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Vertical specialization trade patterns and China’s trade surplus
2
Vertical specialization trade patterns and China’s trade surplus Abstract: The fact that China is enjoying a trade surplus reflects its position in the vertical division of labor at the current stage. China cannot develop without interacting with the markets of developed economies; it needs to develop bilateral trade relations. Furthermore, increased imports from developed economies with which it has large trade surpluses will help China handle trade disputes and correct trade imbalances. The geographical distribution of trade surpluses among three optimized trade development zones in China displays the differential pace of regional trade growth, both across provinces and across three trans-provincial areas. Key words: Vertical specialization; Trade pattern; China; Trade surplus; Western markets; Regional disparity
China’s trade: more and more centered on trade surplus In the last few decades China’s centrally planned economy has been transformed. Since the adoption of its reforms and opening-up policy, China has built a better reputation for its export products, through technological convergence and innovation. Taking scientific development as its theme and an
9
Vertical Specialization in China
accelerated transformation of export-oriented trade patterns as the main focus, China’s commodity export structure shifted from primary products to an emphasis on manufactured goods. In the new millennium, strategic emerging industries have become a significant force for leading trade development. Over the past 30 years or so, China has seized the opportunity to develop mutually beneficial multilateral and bilateral trade and economic relations and consequently enjoyed a trade surplus. The Chinese balance of payments may be represented in a three-stage evolution process: 1. The first stage (1978–1989). There was a certain amount of deficit in China’s balance of payments. In 1989 the total value of China’s imports and exports reached USD 111.68 billion, five times as much as that in 1978. During this period, the value of China’s accumulated trade deficit was USD 46.8 billion, averaging an annual USD 3.9 billion and accounting for 5.4 percent of the trade total. 2. The second stage (1990–2004) saw the establishment of a trade surplus. This stage was mainly represented by growth in exports overtaking that of imports, turning the overall deficit to a surplus in trade. During this period (except 1993) China’s accumulated trade surplus was USD 393.1 billion, averaging an annual USD 24.6 billion. When measured by export as a percentage of GDP, it increases from 6 percent in 1980 to 34.2 percent in 2004. 3. The third stage (2005–2010) aimed at promoting balanced growth in imports and exports. In 2005 China’s trade surplus reached USD 100 billion for the first time. In 2008 China’s trade surplus hit the highest point in history. In 2009 and 2010 China’s trade surpluses were down 34.4 percent and 4.2 percent year-on-year respectively. In 2010 China’s trade surplus accounted for 11.6 percent of the total export volume and 3.1 percent of GDP.
10
Trade patterns
Vertical divisions of labor driving China trade The fact that China is enjoying a trade surplus reflects its position in the vertical division of labor at the current stage. Yet whilst China is considered to be the manufacturing base of the world, its trade surplus consists of manufactured goods. As indicated in Figures 2.1 and 2.2, the sharp rise in the trade surplus is a result of the establishment of a program for processing and assembling industrial products. With the evolutionary path of integrating globally, there has been a great change in the nature of China’s trade pattern. As a burgeoning international division pattern, VS explains the expanding imports and exports in China.
