709
SEE
1.20
I .26
1.06
1.19
1.26
1.06
0.72
0.53
0.77
0.72
0.53
0.77
adj. R* Notes:
1342
0.93**
0.10**
is74
1709
1342
1574
Standard errors are in parentheses ** denotes significant at one percent level (r =>2.576) * denotes significant at five percent level (t ~~1.96) All variables except the dummies are in logarithms “Common links”-dummy for commonlinguisticor colonial links (German, Japanese, Dutch, English, Spanish, Cbinese, Arabic, French, and Pomgese).
According to Taiwan’s statistics, the total indirect trade via Hong Kong was $3.9 billion in 1990, up from $47 million in 1980. We do not have data for 1985 for the moment. If we take a simple average of the above two numbers, the indirect trade was probably on the order of $1.97 billion in 1985. We do not claim that the number is accurate. We redo the estimation after the correction for the indirect trade between China and Taiwan. The results are reported in Table 4. The key column is the last one for 1990. We fmd that the dummy, Bloc A, is no longer significant, suggesting that the apparent “Greater China” bloc effect is the spurious result of official recording of the indirect trade. The dummy, Bloc A, now is significant for 1985, although the result is probably not trustworthy because we have not used the actual data on indirect trade for that year. OVERSEAS
CHINESE
IN CHINA’S DEVELOPMENT
Although China’s trade with Hong Kong and Taiwan may not be any more unusual than other identically situated economies in the world, investment flows into China do appear to
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have a certain unusual pattern. Ideally, we may want to estimate a gravity model for the investment flow. But we do not yet have bilateral investment data needed to accomplish this task. There is strong evidence that foreign direct investment in China has been highly beneficial to the growth of Chinese economy, particularly since late 1980s. Between 1979 and the middle of 1993, some $44 billion of foreign money was invested in China, almost $20 billion of it after the beginning of 1992 (Economist, 1993). Using city level data over 19881990, Wei (1993) has found that more foreign direct investment at the beginning of the sample is positively associated with subsequent growth of the cities’ output. Furthermore, the contribution of the foreign investment is not just a simple infusion of capital. The positive externality from foreign invested firms to other domestic firms appears more important. The externality includes demonstration by foreign invested firms of new management style, work ethics and technological development*. Even though the total amount of FDI into China may not be unusually big for a developing country of that size, the source of capital is heavily skewed towards economies dominated by overseas Chinese. To be more specific, Hong Kong has been the largest supplier of foreign investment by far. Since 1980, its investment has been in excess of 50 percent of all FDI in China for every single year except 1985 (when the share was 48.9 percent). Since late 198Os, some of the Hong Kong investment has been Taiwanese capital in disguise. Overall, the overseas Chinese are responsible for some 80 percent of total foreign investment in China (Economist, 1993). This is certainly a reflection of the supreme importance of ethnic Chinese in providing investment in Mainland China. If it were not for the overseas Chinese, the lack of property rights protection and contract laws could well have resulted in only a trickle of foreign investment going into China. CONCLUDING
REMARKS
China, Hong Kong, and Taiwan (Bloc A) appear to trade more with each other in the 1980s than a random trio of countries, based on their GNP, per capita GNP and geographic distance. The inclusion of the common linguistic/colonial ties and the possibility of an EAEC bloc eliminate the statistical significance of the intra-Bloc A trade bias for 1980 and 1985. The intra-bloc bias for 1990 remains. However, if we correct for the indirect trade between China and Taiwan that is recorded as trade with Hong Kong for both sides, the intra-bloc bias for 1990 also disappears. In conclusion, if there is an implicit trade bloc in East Asia, it is probably among the East Asia Economic Caucus (EAEC) countries. Over the 1980s the trade between China and Hong Kong, and between Taiwan and Hong Kong had been increasing rapidly. But this does not imply an emergence of a “Greater China” trade bloc. Part of the trade can be explained by their economic size and distance. Part of it is due to the fact that they all speak Chinese. Another part results from the political reality that trade between China and Taiwan has to be rerouted through Hong Kong. Once we control for these factors, the three economies do not appear to trade more than a random trio of countries in the world. On the other hand, the presence of overseas Chinese is tremendously important for the rapid industrialization of the Chinese economy, particularly through their direct investment in China. A careful analysis of the investment flow requires a framework similar to the gravity model of bilateral trade flows.
189
A “GREATER CHINA” TRADE BLOC?
ACKNOWLEDGMENTS We would like to thank Jushan Bai, Bruce Reynolds joint session
in Boston
on January
and other participants
4, 1994 for helpful
of the ABA-CES
comments.
NOTES
4. 5.
6. 7. 8.
Strictly speaking, Macao should be included in this definition as well, for it is scheduled to be reunited with the Mainland in 1999. Unfortunately, we do not have data on Macao and thus will exclude it in all subsequent discussions. The list of countries, and regional groupings, is given in an Appendix to Frankel and Wei (1994b). The specification implies that trade between two equal-sized countries (say, of size 0.5) will be greater than trade between a large and small country (say, of size 0.9 and 0.1). This property of models with imperfect competition is not a property of the classical Heckscher-Ohlin theory of comparative advantage. Helpman (1987) and Helpman and Krugman (1985, Section 1.5). Foundations for the gravity model are also offered in papers surveyed by Deardorff (1984, pp. 503-06) and Wang and Winters (1992). We have also tried to capture classic Heckscher-Ohhn effects, first by including bilateral absolute differences in GNP/capita figures, and then by including some factor endowment variables with data (for a subset of 656 of our 1,953 pairs of countries) generously supplied by Gary Saxonhouse. There is some support for these terms [not reported here]. The other coefficients are little affected. These results differ from those in Frankel (1994) and Frankel and Wei (1994a. b) by the explicit consideration of possible “Greater China” blocs. Wang and Winters (1992) addresssed the problem of trade flows so small as to be recorded as zero in another way. They tried the tests substituting fractions (like 0.5) of the minimum recordable unit for the zeros. They too found that it made little substantive difference. The role of language or historical ties in trade may be explained by reduced information costs in business relationships. Four economies in the sample are identified as having Chinese as (one of) the official language(s): China, Taiwan, Hong Kong, and Singapore. For a different analysis of the contribution of foreign investment to Chinese economic change, see Kueh (1992).
