1
Implications of the Euro Sovereign Debt Crisis for China: A CGE Analysis1
Qin Bao, Xiaoguang Yang
(Academy of Mathematics and Systems Science, Chinese Academy of Sciences,
Beijing, China, 100190)
Research Highlights
The on-going Euro sovereign debt crisis has brought a significant downturn to the
European economy, greatly decreasing its growth rate and increasing its
unemployment rate. With sharp declining domestic demands in countries in Euro zone
or EU, other countries have been troubled through the channel of international trade.
As a heavily export-oriented country, China is supposed to be greatly influenced by
the debt crisis broken out in Europe who is amongst the largest trading partners. In
this paper, a general equilibrium methodology is used to study the impacts of the Euro
sovereign debt crisis on China’s economy. A multi-sector computable general
equilibrium (CGE) model of China is built, which contains 28 production sectors and
commodities. The foreign sector is divided into 11 parts, including Germany, France,
Italy, UK, other countries of EU, US, Canada, Australia, Hong Kong, Japan and rest
of the world. The model is consisting of three main modules, i.e., international trade
module, output and demand module and a closure module. In the international trade
module, a double-level nested structure is applied following constant elasticity of
substitute (CES) functions and constant elasticity transformation (CET) functions.
The large-country assumption is used in the international trade module that China’s
domestic supply and demand will affect the world prices. The proposed model is
calibrated based on the social accounting matrix (SAM) in the year 2007. The Euro
sovereign debt crisis is captured by reducing a premium on exporting prices and
importing prices with countries in crisis to reflect the declining of external output and
demand in the proposed model. This treatment is in accordance with the basic
1 This study is supported by the National Natural Science Foundation of China under grant No.71241020 and No.71241016. Corresponding Author: Qin Bao, contacted information: [email protected]
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assumption for general equilibrium that prices are endogenously adjusted to achieve
market equilibrium. Moreover, the on-going Euro sovereign debt crisis has affected
China mainly through its direct influence on imports and exports with European
countries as revealed by empirical studies. Taking different evolution paths of the
Euro crisis into consideration, nine crisis scenarios are set for simulations, which
assume different decreasing levels of the prices for different countries. The results
indicate that the crisis will have a significantly negative shock on China’s
international trade, larger on exports than on imports, and the impacts will be
increased with more countries involved in the crisis and more serious of the crisis.
The impacts on trade by industrial sector are closely related with characteristics of the
sector, i.e., sectors with intensive exports to Europe will have a larger shock.
Moreover, the crisis will have a negative impact on China’s overall economy and
decrease the welfare. By taking a robust test on large-country and small-country
assumptions and a simulation on the export rebate policy, the results also shed light on
policies: On the one hand, the increasing of the pricing power determination will
effectively reduce the negative effect of the crisis. On the other hand, a carefully
designed export rebate rate adjustment policy will mitigate the shock of the crisis
without greatly increasing the overall tax burden.
3
Implications of the Euro Sovereign Debt Crisis for China: A CGE Analysis
Qin Bao, Xiaoguang Yang
(Academy of Mathematics and Systems Science, Chinese Academy of Sciences,
Beijing, China, 100190)
Abstract:
Based on a multi-sector computable general equilibrium (CGE) model of China, this
paper studies the impacts of European sovereign debt crisis on China’s economy
under different scenarios, and simulates the effects of corresponding export debate
adjustment policy. The results indicate that the crisis will have a significantly negative
shock on China’s macro economy from both supply and demand side. Moreover, the
crisis will decrease China’s international trade, more for exports than for imports, and
the impacts will be increased with more countries involved in the crisis and more
serious of the crisis. The impacts on trade by industrial sector are closely related with
characteristics of the sector, i.e., sectors with intensive exports to Europe will have a
larger shock. The results also shed light on policies: On the one hand, the increasing
of the pricing power determination will effectively reduce the negative effect of the
crisis. On the other hand, a carefully designed export rebate rate adjustment policy
will mitigate the shock of the crisis without greatly increasing the overall tax burden.