32,000 TT
28,000
PT
24,000 20,000 16,000 12,000 8,000 4,000 0 90
Figure 2.1
92
94
96
98
00
02
04
06
08
Processing trade and total value of trade USD: 100 million
TT: total trade volume PT: processing trade volume Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
11
10
2005
2004
2006
1999
1992
BT
BPT
2008
2001
1994
BPT: balance of processing trade
BCT
2007
2000
1993
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
BT: balance of total trade BCT: balance of conventional trade
China’s trade surplus USD: 100 million
1998
1997
Figure 2.2
1991
1990
2009
2002
1995
2010
2003
1996
Trade patterns
With a rich labor advantage, China participated in production fragmentation. Moreover, China plays an important role in the East Asia production network, switching over, that is, between intra-regional intermediate goods and inter-regional final goods. If we consider China’s production and trade characteristics, it will be found that China’s competitiveness in high-tech products focuses on labor-intensive production stages with low value added. Moreover, China’s exports have evolved with foreign-invested enterprises (FIEs), changing from “bilateral trade” into “triangular trade” with Japan, other East Asian economies, the US and the European Union (EU). As VS theory indicates, imports have made a greater contribution than exports to China’s growth. The effects of VS on the trade surplus derive from imports of advanced technical equipment, raw materials and energy, and key parts and components. Imports of intermediate input play a positive role in firm-level innovation, which highlights the importance of dynamic gains from trade. China has a comparative advantage in labor and transaction costs which encourages FIEs to operate under this export promotion regime. In the course of integration into VS, China has clearly upgraded its value chain, focusing on the assembly stage, while western economies concentrate on R&D and marketing stages with high returns. Thus, the lessons of VS differ between China and western economies: China accumulates experience in assembling, while western economies get the opportunity to develop their advantages in R&D. China relies heavily on western economies’ markets in key parts and components. According to this pattern, China’s trade surplus is particularly vulnerable to external shocks.
13
Vertical Specialization in China
China’s trade is still dependent on western markets for final goods exports The economic reform and opening up in China represents a fundamental change, which constitutes a necessary step to establishing trade relations with countries and regions. The US, Japan, the EU, and ASEAN have become China’s major trading partners. As indicated in Figures 2.3 and 2.4, trade relations with the EU, the US and Japan are important to China. The EU was the most important export destination from 2007 to 2010. The US was the second most important export destination over the same period. Their share of China’s exports has generally been around 40 percent over the past few years (the leading export markets for China). By 2011 the US was the most important single-country market for Chinese exports, moving up from third largest in 1996. Japan received the third largest share, importing more than twice as much as the next largest importer of Chinese goods, South Korea. Japan was the fourth most important export destination in 2008. In 2009, ASEAN displaced Japan as China’s fourth largest export destination. The top 10 largest trade partners provided 76 percent of China’s imports and exports by the end of 2010. As indicated in Figures 2.3 and 2.4, in recent years China’s main export and import partners are the EU, US, and Japan. The EU is China’s biggest trading partner. China is the EU’s second trading partner, behind the US, and the EU’s biggest source of imports by 2011. China’s exports to the EU are mainly industrial goods: machinery and transport equipment, miscellaneous manufactured articles. China’s goods imports from the EU are also concentrated on industrial products: machinery and transport equipment, miscellaneous manufactured goods and chemicals. The US is China’s second-largest export market; China is third-largest export
14
TV
JAPAN
2008
2003
US
EU
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
TV: Total value
2009
2004
2010
2005
Value of exports by country (region) of destination from 2001 to 2010 USD: 100 Million
2007
2006
Figure 2.3
2002
2001
TV US
JAPAN ASEAN
2008
2003
EU
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
TV: Total value
2009
2004
Value of exports by country (region) of origin from 2001 to 2010 USD: 100 Million
2007
2006
Figure 2.4
2002
2001
2010
2005
Trade patterns
market of the US. Japan is the largest importing country to China with 14 percent of total import value in 2007. In 2009, China’s imports from Japan decreased 11.6 percent. Though imports from Japan declined for the first time in eleven years, China displaced the US as Japan’s largest export destination. The EU’s presence in China’s exports has also been increasing since 1998 and therefore the US and the EU remain the important destinations for China’s final goods. As China is highly dependent on the developed economies, it has been structurally affected by the demand fluctuation in the US, the EU and Japan. China cannot develop without interacting with the markets of the developed economies. China needs to develop mutually bilateral trade relations. It is necessary for us to promote increases in imports from developed economies with which China has a large trade surplus to handle trade disputes and correct trade imbalances.