REFERENCES Anderson, K., & Norheim, H. (1992). History, geography and regional economic integration. Workshop on Regionalism and the Global Trading System, September. Bayoumi, T., & Sterne, G. (1992). Regional trading blocs, mobile capital and exchange rate coordination. International Monetary Fund (August). China’s diaspora turns homeward. (1993, Nov. 27). Economist. Deardorff, A. (1984). Testing trade theories and predicting trade flows. In R. Jones & l? Kenen (Eds.), Handbook of International Economics: (Vol. I, pp. 467-517). Amsterdam: Elsevier Science Publishers. Frankel, J. (1994). Is Japan creating a yen bloc in East Asia and the Pacific? In J. Frankel & M. Kahler (Eds.), Regionalism and rivalry: Japan and the U. S. in Pacific Asia. Frankel, J., & Shang-Jin Wei. (1994a). Yen bloc or dollar bloc: Exchange rate policies of the East Asian economies. In I. Takatoshi & A. Krueger (Eds.), Macroeconomic linkages: Savings, exchanges rates, and capitalflows. University of Chicago Press.
CHINA ECONOMIC REVIEW
VOLUME 5(2)
1994
Frankel, J., & Shang-Jin Wei. (1994b). Is there a currency bloc in the pacific? In A. Bhmdell-Wignall (Ed.), The Exchange Rate, International Trade and the Balance of Payments. Reserve Bank of Australia. Grant, R., Papadakis, M., & Richardson, J. D. (1992). Global trade flows: Old structures, new issues, empirical evidence, twentieth pacific trade and development conference, Washington, D.C. September. Hamilton, C., & Winters, L. A. (1992). Opening up international trade in eastern europe. Economic Policy (April). Helpman, E. (1987). Imperfect competition and international trade: Evidence from fourteen industrial countries. Joumul of the Jap~ese and Zntematianal Economies, I, 62-8 1. Helpman, E., & Kmgman, l? (1985). market structure and Foreign trade. Cambridge, MA: MIT Press. Krugman, P (199la). Is bilateralism bad? In E. Helpman & A. Razin (Eds.), Zntemationaf trade and trade policy. Cambridge, MA, MIT Press. Krugman, P (1991 b). The move toward free trade zones. In Policy implications of trade and currency zones (pp. 7-42). A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. Kueh, Y. Y (1992). Foreign investment and economic change in China. The China Quarterly, 131, Lardy, Nicholas. (1992). Foreign trade and economic reform in China, 1978-1990. Cambridge University Press. Lawrence, R. (1991c). Emerging regional arrangements: Building blocks or stumbling blocks? In R. O’Brien (Ed.), Finance and the international economy. The AMEX Bank Review Prize Essays. Oxford, UK: Oxford Unive~ity Press. Sung, Yun-Wing. (1991). TJre Chin-hong-Kong connection: The key to China’s open-door policy. Cambridge University Press. Wang, Zhen Kun, & L. A. Winters. (1991). The trading potential of eastern europe. Centre for Economic Policy Research Discussion Paper No. 610. London, UK. Wei, Shang-Jin. (in press). Open-door policy and China’s rapid growth. In I. Takatoshi & A. 0. Krueger (Eds.), Growth theories in light of the East Asian experience. University of Chicago Press.
ABSTRACT: Over the 198Os, trade between China and Hong Kong, and between Taiwan and Hong Kong has been increasing rapidly. The three economies appear to trade three times as much as a random trio of economies in the world even after we take into account their economic size, per capita GNP and geagraphic distance. But this does not necessarily imply an emergence of a “Greater China” trade bloc. Part of the extra trade is due to the fact that they all speak Chinese. Another part resuIts from the political reality that the trade between China and Taiwan has to be rerouted through Hong Kong (or other third countries). Once we control for al1 these factors, the trade among the three economies no longer seems unusually high JEL ClassificationNumbersrFo2, Ff4, FJ5
1NTRDDUClION Increasingly, one hears talk of a “Greater China” trade bloc in formation. Two factors might have contributed to the interest in the subject. The first is the rapid growth of the Mainland Chinese economy, following three decades of rapid growth of Hong Kong, Taiwan, and other Asian NICs. Qver the 198Os,mainland China had a 9.5 percent growth rate per annum in real term, three times as fast as an average World Bank member country during the same period. China’s trade with the outside world had an even faster growth during the same period (Lardy, 1992; Sung, 1991). There is evidence that its open-door policy has contributed sig~fic~tly to its rapid growth (Wei, I993). Second, regionalization of trade and economic relations appears the trend of the day, and his caught increasing attention. The conclusion of the North America Free Trade Agreement (NAFTA) and the Single Europe Act of 1986, the Maastricht Treaty and other programs in the European Community (now called the European Union) are but the most recent examples of formation or consolidation of regional blocs. Against this general background, the increasing trade and investment relationship among East Asian economies has aroused people’s curiosity or concern regarding the potential for regional trade blocs in East Asia. The notion of a “Greater China” trade bloc suggests something special about the trading relationship among certain group of economies in East Asia. But the notion is largely vague as it has not been subject to a systematic investigation‘ The purpose of this paper is to review the evidence and examine in a relatively systematic way whether some versions of a ‘*Greater China” grouping of countries have emerged as a regional trade bloc. The paper is organized as follows. In the next section, we will spell out possible groups of countries in East Asia that can be loosely linked to either ethnic Chinese people/businessmen or Chinese culture. We will also review the trend of regionalization elsewhere in Directall corresp~n&?rn~? to: Shang-Jin Wei, Kennedy School of Gavemment, Harvard University, Cambridge, MA 02138. Jeffrey Prankel, Department
of Economics,
China Beonomic Review, Volume 5, Number 2,1994, All rights of reproduction in any form reserved.