Keywords:
European Sovereign Debt Crisis; International Trade; Computable General
Equilibrium Model; Policy Analysis
1. Introduction
The Euro sovereign debt crisis broke out in the late 2009, with downward of the
sovereign debt rank of Greek. The crisis was caused by multiple factors, including the
real-estate bubbles in U.S. and the subsequent global recession. The countries that are
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most influenced by the crisis are called PIIGS, including Portugal, Ireland, Italy,
Greek and Spain. The on-going Euro sovereign debt crisis has brought a significant
downturn to the European economy, greatly decreasing its growth rate and increasing
its unemployment rate. The two largest economy, i.e., German and France have shown
an obvious slowdown.
The solution for the Euro crisis has been discussed and policies have been
undertaken to solve the crisis. The solution will be a lasting process and it will take a
long time for the Europe to recover from the recessions. With sharp declining
domestic demands in countries of Euro zone or Europe, other countries in the world
have been troubled through the channel of international trade. As a heavily
export-oriented country, China is supposed to be greatly influenced by the debt crisis
broken out in Europe. Since Europe has been China’s largest trading partner, the crisis
has brought significant influence on China’s economy. For example, the ratio of
export to European to the total export has shown an obvious decrease. The lasting
crisis will cut down more the European demand, and the solution of the crisis, i.e., a
tighter fiscal policy will further decrease the economic demand. Thus it is both
important and urgent to study how the Euro crisis will affect China’s economy and the
possible mitigation policies.
In this paper, a general equilibrium methodology is used to study the impacts of the
Euro sovereign debt crisis on China’s economy. A multi-sector computable general
equilibrium (CGE) model of China is built, which contains 28 sectors and 11 foreign
accounts. The Euro sovereign debt crisis is captured by a negative premium on
exporting prices and importing prices with countries in crisis to reflect the declining
of external output and demand in the proposed model. Three crisis scenarios and each
with three assumptions for different evolutionary paths of the Euro crisis are set for
simulations, which assume different decreasing levels of the prices for different
countries. The results indicate that the crisis will have a significantly negative shock
on China’s whole economy as well as its international trade. The impact will be larger
on exports than on imports, and the impacts will be increased with more countries
involved in the crisis and more serious of the crisis. Sectors are affected differently,
5
and those with intensive exports to Europe will have a larger negative shock in
sectoral exports. By taking a robust test on large-country and small-country
assumptions and a simulation on the export rebate policy, the results also shed light on
policies: On the one hand, the increasing of the pricing power determination will
effectively reduce the negative effect of the crisis. On the other hand, a carefully
designed export rebate rate adjustment policy will mitigate the shock of the crisis
without greatly increasing the overall tax burden.
This paper is organized as follows: The literature review is provided in Section 2.
The model and the data and scenarios are described in Section 3. The results are
presented in Section 4. Section 5 provides the conclusion.
2. Literature Review
Ever since the US financial crisis, researchers have been studied the facts and
reasons of the crisis. However, since the crisis can be better reflected in financial
market, data for stock market, bond market and so on are used to study the
transmission and influence of the crisis. For example, Arghyrou and Kontonikas
(2012) analyzed the fundamentals and contagion of the EMU sovereign-debt crisis by
using the euro area government bond yield data. Chudik and Fratzscher (2012)
studied the global transmission of the crisis base on a VAR method. Grammatikos and
Vermeulen (2012) studied the transmission of financial and sovereign debt crisis to
fifteen EMU countries by using the data of stock prices, CDS spreads and exchange
rates. Long et al (2012) studied the impact of U.S. finaical crisis based on the method
of functional analysis of variance. These researches provide insights on the contagion
process of the Euro sovereign debt crisis, however, the empirical method is not
applicable for study the impacts of the crisis on the whole economy. Ziesemer (2010)
studied the impact of the credit crisis on developing countries by using an
error-correction model. Tagkalakis (2013) used the econometric analysis to study the
effects of U.S. financial crisis on fiscal debt in OECD countries. However, as for the
Euro crisis, there isn’t enough data.
Although the Euro crisis has been extensively studied, there are recently few
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studies about the impacts of Euro crisis on China’s economy. Strutt and Walmsley
(2009, 2011) used a dynamic global CGE model GDyn to study the impacts of the
global financial crisis for China. Tuan et al.(2010) studied the impact of global
financial crisis on China’s energy consumption absed on an input-output model.