Three optimized trade development zones: regional foreign trade disparity in China The pattern of geographical distribution of trade surplus at the national level is not reflected by trade imbalances among the provinces in China. Figures 2.5 and 2.6 present the distribution pattern of trade for the period 2002–2010. The Pearl River Delta (PRD) economic region (with Guangdong province as its proxy) and the YRD economic region (including Shanghai, Jiangsu, and Zhejiang provinces as proxies) represent the two largest regions of trade, followed by two smaller regions, the Bohai Gulf (Beijing,
17
Vertical Specialization in China
2002
2003
2004
2005
2006
2007
2008
2009
2010
WC ZJ
Figure 2.5
SH GD
JS
Total value of exports by location of exporters from 2002 to 2010 USD: 10 thousand
Indexes: WC: The whole country; SH: Shanghai; JS: Jiangsu; ZJ: Zhejiang; GD: Guangdong Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
Tianjin, and the province Liaoning, Shandong, Hebei) and Fujian Province. These four regions account for more than 90 percent of total national trade. In reality, in the past decade the PRD economic region has overtaken Taiwan and Hong Kong in terms of GDP. By 2011, due to the appreciation of the Chinese yuan, Guangzhou
18
Trade patterns
2002
2003
2004
2005
2006
2007
2008
2009
2010
WCI ZJI
Figure 2.6
SHI GDI
JSI
Total value of imports by location of importers from 2002 to 2010 USD: 10 thousand
Indexes: WC: The whole country; SH: Shanghai; JS: Jiangsu; ZJ: Zhejiang; GD: Guangdong Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
and Foshan (these two Guangdong cities have begun merging) had an economy about the same size as Hong Kong’s. A feature of economic development in the PRD economy is the outward spread of trade and FDI growth centering on Guangzhou and Shenzhen. Shenzhen also obtained the highest level of FDI in terms of both contracts signed and actual utilized value. The level of total trade
19
Vertical Specialization in China
value in Dongguan was the second highest in the PRD economy, followed by Guangzhou. As for the FDI values, on the contrary, Guangzhou ranked in second place after Shenzhen. The YRD economic region refers to Shanghai and 15 surrounding cities in Jiangsu and Zhejiang provinces. These are eight more developed cities in Jiangsu province and seven in Zhejiang province. The Yangtze River Delta (YRD) economy remains a solid foreign direct investment (FDI) destination and takes a lead in Chinese foreign trade. Changes in FDI have played a major role in these changes in export shares. Export growth in the PRD economy has been driven by an influx of FDI following China’s shift to the reform and open-door policy. By the mid-1990s it was the source of over 40 percent of Chinese total exports. However, its share began to decline in the second half of the 1990s. In 2010, the PRD economy accounted for 29.9 percent of total exports, compared with 39.4 percent for the YRD economy. Between 1980 and 1990, the share of total FDI in Guangdong province was twice that of the YRD economy. However, after China entered the World Trade Organization (WTO) in 2000, the total FDI received by the YRD economy was more than double that of the PRD. In 2010, total trade values of Shanghai and Suzhou accounted for 62 percent of the total trade values of the 16 YRD cities. In the YRD economy, Shanghai, Suzhou and Hangzhou utilized the highest amount of FDI. ‘The Bohai Rim’ is the term used to describe the economic hinterland surrounding Beijing and Tianjin. It also includes areas in Hebei, Liaoning and Shandong, which surround the Bohai sea. This emerging region is rising as a northern economic powerhouse and rivals the PRD in the south and YRD in the east.1 In 2010 Beijing recorded the second highest level of import value in China. Its export value was
20
Trade patterns
also higher than other counterparts in the Bohai Rim. Besides Beijing, relatively high levels of total trade value were recorded in four Bohai Rim cities (Tjianjin, Dalian, Qingdao and Yantai). Of the Bohai Rim economies, Tianjin and Dalian utilized the highest amount of FDI in 2011. Beijing ranked third in terms of the level of utilized FDI in 2010. However, total trade value in the Bohai Rim economy was 78 percent of that in the PRD.
Note 1. Wikipedia, Bohai Economic Rim, n.d., http://en.wikipedia. org/wiki/Bohai_Economic_Rim (Viewed on July 26, 2012).