University
of California,
pages 179-M
BerkeIey, CA 94720.
Copyright
0 I994 by JAI Press, Inc. ISSN: lO43-9slx~
180
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the world. In Section 2, a statistical model (gravity model) is described that will be used to investigate possible intensification of regional trade. In Section 3, we focus on the possibility of a “Greater China” bloc by systematically considering the contribution of a common language to trade, the possible presence of an EAEC trade bloc, and the implication of indirect trade between China and Taiwan. Section 4 discusses briefly the contribution of overseas Chinese to China’s growth through direct investment. Concluding remarks are provided in Section 5.
POSSIBLE “GREATER CHINA” BLOCS AND THE REGIONALIZATION OF THE WORLD TRADE Definitions of Potential Trade Blocs in East Asia In this paper, we will consider three sequentially nested groupings of countries in East Asia that can be loosely linked by the presence of ethnic Chinese or the influence of Chinese culture. At the most narrow level, one may think of mainland China, Hong Kong, and Taiwan as constituting a potential bloc.’ For subsequent discussions, we will call it “Bloc A.” All three economies once belonged to one sovereign country and will possibly be so again in the future, though politics and history have separated them apart thus far. A second possible grouping may add Singapore, Malaysia, Indonesia, Thailand and the Philippines to the above list. In all these economies, ethnic Chinese account for a subst~ti~ share of the ~pulation, and even larger share in the economic powers. Although these economies will likely resent to be called as part of a “Greater China” bloc, they are a group countries among which ethnic Chinese are economically influential. In this paper, we will call this group “Bloc B.” In addition to these economies, Confucian culture and (modified) Chinese language are also influential in Japan and Korea. These two economies together with all the economies in Bloc B are (perceived to be) engaging in an intimate economic relationship, and thus may constitute a potential bloc. Following the terminology proposed by Malaysian Prime Minister Mahatir, we will refer to this group as “East Asian Economic Caucus,” or EAEC for short,
Trade Regionali~atlon in the World Among various parts of the world, formal regional economic ~~gements have progressed the furthest in Europe. Within the European Community (EC), the Single European Act of 1986 resulted in the elimination of most trade barriers in 1992. Most members removed capital controls as well by 1990. Now they are emboldened to plan for an eventual unification of national currencies (the European Monetary Union, or EMU) by the end of the century. In addition to the deepening of integration among the existing members, the EC is also considering enlargements to include those of the other European countries. The first stage of enlargement is largely targeted to include the members of European Free Trade Association who wish to join. The second stage could also include countries from Central and Eastern Europe. In the Western He~sphere, the North America Free Trade Agreement (NAFTA) among the U.S., Canada and Mexico has certainly received tremendous attention in the U.S. due to a heated debate before its approval by the U.S. Congress at the end of 1993. Even before
A “GREATER CHINA” TRADE BLOC?
181
the signing of NAFTA, the Canadian-US Free Trade Agreement took effect in 1989, the countries in part of the South America agreed in 1990 to establish a free trade area (MERCOSUR) among themselves by 1994. Even the moribund Andean Pact, another group of countries in South America, went forward to implement removal of trade barriers among its members in 1991. In contrast to Europe and the Western Hemisphere, formal regional arrangements in East Asia are almost absent. One rare exception is the Australia-New Zealand Closer Economic Relationship that was advanced in 1983. It even attempts to go beyond removal of trade barriers by propositions to harmonize some of the competition policies between the two signature countries. Beyond the bilateral level, the Association of SouthEast Asian Nations (ASEAN), although slow to get off the ground, did in 199 1 endorse the idea of establishing an ASEAN Free Trade Area (AFTA) with a 15-year phasing-in period. Although Pacific Asia is less inclined to establish formal i&a-regional blocs through government actions than is the case in Europe or the Americas, de facto blocs could still emerge nonetheless in informal private-sector ways. Mainland China, Taiwan and Hong Kong (Bloc A) is becoming a “growth pole” deriving its dynamism by the rapid industrialization in the Mainland made possible by the decade-long economic reform in China. Some other East Asia countries (for example, Singapore, Malaysia, Indonesia, and other countries in Bloc B) may also trade intensively among themselves and with China, Hong Kong and Taiwan, possibly through the entrepreneurship of the Chinese diaspora. Another possible view is that Japan could be establishing a yen bloc in East Asia, not necessarily through preferential trading treaties, but through foreign direct investment, overseas development assistance and other financial flows to the rest of Asia. Such propositions should be subject to empirical investigation rather than taken for granted.