Huang et al.(2011) studied the impacts of the global financial crisis on off-farm
employment and earnings in rural China. However, these researches didn’t specify the
Euro sovereign debt crisis and lacks a complete analysis of the impacts on the whole
economy. Some related literature studied the impacts of other crisis, like the U.S.
financial crisis, for example, Glodstein and Xie (2009) studied the spillover effect of
the U.S. credit crisis on Asia, however, the analysis wasn’t based on models.
Fidermuc and Korhonen (2010) analyzed the transmission of global financial crisis in
China and India from the perspective of business cycles.
The computable general equilibrium (CGE) method has been widely used in
economic simulations and policy analysis for China. For example, Liang et al. (2007)
used a CGE model to study the carbon taxation policy in China. Diao et al.(2012)
studied the global recession and China’s stimulus package policy based on a CGE
model. Bao et al.(2013) used CGE method to study the impacts of border carbon
adjustments on China. In this paper, the CGE method is also used to study the impacts
of the crisis on China’s economy. Moreover, the export rebate policy of China is
analyzed also based on the proposed CGE model.
By employing the CGE method to study the impacts of the Euro sovereign debt
crisis on China’s economy, this paper makes contributions in several aspects: Firstly,
this paper studied the Euro crisis based on a CGE method. Considering the Euro crisis
is still on-going and there is not enough data for econometric models. Secondly, this
paper depicts a whole picture of how the crisis will affect China, including its macro
economy, total international trade and sectoral international trade, which provide more
policy insights. Finally, the export rebate policy is studied based on the proposed
model, which suggests a proper policy undertaken will effectively mitigate the
negative impacts of Euro crisis on China.
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3. Model
3.1 Modules of the Model
A multi-sector CGE model is built to study the impacts of the Euro sovereign debt
crisis on China’s economy. There are three main modules in the model, which are
described below.
3.1.1 International Trade Module
The impacts of the Euro sovereign debt crisis on China will be transmitted mainly
through the international trade channel. To capture the different scenarios of the crisis,
the foreign accounts in the international trade module are divided into 11 regions, i.e.,
Germany, France, Italy, UK, other countries of EU, US, Canada, Australia, Hong
Kong, Japan and rest of the world. The structure of international trade module is
illustrated in Fig.1, which contains a double nested structure for both exports and
imports. Armington assumption (1969) is used which assumes imperfect
substitutability between domestic goods and foreign goods. Similarly, the
substitutability between foreign goods from different regions is assumed to be
imperfect.
OutputX
Domestic salesD
Total exportE
Total importM
DemandQ
CHINA
FOREIGN ACCOUNTS
regional importMM
regional exportEE
Fig. 1: Structure of international trade module
The international trade module includes both exports and imports. For exports, as
shown in Eq. (1), the sectoral output iX is used for export iE and domestic sales
iD following a constant elasticity transformation (CET) function.
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1/, ,( )e e e
i e i i de i iX a E a Dρ ρ ρ= + (1)
where ,e ia and ,de ia are the share parameters of exports and domestic goods with
, , 1e i de ia a+ = . 1/ ( 1)e eσ ρ= − is the elasticity between exports and domestic goods.
The optimal strategy for export is derived from maximizing output sales
i i i iPE E PD D+ under the constraint described by Eq. (1), whereas iPE and iPD
are the export price and domestic price for commodity i, respectively
For import, the sectoral demand iQ is used for import iM and domestic sales
iD following a constant elasticity of substitute (CES) function as shown in Eq. (2). 1/
, ,( )m m mi m i i dm i iQ a M a Dρ ρ ρ= + (2)
where ,m ia and ,dm ia are the share parameters of imports and domestic goods with
, , 1m i dm ia a+ = . 1/ (1 )m mσ ρ= − is the Armington elasticity between the imports and
domestic goods. The optimal solution for import is obtained by minimizing the
demand expenditures i i i iPM M PD D+ under the constraint described by Eq. (2),
whereas iPM and iPD are the import price and domestic price for commodity i,
respectively.
The sectoral export ,i sEE and import ,i sMM from region s are similarly
determined by CET functions and CES functions, respectively. The optimal regional
export and import are derived from maximization of the total export sales and
minimization of the total import expenditures, respectively.