21
Vertical specialization trade patterns and China’s trade surplus Abstract: The fact that China is enjoying a trade surplus reflects its position in the vertical division of labor at the current stage. China cannot develop without interacting with the markets of developed economies; it needs to develop bilateral trade relations. Furthermore, increased imports from developed economies with which it has large trade surpluses will help China handle trade disputes and correct trade imbalances. The geographical distribution of trade surpluses among three optimized trade development zones in China displays the differential pace of regional trade growth, both across provinces and across three trans-provincial areas. Key words: Vertical specialization; Trade pattern; China; Trade surplus; Western markets; Regional disparity
China’s trade: more and more centered on trade surplus In the last few decades China’s centrally planned economy has been transformed. Since the adoption of its reforms and opening-up policy, China has built a better reputation for its export products, through technological convergence and innovation. Taking scientific development as its theme and an
9
Vertical Specialization in China
accelerated transformation of export-oriented trade patterns as the main focus, China’s commodity export structure shifted from primary products to an emphasis on manufactured goods. In the new millennium, strategic emerging industries have become a significant force for leading trade development. Over the past 30 years or so, China has seized the opportunity to develop mutually beneficial multilateral and bilateral trade and economic relations and consequently enjoyed a trade surplus. The Chinese balance of payments may be represented in a three-stage evolution process: 1. The first stage (1978–1989). There was a certain amount of deficit in China’s balance of payments. In 1989 the total value of China’s imports and exports reached USD 111.68 billion, five times as much as that in 1978. During this period, the value of China’s accumulated trade deficit was USD 46.8 billion, averaging an annual USD 3.9 billion and accounting for 5.4 percent of the trade total. 2. The second stage (1990–2004) saw the establishment of a trade surplus. This stage was mainly represented by growth in exports overtaking that of imports, turning the overall deficit to a surplus in trade. During this period (except 1993) China’s accumulated trade surplus was USD 393.1 billion, averaging an annual USD 24.6 billion. When measured by export as a percentage of GDP, it increases from 6 percent in 1980 to 34.2 percent in 2004. 3. The third stage (2005–2010) aimed at promoting balanced growth in imports and exports. In 2005 China’s trade surplus reached USD 100 billion for the first time. In 2008 China’s trade surplus hit the highest point in history. In 2009 and 2010 China’s trade surpluses were down 34.4 percent and 4.2 percent year-on-year respectively. In 2010 China’s trade surplus accounted for 11.6 percent of the total export volume and 3.1 percent of GDP.
10
Trade patterns
Vertical divisions of labor driving China trade The fact that China is enjoying a trade surplus reflects its position in the vertical division of labor at the current stage. Yet whilst China is considered to be the manufacturing base of the world, its trade surplus consists of manufactured goods. As indicated in Figures 2.1 and 2.2, the sharp rise in the trade surplus is a result of the establishment of a program for processing and assembling industrial products. With the evolutionary path of integrating globally, there has been a great change in the nature of China’s trade pattern. As a burgeoning international division pattern, VS explains the expanding imports and exports in China.