THE GRAVITY MODEL To judge whether or not a “Greater China” bloc is in emergence among a selected number of countries, the key is to establish a “norm” of bilateral trade. Only when we have this “norm” can we meaningfully say certain countries trade more among themselves than other countries in the world and thus may have formed an implicit bloc. This section discusses the framework that we use to establish the norm of trade volume. A systematic framework for measuring what patterns of bilateral trade are normal around the world is offered by the gravity model. In the model, economic size, geographic distance and other natural determinants of bilateral trade volume are considered. A dummy variable can then be added to represent when both countries in a given pair belong to the same regional grouping (for example, “Greater China” Bloc A). One can check how the level and time trend in, for example, “Greater China” Bloc A, compare with those in other groupings. The dependent variable is trade (exports plus imports), in log form, between pairs of countries in a given year. We have 63 countries in our data set, so that there are 1,953 data points (=63x62/2) for a given year.* The goal, again, is to see how much of the high level of trade within each region can be explained by simple economic factors common to bilateral trade throughout the world, and how much is left over to be attributed to a special regional effect. One would expect the two most important factors in explaining bilateral trade flows to be the geographical distance between the two countries, and their economic size. These fac-
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tots are the essence of the gravity model (and indeed are the presumed source of the name, by analogy to the formula for gravitational attraction between two masses). A large part of the apparent bias toward intra-regional trade is certainly due to simple geographical proximity. Indeed Krugman (1991b) suggests that most of it may be due to proximity, so that the three trading blocs are welfare-improving “natural” groupings (as distinct from “unnatural” trading arrangements between distant trading partners such as the United Kingdom and a Commonwealth member). Despite the obvious importance of distance and transportation costs in determining the volume of trade, empirical studies surprisingly often neglect to measure this factor. Our measure is the log of distance between the two major cities (usually the capital or economic center) of the respective countries. We also add a dummy “Adjacent” variable to indicate when two countries share a common land border. Entering GNPs in product form is empirically well-established in bilateral trade regressions. It can be easily justified by the modern theory of trade under imperfect competition.3 In addition there is reason to believe that GNP per capita has a positive effect, for a given size: as countries become more developed, they tend to specialize more and to trade more. The equation to be estimated is: log ( Tij) = a + pilog (GNPiGNPj)
+ &log (GNP/popiGNP/popj) (1)
+ &log (DISTANCE)
+ f14 (ADJACENT
+ yfBloc
-A)
+ uij.
“Bloc-A” is a dummy variable for bilateral trade among Bloc-A economies (China, Hong Kong, and Taiwan). Similarly, we can add another dummy, “Bloc-B,” for common membership in Bloc B (Bloc A countries, plus Singapore, Malaysia, Indonesia, Thailand and the Philippines). Table 1 reports the basic regression results.4 We found all three standard variables to be highly significant statistically (> 99 percent level). The coefficient on the log of distance was about -0.58 for 1990, when the adjacency variable (which is also highly significant statistically) is included at the same time. This means that when the distance between two non-adjacent countries is higher by one percent, the trade between them falls by about 0.58 percent. We tested for possible non-~ne~ty in the log-distance term, as it could conceivably be the cause of any apparent bias toward intra-~gion~ trade that is left after controlling linearly for distance. It turns out that the addition of a quadratic term of the distance variable makes little difference to the key inference in the paper. The estimated coefficient on GNP per capita is about 0.28 as of 1980, indicating that richer countries do indeed trade more, though this term declines during the 1980s reaching 0.09 in 1990. The estimated coefficient for the log of the product of the two countries’ GNPs is about 0.78 in 1990, indicating that, though trade increases with size, it increases less-than-proportionately (holding GNP per capita constant). This presumably reflects the widely-known pattern that small economies tend to be more open to international trade than larger, more diversified, economies. We have added a few checks for econometric robustness of our specification. Using the non-linear maximum likelihood method, we have tried running the equation in multip~cative form, instead of log-linear, so as to allow the inclusion of pairs of countries that are reported as undertaking zero trade. (Under our log-linear specification, arty pair of coun-
183
A “GREATER CHINA” TRADE BLOC?
Table 1 “Greater China” Trade Bloc (1980-1990) 1980
1985
1990
1980
1985
1990
0.57**
0.17** (0.02)
(9.02)
0.78** (0.02)
0.76** (0.02)
0.57** (0.02)
0.78** (0.02)
GNP per capita
0.27** (0.02)
0.06** (0.02)
0.07** (0.02)
0.28** (0.02)
0.08** (0.02)
0.09** (0.02)
Distance
-0.62**
-0.41** (0.04)
-0.57** (0.03)
-0.45**
(0.04) Adjacency
0.83** (0.16)
0.92** (0.19)
1.04** (0.18)
0.87** (0.16)
0.93** (0.20)
1.06** (0.18)
Bloc A
2.48** (0.28)
1.16* (0.50)
2.83** (0.15)
0.44 (0.36)
0.88## (0.61)
1.02** (0.25)
2.18** (0.23)
0.93** (0.26)
1.91** (0.21)
1708
1343
1573
-0.62** (0.03)
Bloc B
# observations
1708
1343
1573
(0.04)
-0.58** (0.03)
SEE
1.27
1.34
1.14
1.25
1.34
1.12
adj. R2
0.68
0.46
0.74
0.69
0.47
0.75
Nores:
Heteroskedastic-consistent standarderrors are in parentheses ** denotes significant at one percent level (t ~-2.576) * denotes significant at five percent level (t => l.%) # denotes significant at 10 percent level (t => 1.645) #+ denotes significant at 15 percent level (f => 1.44) All variables except the dummies are in logarithms AU regressions have an intercept whose estimae is not reported here.