The export prices and import prices are assumed to be determined following a
large-country assumption, i.e., China’s supply and demand will influence the world
prices. Formally, sectoral world export price ,i sPWE and import price ,i sPWM for
commodity i from region s are determined by Eq. (3) and Eq.(4), and sectoral export
price i ,sPEE and import price i ,sPMM are determined by Eq.(5) and Eq.(6).
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( ),
,
1 ex
i si s i
i s
PWSE * +preexEE econ
PWE
σ
= (3)
( ),
, 1
im
i si s i
i s
PWMMM icon
PWSM * +preim
σ
= (4)
( )1i ,s i i ,sPEE * -esub PWE *ER= (5)
( )1i ,s i ,s iPMM PWM *ER* +mtax= (6)
where ,i sEE and ,i sMM are the regional export and import for commodity i from
region s, iPWSE and iPWSM are the fixed world export prices and import prices.
iecon and iicon are the transforming parameters for exports and imports, and exσ
and imσ are the elasticity parameters for exports and imports. ER denotes the
foreign exchange rate, while iesub and imtax are used to define export rebate rate
and import tariff rate. To capture the impacts of different developing scenarios of Euro
sovereign debt crisis, parameters spreex and spreim are used to define the relative
price change for the world fixed prices. It is assumed that the crisis will cause the
downturn of global demand, which will increase the prices.
3.1.2 Production and Final Demand Module
The production and final demand module describes the domestic output and
demand as shown in Fig. 2. The domestic output function is assumed to be a
double-nested production function. At the top level, the output for each sector is
composed by different intermediate inputs and value-added composite. The Leontief
function is used to assume no substitution amongst different inputs. At the second
level, the value-added composite is composed by capital and labor following a CES
function. As illustrate by Fig.2, the domestic demand is composed by a linear sum of
intermediate input, consumption of households and government as well as capital
formation.
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OutputX
Value-addedVAD
Intermediate inputINT
CapitalCAP
LaborLAB
DemandQ
Household consumptionCD
Government consumptionGD
Capital formationID
Fig. 2: Structure of production and final demand module
In the proposed model, there are three types of domestic agents, i.e., households,
enterprises and government. Each agent holds equilibrium between their income and
expenditure. For households, they get their income from the production factors they
possessed, i.e., labor and capital. They also get transfer income from enterprises,
government and foreign accounts. The disposable income after taxation will be
allocated to consumption and saving according to a fixed marginal prosperity of
savings. The households’ consumption for different commodity i will be determined
by an extended linear expenditure system (ELES) function. For enterprises, they gain
income from capital returns and government transfers. Their expenditure includes
income tax to government, transferring to households and savings. For government,
the income sources from various taxes, including production tax, income tax and tariff.
The expenditure of government includes transferring, export rebate, consumption and
saving. The government consumption on different commodity will also be determined
through an ELES function.
The gross economy status will be captured by both real and nominal gross domestic
product (GDP). The real GDP is calculated from the expenditure side, i.e., the sum of
domestic consumption, capital formation and net export. The nominal GDP is
calculated from the income side, i.e., the sum of labor income, capital returns and net
taxes.
3.1.3 Closure Module
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The closure module includes the equilibrium of factor markets and commodity
markets, as well as the choice of closure conditions. For the two factor market, i.e.,
labor and capital, it is assumed that both are clear. In the labor market, the total labor
is assumed to be fixed, while the wage can be adjusted. In the capital market, it’s
assumed that the capital return is fixed while the capital using can be adjusted. For
commodities, it’s assumed that the supply and the demand equals.
The closure condition for foreign accounts includes endogenous foreign savings as
well as exogenous exchange rate. The foreign savings are the net income of foreign
regions considering their exports, imports and transfers with China. For government,
the closure condition includes endogenous government surplus or deficit, and
exogenous tax rates. Moreover, the neoclassical closure condition is hold in the model
whereas the total investment equals the total savings.