32,000 TT
28,000
PT
24,000 20,000 16,000 12,000 8,000 4,000 0 90
Figure 2.1
92
94
96
98
00
02
04
06
08
Processing trade and total value of trade USD: 100 million
TT: total trade volume PT: processing trade volume Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
11
10
2005
2004
2006
1999
1992
BT
BPT
2008
2001
1994
BPT: balance of processing trade
BCT
2007
2000
1993
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
BT: balance of total trade BCT: balance of conventional trade
China’s trade surplus USD: 100 million
1998
1997
Figure 2.2
1991
1990
2009
2002
1995
2010
2003
1996
Trade patterns
With a rich labor advantage, China participated in production fragmentation. Moreover, China plays an important role in the East Asia production network, switching over, that is, between intra-regional intermediate goods and inter-regional final goods. If we consider China’s production and trade characteristics, it will be found that China’s competitiveness in high-tech products focuses on labor-intensive production stages with low value added. Moreover, China’s exports have evolved with foreign-invested enterprises (FIEs), changing from “bilateral trade” into “triangular trade” with Japan, other East Asian economies, the US and the European Union (EU). As VS theory indicates, imports have made a greater contribution than exports to China’s growth. The effects of VS on the trade surplus derive from imports of advanced technical equipment, raw materials and energy, and key parts and components. Imports of intermediate input play a positive role in firm-level innovation, which highlights the importance of dynamic gains from trade. China has a comparative advantage in labor and transaction costs which encourages FIEs to operate under this export promotion regime. In the course of integration into VS, China has clearly upgraded its value chain, focusing on the assembly stage, while western economies concentrate on R&D and marketing stages with high returns. Thus, the lessons of VS differ between China and western economies: China accumulates experience in assembling, while western economies get the opportunity to develop their advantages in R&D. China relies heavily on western economies’ markets in key parts and components. According to this pattern, China’s trade surplus is particularly vulnerable to external shocks.
13
Vertical Specialization in China
China’s trade is still dependent on western markets for final goods exports The economic reform and opening up in China represents a fundamental change, which constitutes a necessary step to establishing trade relations with countries and regions. The US, Japan, the EU, and ASEAN have become China’s major trading partners. As indicated in Figures 2.3 and 2.4, trade relations with the EU, the US and Japan are important to China. The EU was the most important export destination from 2007 to 2010. The US was the second most important export destination over the same period. Their share of China’s exports has generally been around 40 percent over the past few years (the leading export markets for China). By 2011 the US was the most important single-country market for Chinese exports, moving up from third largest in 1996. Japan received the third largest share, importing more than twice as much as the next largest importer of Chinese goods, South Korea. Japan was the fourth most important export destination in 2008. In 2009, ASEAN displaced Japan as China’s fourth largest export destination. The top 10 largest trade partners provided 76 percent of China’s imports and exports by the end of 2010. As indicated in Figures 2.3 and 2.4, in recent years China’s main export and import partners are the EU, US, and Japan. The EU is China’s biggest trading partner. China is the EU’s second trading partner, behind the US, and the EU’s biggest source of imports by 2011. China’s exports to the EU are mainly industrial goods: machinery and transport equipment, miscellaneous manufactured articles. China’s goods imports from the EU are also concentrated on industrial products: machinery and transport equipment, miscellaneous manufactured goods and chemicals. The US is China’s second-largest export market; China is third-largest export
14
TV
JAPAN
2008
2003
US
EU
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
TV: Total value
2009
2004
2010
2005
Value of exports by country (region) of destination from 2001 to 2010 USD: 100 Million
2007
2006
Figure 2.3
2002
2001
TV US
JAPAN ASEAN
2008
2003
EU
Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
TV: Total value
2009
2004
Value of exports by country (region) of origin from 2001 to 2010 USD: 100 Million
2007
2006
Figure 2.4
2002
2001
2010
2005
Trade patterns
market of the US. Japan is the largest importing country to China with 14 percent of total import value in 2007. In 2009, China’s imports from Japan decreased 11.6 percent. Though imports from Japan declined for the first time in eleven years, China displaced the US as Japan’s largest export destination. The EU’s presence in China’s exports has also been increasing since 1998 and therefore the US and the EU remain the important destinations for China’s final goods. As China is highly dependent on the developed economies, it has been structurally affected by the demand fluctuation in the US, the EU and Japan. China cannot develop without interacting with the markets of the developed economies. China needs to develop mutually bilateral trade relations. It is necessary for us to promote increases in imports from developed economies with which China has a large trade surplus to handle trade disputes and correct trade imbalances.