tries that shows up with zero trade must necessarily be dropped from the sample.) We find that the inclusion or omission of such countries in the multiplicative specification makes little difference to the results.5 Using weighted least square method, a correction for heteroscedasticity based on the size of the countries also makes little difference to the results. Finally, we have also added certain factor endownment variables (differences in capital/ labor ratio, skilled and unskilled labor ratio, and land/labor ratio) to the regression (only for 1980 due to data availability). The coefftcient estimates on other variables are essentially unchanged. These results are not reported to save space. ESTIMATION
OF TRADE-BLOC
EFFECTS
If there were nothing to the notion of trading blocs, then these four basic variables would soak up most of the explanatory power. There would be little left to attribute to a dummy variable representing whether two trading partners are both located in the same region. In this case the level and trend in i&a-regional trade would be due solely to the proximity of the countries, and to their rapid rate of overall economic growth. If we first look at the first columns where only Bloc-A dummy is included, we find that the it&a-Bloc-A trade is highly significant statistically and astonishingly large in magnitude. Two Bloc A economies trade over three times as much as a random pair of
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1994
countries in the world, after taking into account distance and the other gravity variables. Fu~he~ore, comp~ng the estimates for 1980 and 1990, the i&a-Bloc-A trade has apparently become more intense towards the end of the decade than at the beginning of the decade. In calculating the distances among countries, the city of Shanghai is used as a point of reference. If we used Fuzhou, Guangzhou or any other city south of Shanghai, the intraBloc A trade bias would have been less pronounced. That is, the trading relation among the Bloc A economies would have been less a puzzle. In the last three columns, Bloc-B dummy is added to the regressions. Bioc-B dummy is sig~~c~t, vacating that economies with a large Chinese diaspora do trade more than what can be explained by economic size, development level and geographical proximity. On the other hand, the dummy, Bloc-A, loses its statistical significance (at the IO percent level) for 1980 and 1985, suggesting the intra-Bloc-A trade bias for those years could be entirely due to the extra trade tendency of economies with large Chinese populations. But in 1990, both Bloc-A and Bloc-B are positive and significant at the one percent level. ‘Ikvo Bloc-B economies tend to trade 190 percent more than the prediction of the gravity model. On top of that, Bloc A economies trade au additional 100 percent more than average countries in Bloc B . Linguistic and Colonial Links The speci~cation in Table 1 could exaggerate the extent of ink-regions trade bias among Blocs A aud B countries. For reasons economic theories have relatively little to say about but are nevertheless important, countries with common languages or historical ties tend to trade more than otherwise.6 It is possible that Bloc-A countries trade more with each other simply because they all share Chinese language, but they may not trade more than other countries that also share a common language. To investigate this possibility, we add a dummy to represent when a pair of countries speak a common language or had colonial links earlier in the century. The dummy, Common Links, indicates two countries speak at least one of the following common languages: English, Spanish, Chinese, Arabic, French, German, Japanese, Dutch, and Portuguese.’ The dummy is statistically significant and the point estimate is about 0.65 in 1980 and 1985, and 0.53 in 1990. That is, two countries that share a common language or colonial links trade about 53 percent more in 1990 than a r~dom pair in the world. The point estimates for Bloc A dummy in the first three columns and those for Bloc B dummy in the last three columns are reduced somewhat in magnitude. This suggests that part of the intra-Bloc A and intra-Bloc B biases is indeed att~butable to the fact that they speak a common language (Chinese). However, the Bloc-A and Bloc-B dummies are still statistically significant. In 1990, for example, two Bloc B countries trade 185 percent more than two random countries in the world, after taking into account of linguistic links and other gravity variables. In addition, two Bloc A economies trade an extra 70 percent more than a random pair of Bloc B countries. This appears to be a strong evidence of a de facto “Greater China” trade bloc. EAEC and Other Regional Blocs As we mentioned at the beginning of the paper, certain regional blocs in East Asia have been formally proposed if not legally implemented yet. One of them, the East Asia Eco-
185
A “TREATER CHINA” TRADE BLOC?
Controlling 1980 0.71**
GNP
(0.02) GNP per capita
0.27** (0.02)
Distance
-O&51** (0.04)
Adjacency
0.6.5** (0.16)
Bloc A
2&i** (0.23)
Table 2 for Linguistic/Colonial
Links
1985
1980
0..58** (0.02) 0.07**
1990 0.79** (0.02) 0.08**
0.77** (0.02) 0.30**
0.10**
(0.02)
(0.02)
(0.02)
-0.47**
-0.61**
-0.55**
-0.45**
-0.57**
(0.04)
(0.03)
(0.03)
(0.04)
(0.03)
0.75** (0.19) 1.28” (0.57)
0.91** (0.18) 2.44** (0.21)
0.69*” 0.16
0.66** (0.10)
0.55** (0.09)
0.76** (0.20)
0.05
0.49
(0.30)
(0.61)
2.14**
0.67**
0.08**
0.79** (0.02)
(0.02)
(0.21)
(0.09)
0.58** (0.02)
1990
(0.02)
Bloc B
Common Links
1985
0.65** (0.10)
0.85** (0.25) 0.65** (0.10)
0.93** (0.18) 0.70** (0.26) 1.85** (0.18) 0..53** (0.W
#observations
1708
SEE
1.25
1.32
1.12
1.23
1.32
1.10
0.69
0.48
0.75
0.70
0.48
0.76
adj. R2 Nofes:
1343
1573
1708
1343
1573
Heteroskedastic-consistentstandard errors are in parentheses
** denotes significant at one percent level (r => 2.576) * denotes significant at five percent levet (I => l.%) All variables except the dummies are in logarithms “Common Links”--dummy for common linguistic or cokmial links (Geman, Japanese, Dutch, English, Spanish, Chinese, Arabic, French, and Portugese.