3.2 Database and Calibration
The proposed CGE model is calibrated based on a social accounting matrix (SAM)
of the year 2007. The SAM provides a uniform data base for economic activities and
allocations. The data sources includes China national input-output (IO) table for 2007
(135 sectors), National Bureau of Statistics of 2008 and General Administration of
Customs of P.R. China. The production sectors and commodities are disaggregated
into 28 sectors as shown in Table 1. The regional imports and exports data for
different sectors are aggregated from the HS classification codes with references of IO
table’s categories. Table 1 Definitions of sectors and commodities
Codes Definitions AGR Agriculture M_C Mining and washing of coal P_G Extraction of petroleum and natural gas MIN Other mining and processing FOD Manufacture of food, beverages and tobacco products TEX Manufacture of textiles FUR Manufacture of textile-apparel, leather, fur, and related products
WOD Processing of timber; manufacture of wood, bamboo, rattan, palm and straw products; manufacture of furniture
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PAP Manufacture of paper products and printings OIL Processing of petroleum and nuclear fuel COK Processing of coke RCM Manufacture of raw chemical materials and chemical products MCM Manufacture of medicines CMF Manufacture of chemical fibers RUB Manufacture of rubber and plastics NMM Manufacture of non-metallic mineral products MET Manufacture of metal products EQP Manufacture of general and special purpose machinery TRM Manufacture of transport equipment EEQ Manufacture of electrical and electronic equipment
CCO Manufacture of communication equipment, computers and other electronic equipment
MEA Manufacture of measuring instruments and machinery for cultural activity and office work
OTM Other manufacture ELE Production and supply of electric power and heat power GAS Production and supply of gas WTR Production and supply of water CNS Construction
TRP Transportation, storage, post telecommunication and other information-transmission services
OSR Wholesale and retail trades
The calibration of scale parameters, transform parameters and share parameters are
based on the SAM. The parameters of elasticity of substitution in international trade
module and production module are shown in Table 2. Table 2 Substitution parameters
Sectors/Commodities Between labor and capital Imports Exports AGR 0.2 4.9 5 M_C,P_G,MIN 0.3 5.6 6 FOD 0.56 5.6 6 ELE 0.63 3.8 4 CNS 0.7 3.8 4 TRP 0.84 4 4.5 OSR 0.63 4 4.5 others 0.63 5.6 6
3.3 Scenarios
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To capture the Euro sovereign debt crisis in China’s single-country multi-sector
CGE model, it is assumed that the world prices will be shocked as a result of the
global demands decreases due to the crisis. By a negative price premium, this
assumption will enable to make the crisis endogenously captured and transmitted.
This settings well considers the feature of CGE model, i.e., the equilibrium is brought
about by the adjustment of prices. Furthermore, it well depicts the transmission
channel of Euro crisis to China’s economy by its influence in international trade.
Three scenarios are set to assumed different evolutionary paths of the crisis, and
each with three different influence scales, as shown in Table 3. The assumptions are
referred to the actual decreases of export and import prices in both U.S. financial
crisis and in the early time of the Euro crisis. Table 3 Scenarios of Euro sovereign debt crisis
Scenarios Descriptions
Scenario A A1 preex = -3% and preim = - 1% for Euro zone countries A2 preex = -5% and preim = - 3% for Euro zone countries A3 preex = -8% and preim = - 5% for Euro zone countries
Scenario B B1 preex = -3% and preim = - 1% for European countries B2 preex = -5% and preim = - 3% for European countries B3 preex = -8% and preim = - 5% for European countries
Scenario C C1 preex = -3% and preim = - 1% for European countries and U.S. C2 preex = -5% and preim = - 3% for European countries and U.S. C3 preex = -8% and preim = - 5% for European countries and U.S.
4. Results and Analysis
4.1 Macro economy
The impacts of Euro sovereign debt crisis on China’s macro economy is illustrated
in Fig. 3. In general, the crisis will bring down China’s overall economy, with real
GDP decreasing from 0.876% to 3.936% in different scenarios. Another obvious
impact is that a larger and wider effect of the crisis on global demand will cause a
more severe effect. For example, with the same influence scale, i.e., the same decrease
in prices, when only Euro zone countries are affected, the impacts on China’s GDP is
smaller than if European countries are affected, and if both European countries and
U.S. are affected, the negative impacts will be the largest.
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Fig.3 Impacts of Euro crisis on China’s real GDP (%)
The impacts of the Euro crisis on China’s demand and output are further shown in
Fig. 4. The impacts for scenario B and scenario C are similar as shown in Fig. 3, so
only impacts for scenario A is illustrated. It can be seen that both total output and total
demand will be decreased by the crisis, and the impacts are smaller than on GDP.