Three optimized trade development zones: regional foreign trade disparity in China The pattern of geographical distribution of trade surplus at the national level is not reflected by trade imbalances among the provinces in China. Figures 2.5 and 2.6 present the distribution pattern of trade for the period 2002–2010. The Pearl River Delta (PRD) economic region (with Guangdong province as its proxy) and the YRD economic region (including Shanghai, Jiangsu, and Zhejiang provinces as proxies) represent the two largest regions of trade, followed by two smaller regions, the Bohai Gulf (Beijing,
17
Vertical Specialization in China
2002
2003
2004
2005
2006
2007
2008
2009
2010
WC ZJ
Figure 2.5
SH GD
JS
Total value of exports by location of exporters from 2002 to 2010 USD: 10 thousand
Indexes: WC: The whole country; SH: Shanghai; JS: Jiangsu; ZJ: Zhejiang; GD: Guangdong Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
Tianjin, and the province Liaoning, Shandong, Hebei) and Fujian Province. These four regions account for more than 90 percent of total national trade. In reality, in the past decade the PRD economic region has overtaken Taiwan and Hong Kong in terms of GDP. By 2011, due to the appreciation of the Chinese yuan, Guangzhou
18
Trade patterns
2002
2003
2004
2005
2006
2007
2008
2009
2010
WCI ZJI
Figure 2.6
SHI GDI
JSI
Total value of imports by location of importers from 2002 to 2010 USD: 10 thousand
Indexes: WC: The whole country; SH: Shanghai; JS: Jiangsu; ZJ: Zhejiang; GD: Guangdong Source: Author’s estimates based on China Customs Statistics and China Statistical Yearbook.
and Foshan (these two Guangdong cities have begun merging) had an economy about the same size as Hong Kong’s. A feature of economic development in the PRD economy is the outward spread of trade and FDI growth centering on Guangzhou and Shenzhen. Shenzhen also obtained the highest level of FDI in terms of both contracts signed and actual utilized value. The level of total trade
19
Vertical Specialization in China
value in Dongguan was the second highest in the PRD economy, followed by Guangzhou. As for the FDI values, on the contrary, Guangzhou ranked in second place after Shenzhen. The YRD economic region refers to Shanghai and 15 surrounding cities in Jiangsu and Zhejiang provinces. These are eight more developed cities in Jiangsu province and seven in Zhejiang province. The Yangtze River Delta (YRD) economy remains a solid foreign direct investment (FDI) destination and takes a lead in Chinese foreign trade. Changes in FDI have played a major role in these changes in export shares. Export growth in the PRD economy has been driven by an influx of FDI following China’s shift to the reform and open-door policy. By the mid-1990s it was the source of over 40 percent of Chinese total exports. However, its share began to decline in the second half of the 1990s. In 2010, the PRD economy accounted for 29.9 percent of total exports, compared with 39.4 percent for the YRD economy. Between 1980 and 1990, the share of total FDI in Guangdong province was twice that of the YRD economy. However, after China entered the World Trade Organization (WTO) in 2000, the total FDI received by the YRD economy was more than double that of the PRD. In 2010, total trade values of Shanghai and Suzhou accounted for 62 percent of the total trade values of the 16 YRD cities. In the YRD economy, Shanghai, Suzhou and Hangzhou utilized the highest amount of FDI. ‘The Bohai Rim’ is the term used to describe the economic hinterland surrounding Beijing and Tianjin. It also includes areas in Hebei, Liaoning and Shandong, which surround the Bohai sea. This emerging region is rising as a northern economic powerhouse and rivals the PRD in the south and YRD in the east.1 In 2010 Beijing recorded the second highest level of import value in China. Its export value was
20
Trade patterns
also higher than other counterparts in the Bohai Rim. Besides Beijing, relatively high levels of total trade value were recorded in four Bohai Rim cities (Tjianjin, Dalian, Qingdao and Yantai). Of the Bohai Rim economies, Tianjin and Dalian utilized the highest amount of FDI in 2011. Beijing ranked third in terms of the level of utilized FDI in 2010. However, total trade value in the Bohai Rim economy was 78 percent of that in the PRD.
Note 1. Wikipedia, Bohai Economic Rim, n.d., http://en.wikipedia. org/wiki/Bohai_Economic_Rim (Viewed on July 26, 2012).
21