nomic Caucus (EAEC), proposed by the Malaysian Prime Minister Mahatir, includes all Bloc B countries plus Japan and Korea (and other smaller countries not in our sample). Although Japan and Korea do not have a large Chinese population, both have been heavily influenced by Chinese culture, particularly in the form of Confucianism and written language. Could EAEC have emerged as an implicit trade bloc? When a dummy for common membership in the EAEC is included in the regressions (together with dummies for the EC mem~rship and the WestemHe~sphere), it is significant for all three years. In 1990, for example, two EAEC economies trade 160 percent more than a random pair of countries in the world. Over the 1980s however, there is no evidence of a trend increase for the intra-EAEC trade bias. Indeed, the intra-EAEC bias declines from an estimated 2.14 in 1980 to 1.61 in 1990. The blocs that strengthened in the 1980s lay elsewhere, in the Americas and Europe. The Western Hemisphere coefficient started the decade at 0.3, and rose to 0.8. Western Europe posts a large increase in the intra-EC trade bias as well, starting from 0.25 in 1980 to reach 0.52 in 1990. Similar results have been noted by Frankel(l994) and Frankel and Wei (1994a and b). The most important results for the current paper are with respect to the estimates for Blocs A and B dummies. Basically, both dummies have lost their statistical significance in 1980 and 1985 after EAEC and other regional dummies are included in the regression. This suggests that the apparent intra-regions bias for Blocs A and B is actually due to the tendency of an intra-EAEC bias. In other words, up to late 1980s there is no “Greater China” trade bloc if one restricts attention to either Blocs A or B countries. However, in 1990, the
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5(2)
1994
Table 3 Adding the EAEC Bloc 1985
1990
1980
1985
1990
GNP
0.76** (0.02)
1980
0.56** (0.02)
0.77** (0.02)
0.76** (0.02)
0.56** (0.02)
0.77** (0.02)
GNP per capita
0.31** (0.02)
0.08** (0.02)
0.11** (0.02)
0.31** (0.02)
0.08** (0.02)
0.11** (0.02)
-0.51**
-0.31**
-0.51**
-Q.51**
-0.31**
-0.51**
(0.04)
(0.04)
(0.04)
(0.04)
(0.04)
(0.04)
Adjacency
0.69** (0.16)
0.75** (0.18)
0.80** (0.16)
0.69** (0.16)
0.75** (0.18)
0.79** (0.16)
WH2
0.29* (0.13)
0.34# (0.17)
0.79** (0.16)
0.29* (0.13)
0.34# (0.17)
0.80** (0.16)
EAEC2
2.20** (0.15)
1.07** (0.18)
1.86** (0.14)
2.14** (0.19)
1.10** (0.22)
1.61** (0.19)
EC2
0.25* (0.10)
1.56** (0.14)
0.52** (0.10)
0.25* (0.10)
1.56** (0.14)
0.52** (0.10)
Bloc A
0.14 (0.26)
0.59 (0.59)
1.01** (0.28)
0.10 (0.29)
0.61 (0.61)
0.85** (0.30)
0.10 (0.27)
-0.04 (0.32)
0.42 (0.26)
Distance
Bloc B Common Links
0.62** (0.09)
0.66** (0.09) 1343
0.45** (0.09)
1708
0.66** (0.09) 1343
0.45** (0.09) 1573
#observations
1708
SEE
1.21
1.28
1.08
1.21
1.28
1.08
0.71
0.51
0.77
0.71
0.5 1
0.77
adj . R2 Notes:
1573
0.62** (0.09)
Standard mm arein parentheses ** denotessignificant at one percent level (t => 2.576) * denotes significant at five percent level (t => 1.96) All variables except the dummies are in logarithms “Common Links”4wmny for common linguistic or colonial links (Ge-, nese, Arabic, French, and Portagese.
Japanese, Dutch, English, Spanish, Chi-
intra-Bloc-A bias (0.85) is statistically significant at the one percent level, even after the inclusion of the EAEC variable. Furthermore, the point estimates of the i&a-Bloc A trade bias increase steadily over the course of the 1980s. Hence, a “Greater China” trade bloc appears to have emerged around 1990. We have also tested whether ASEAN has emerged as a trade bloc (not reported here). A dummy for common membership in ASEAN is significant if the EAEC dummy is not included, but no longer significant once the EAEC dummy is in the regression.
The Hong Kong Connection: Indirect Trade between China and Taiwan There is one more correction we have to make. The trade between Mainland China and Taiwan is offkially recorded as zero. However, the two sides do trade, typically through Honk Kong, less frequently through other third countries. This indirect trade via Hong Kong implies that the same amount of trade is recorded twice (as China-Hong Kong and Taiwan-Hong Kong trade). This could greatly exaggerate the degree of intra-Bloc A trade bias.