Both households consumption and government consumption will be decreased, and
the formal will be decreased more. However, total investment will be influence a little,
which can be omitted. The social welfare will also be influenced by the crisis, under a
Hick measurement, the welfare for rural households and urban households will be cut
down 44.3 and 122.1 billion RMB Yuan in scenario A2.
-4.500
-4.000
-3.500
-3.000
-2.500
-2.000
-1.500
-1.000
-0.500
0.000 A1 A2 A3 B1 B2 B3 C1 C2 C3
15
Fig.4 Impacts of Euro crisis on China’s macroeconomy in scenario A (%)
4.2 International Trade
4.2.1 Total Imports and Exports
As the Euro sovereign debt crisis affects China’s economy mainly through the
channel of international trade, the imports and exports will be directly influenced as
prices change as shown in Eq. (3) to Eq. (6). The impacts of the crisis on China’s
international trade are illustrated in Fig. 5. It can be seen that the crisis will cut down
China’s total export and import, and the negative impacts will be larger on exports
than on imports. For different scenarios, the impacts are similar with that on GDP, i.e.,
a greater and wider evolution of the crisis will cause a larger effect. For example, in
scenario A2, B2 and C2, the impacts on total exports will be -2.619%, -2.865% and
-5.101%, while on total imports will be -0.816%, -0.942% and -2.027%. It can be
seen that when the crisis will transmit to U.S. and affect its demand, the negative
effects on China will be much more increased. This is because both EU and U.S. are
amongst China’s largest trading partners.
-3.000
-2.500
-2.000
-1.500
-1.000
-0.500
0.000 total demand total output
households consumption
government consumption real GDP
total investment
A1
A2
A3
16
Fig.5 Impacts of Euro crisis on China’s international trade (%)
The crisis will be transmitted to international trade through prices. The price
changes as a result of the crisis are illustrated in Fig. 6 for scenario A2. It can be
found that when Euro sovereign debt crisis broke out and cut down Eurozone
countries’ demand, the trade prices between China and Eurozone countries will firstly
be decreased. Therefore the average world export price and import price will be
reduced by 0.819% and 0.712%, respectively. Under the large-country assumption,
China’s supply and demand will affect the world prices, and the average export and
import prices faced by China’s enterprises will be decreased by 0.823% and 0.724%.
In this way, the final export price and import price will be cut down by 0.429% and
0.416% respectively. Since the relative decrease of the trade prices are more than
domestic prices (-0.212%), the enterprises will choose to substitute domestic sales
rather than export, while the domestic demand will prefer more import goods. This
explains why the crisis will have a larger negative impact on export than on import.
-9.000
-8.000
-7.000
-6.000
-5.000
-4.000
-3.000
-2.000
-1.000
0.000 A1 A2 A3 B1 B2 B3 C1 C2 C3
total export
total import
17
Fig.6 Impacts of Euro crisis on China’s prices in scenario A2 (%)
4.2.2 Sectoral Imports and Exports
The impacts of the Euro crisis on sectoral imports and exports are similar with the
total trade, i.e., the influence will be increased with a wider and larger evolutionary
path. Moreover, the impacts will be different for different sectors, as illustrated in Fig.
7. For sector WOD, EQP, OTM, EEQ and CCO, the export will be seriously affected
by the Euro crisis, decreasing 3.528%, 3.445%, 3.161%, 3.123% and 3.054%
respectively. For sector MIN, M_G and OIL, the import will be greatly hurt by the
crisis, at about -2.349%, -2.127% and -2.117%, respectively.
-0.900
-0.800
-0.700
-0.600
-0.500
-0.400
-0.300
-0.200
-0.100
0.000
average PWE
average PWM
average PEE
average PMM average PE average PM average PD
18
Fig.7 Impacts of Euro crisis on China’s sectoral export and import in scenario A2 (%)
The sectoral characteristics are further analyzed to study the reason why some
sectors will be more affected. For exports, sectors with a higher ratio of export to
output and a higher ratio of export to Eurozone area to total export will be more
influenced. For imports, the influence will be opposite. As illustrated in Fig. 8 and Fig.
9, it can be observed obviously a positive relationship and a negative relationship. In
Fig.9, some sectors with a larger import to Euro countries are affected negatively,
such as MEA and CCO, this is because these sectors are processing trade and their
exports are greatly hurt by the crisis.