187
Adjusting
Table 4 for Indirect Trade between China and Taiwan via Hong Kong 1985
1990
1980
1985
1990
0.74** (0.02)
1980
0.54** (0.02)
0.71** (0.02)
0.74** (0.02)
0.54** (0.02)
0.76** (0.02)
0.30** (0.02)
0.07** (0.02)
0.08** (0.02)
0.30** (0.02)
0.07** (0.02)
(0.W
-0.54**
-0.37** (0.05)
-o.so** (0.05)
-0.53**
-0.35**
-os4**
(0.04)
(0.W
(0.W
(0.04)
Adjacency
0.45** (0.18)
0.65** (0.20)
0.72** (0.18)
0.70*x (0.17)
0.70** (0.18)
0.79** (0.16)
WI-E
0.35’ (0.15)
0.39* (0.19)
0.78 (0.15)
0.33’ (0.16)
0.38* (0.18)
0.81** (0.16)
EAEC2
0.84** (0.26)
-0.25 (0.28)
0.71** (0.17)
(0.24)
-0.29 (0.22)
0.71* (0.17)
EC2
0.27** (0.10)
1.5.5** (0.19)
0.55** (0.18)
0.27** (0.10)
1.58** (0.15)
0.55** (0.10)
APEC2
1.29”* (0.18)
1.39** (0.20)
1.18** (0.11)
1.28** (0.12)
1.39** (0.14)
1.19** (0.11)
Common Links
o.so** (0.08)
0.54** (0.10)
0.5 1**
(0.09)
(0.09)
0.52** (0.09)
0.34** (0.08)
-1.36 (1.27)
2.19** (0.20)
0.13 (0.62)
GNP per capita Distance
0.35**
Bloc A #observations
1709
SEE
1.20
I .26
1.06
1.19
1.26
1.06
0.72
0.53
0.77
0.72
0.53
0.77
adj. R* Notes:
1342
0.93**
0.10**
is74
1709
1342
1574
Standard errors are in parentheses ** denotes significant at one percent level (r =>2.576) * denotes significant at five percent level (t ~~1.96) All variables except the dummies are in logarithms “Common links”-dummy for commonlinguisticor colonial links (German, Japanese, Dutch, English, Spanish, Cbinese, Arabic, French, and Pomgese).
According to Taiwan’s statistics, the total indirect trade via Hong Kong was $3.9 billion in 1990, up from $47 million in 1980. We do not have data for 1985 for the moment. If we take a simple average of the above two numbers, the indirect trade was probably on the order of $1.97 billion in 1985. We do not claim that the number is accurate. We redo the estimation after the correction for the indirect trade between China and Taiwan. The results are reported in Table 4. The key column is the last one for 1990. We fmd that the dummy, Bloc A, is no longer significant, suggesting that the apparent “Greater China” bloc effect is the spurious result of official recording of the indirect trade. The dummy, Bloc A, now is significant for 1985, although the result is probably not trustworthy because we have not used the actual data on indirect trade for that year. OVERSEAS
CHINESE
IN CHINA’S DEVELOPMENT
Although China’s trade with Hong Kong and Taiwan may not be any more unusual than other identically situated economies in the world, investment flows into China do appear to
188
CHINA ECONOMIC
REVIEW
VOLUME 32)
1994
have a certain unusual pattern. Ideally, we may want to estimate a gravity model for the investment flow. But we do not yet have bilateral investment data needed to accomplish this task. There is strong evidence that foreign direct investment in China has been highly beneficial to the growth of Chinese economy, particularly since late 1980s. Between 1979 and the middle of 1993, some $44 billion of foreign money was invested in China, almost $20 billion of it after the beginning of 1992 (Economist, 1993). Using city level data over 19881990, Wei (1993) has found that more foreign direct investment at the beginning of the sample is positively associated with subsequent growth of the cities’ output. Furthermore, the contribution of the foreign investment is not just a simple infusion of capital. The positive externality from foreign invested firms to other domestic firms appears more important. The externality includes demonstration by foreign invested firms of new management style, work ethics and technological development*. Even though the total amount of FDI into China may not be unusually big for a developing country of that size, the source of capital is heavily skewed towards economies dominated by overseas Chinese. To be more specific, Hong Kong has been the largest supplier of foreign investment by far. Since 1980, its investment has been in excess of 50 percent of all FDI in China for every single year except 1985 (when the share was 48.9 percent). Since late 198Os, some of the Hong Kong investment has been Taiwanese capital in disguise. Overall, the overseas Chinese are responsible for some 80 percent of total foreign investment in China (Economist, 1993). This is certainly a reflection of the supreme importance of ethnic Chinese in providing investment in Mainland China. If it were not for the overseas Chinese, the lack of property rights protection and contract laws could well have resulted in only a trickle of foreign investment going into China. CONCLUDING
REMARKS
China, Hong Kong, and Taiwan (Bloc A) appear to trade more with each other in the 1980s than a random trio of countries, based on their GNP, per capita GNP and geographic distance. The inclusion of the common linguistic/colonial ties and the possibility of an EAEC bloc eliminate the statistical significance of the intra-Bloc A trade bias for 1980 and 1985. The intra-bloc bias for 1990 remains. However, if we correct for the indirect trade between China and Taiwan that is recorded as trade with Hong Kong for both sides, the intra-bloc bias for 1990 also disappears. In conclusion, if there is an implicit trade bloc in East Asia, it is probably among the East Asia Economic Caucus (EAEC) countries. Over the 1980s the trade between China and Hong Kong, and between Taiwan and Hong Kong had been increasing rapidly. But this does not imply an emergence of a “Greater China” trade bloc. Part of the trade can be explained by their economic size and distance. Part of it is due to the fact that they all speak Chinese. Another part results from the political reality that trade between China and Taiwan has to be rerouted through Hong Kong. Once we control for these factors, the three economies do not appear to trade more than a random trio of countries in the world. On the other hand, the presence of overseas Chinese is tremendously important for the rapid industrialization of the Chinese economy, particularly through their direct investment in China. A careful analysis of the investment flow requires a framework similar to the gravity model of bilateral trade flows.
189
A “GREATER CHINA” TRADE BLOC?
ACKNOWLEDGMENTS We would like to thank Jushan Bai, Bruce Reynolds joint session
in Boston
on January
and other participants
4, 1994 for helpful
of the ABA-CES
comments.
NOTES
4. 5.
6. 7. 8.
Strictly speaking, Macao should be included in this definition as well, for it is scheduled to be reunited with the Mainland in 1999. Unfortunately, we do not have data on Macao and thus will exclude it in all subsequent discussions. The list of countries, and regional groupings, is given in an Appendix to Frankel and Wei (1994b). The specification implies that trade between two equal-sized countries (say, of size 0.5) will be greater than trade between a large and small country (say, of size 0.9 and 0.1). This property of models with imperfect competition is not a property of the classical Heckscher-Ohlin theory of comparative advantage. Helpman (1987) and Helpman and Krugman (1985, Section 1.5). Foundations for the gravity model are also offered in papers surveyed by Deardorff (1984, pp. 503-06) and Wang and Winters (1992). We have also tried to capture classic Heckscher-Ohhn effects, first by including bilateral absolute differences in GNP/capita figures, and then by including some factor endowment variables with data (for a subset of 656 of our 1,953 pairs of countries) generously supplied by Gary Saxonhouse. There is some support for these terms [not reported here]. The other coefficients are little affected. These results differ from those in Frankel (1994) and Frankel and Wei (1994a. b) by the explicit consideration of possible “Greater China” blocs. Wang and Winters (1992) addresssed the problem of trade flows so small as to be recorded as zero in another way. They tried the tests substituting fractions (like 0.5) of the minimum recordable unit for the zeros. They too found that it made little substantive difference. The role of language or historical ties in trade may be explained by reduced information costs in business relationships. Four economies in the sample are identified as having Chinese as (one of) the official language(s): China, Taiwan, Hong Kong, and Singapore. For a different analysis of the contribution of foreign investment to Chinese economic change, see Kueh (1992).
REFERENCES Anderson, K., & Norheim, H. (1992). History, geography and regional economic integration. Workshop on Regionalism and the Global Trading System, September. Bayoumi, T., & Sterne, G. (1992). Regional trading blocs, mobile capital and exchange rate coordination. International Monetary Fund (August). China’s diaspora turns homeward. (1993, Nov. 27). Economist. Deardorff, A. (1984). Testing trade theories and predicting trade flows. In R. Jones & l? Kenen (Eds.), Handbook of International Economics: (Vol. I, pp. 467-517). Amsterdam: Elsevier Science Publishers. Frankel, J. (1994). Is Japan creating a yen bloc in East Asia and the Pacific? In J. Frankel & M. Kahler (Eds.), Regionalism and rivalry: Japan and the U. S. in Pacific Asia. Frankel, J., & Shang-Jin Wei. (1994a). Yen bloc or dollar bloc: Exchange rate policies of the East Asian economies. In I. Takatoshi & A. Krueger (Eds.), Macroeconomic linkages: Savings, exchanges rates, and capitalflows. University of Chicago Press.
CHINA ECONOMIC REVIEW
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1994
Frankel, J., & Shang-Jin Wei. (1994b). Is there a currency bloc in the pacific? In A. Bhmdell-Wignall (Ed.), The Exchange Rate, International Trade and the Balance of Payments. Reserve Bank of Australia. Grant, R., Papadakis, M., & Richardson, J. D. (1992). Global trade flows: Old structures, new issues, empirical evidence, twentieth pacific trade and development conference, Washington, D.C. September. Hamilton, C., & Winters, L. A. (1992). Opening up international trade in eastern europe. Economic Policy (April). Helpman, E. (1987). Imperfect competition and international trade: Evidence from fourteen industrial countries. Joumul of the Jap~ese and Zntematianal Economies, I, 62-8 1. Helpman, E., & Kmgman, l? (1985). market structure and Foreign trade. Cambridge, MA: MIT Press. Krugman, P (199la). Is bilateralism bad? In E. Helpman & A. Razin (Eds.), Zntemationaf trade and trade policy. Cambridge, MA, MIT Press. Krugman, P (1991 b). The move toward free trade zones. In Policy implications of trade and currency zones (pp. 7-42). A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. Kueh, Y. Y (1992). Foreign investment and economic change in China. The China Quarterly, 131, Lardy, Nicholas. (1992). Foreign trade and economic reform in China, 1978-1990. Cambridge University Press. Lawrence, R. (1991c). Emerging regional arrangements: Building blocks or stumbling blocks? In R. O’Brien (Ed.), Finance and the international economy. The AMEX Bank Review Prize Essays. Oxford, UK: Oxford Unive~ity Press. Sung, Yun-Wing. (1991). TJre Chin-hong-Kong connection: The key to China’s open-door policy. Cambridge University Press. Wang, Zhen Kun, & L. A. Winters. (1991). The trading potential of eastern europe. Centre for Economic Policy Research Discussion Paper No. 610. London, UK. Wei, Shang-Jin. (in press). Open-door policy and China’s rapid growth. In I. Takatoshi & A. 0. Krueger (Eds.), Growth theories in light of the East Asian experience. University of Chicago Press.