-4.000 -3.000 -2.000 -1.000 0.000 1.000 2.000 3.000
AGR
M_C
P_G
MIN
FOD
TEX
FUR
WOD
PAP
OIL
COK
RCM
MCM
CMF
RUB
NMM
MET
EQP
TRM
EEQ
CCO
MEA
OTM
ELE
CNS
TRP
OSR
import
export
19
Fig. 8 Impacts of crisis on sectoral export and sector characteristics in scenario A2
Fig. 9 Impacts of crisis on sectoral import and sector characteristics in scenario A2
5. Robust Tests and Policy Implications
5.1 The Large- and Small- Country Assumptions
To testify the robustness of the results, the large-country assumption is altered,
which is the most important assumption for our model. The assumption is employed
considering China’s importance in global market to influence the prices. For
comparison purpose, three other scenarios are designed as shown in Table 4. Table 4 Scenarios for large- and small- country assumption under crisis scenario A2
-4.000
-3.500
-3.000
-2.500
-2.000
-1.500
-1.000
-0.500
0.000 0 2 4 6 8 10 12 14 16
chan
ges
of e
xpor
ts (%
)
exports to Eurozone countries/output (%)
MEA
cco OTM
FUR
TEX
EEQ
EQP WOD
-3.000
-2.000
-1.000
0.000
1.000
2.000
3.000
4.000 0 1 2 3 4 5 6
chan
ges
of im
port
s (%
)
imports to Eurozone countries / demand (%)
MEA
TRM
EQP
cco
OTM
RCM
MIN
20
Scenario China’s Exports China’s Imports A2-BAU Large country assumption Large country assumption A2-T1 Small country assumption Small country assumption A2-T2 Small country assumption Large country assumption A2-T3 Large country assumption Small country assumption
The impacts of Euro crisis on China’s total exports and imports in different
scenarios are compared in Table 5. From the result it can be seen that the assumptions
will significantly affect the result. On the one hand, if the small-country assumption is
assumed for import, China will play as the import price taker, which means a more
decrease in import prices and a positive effect on import. On the other hand, if the
small-country assumption is made for export, as a price taker in export, China will
face a much more decrease in export prices, which will enlarge the negative impacts
of Euro crisis on China’s export. Therefore, for scenario A2-T1, i.e., small-country
assumption in both export and import, the crisis will have the most negative impact on
export and the most positive impact on import. Furthermore the worst case is that
when China is a price taker in export and a price determinant in import, as shown in
scenario A2-T2. Table 5 Impacts of crisis under different scenarios (%)
Scenarios total export total import A2-BAU -2.619 -0.816 A2-T1 -7.755 1.665 A2-T2 -7.069 -6.084 A2-T3 -2.405 1.025
5.2 Export Rebate Policy
To mitigate the negative impact of the Euro sovereign debt crisis on China,
especially China’s export, the export rebate policy is studied. The export rebate policy
is flexible and easy to commit, and has been used as the usual tool to coordinate
international trade. Three policy scenarios are assumed as shown in Table 6. Table 6 Policy scenarios for export rebate rate esub
Scenarios Definition PA esub is increased for each sector PB esub is increased only for manufacturing industries
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PC esub is increased only for the mostly shock ten sectors
The results of the export rebate policy are shown in Table 7, the crisis scenario A2
is taken as an illustration. It can be concluded that the export rebate rate adjustment
will effectively mitigate the negative impacts of the Euro crisis. Whatever policy
scenarios, they will all reduce the negative shock on China’s export, especially, for
scenario PB-2%, i.e., increasing esub by 2% for all manufacturing industries, the
positive effect on export will offset the negative effect due to the crisis. When taken
the whole economy into consideration, the effects of export rebate policy on real GDP
is calculated. It can be seen that the optimal policy will be increase esub only for
manufacturing industries by 1.5%. In this case, it will reduce the negative effect on
GDP from 1.533% to 0.954%. Table 7 Effects of export rebate policies in crisis scenario A2 (%)
total export total import real GDP scenario A2 -2.619 -0.816 -1.533
PA-1% -1.926 -1.381 -2.847 PA-1.5% -1.494 -1.283 -3.015 PA-2% -0.345 0.077 -1.669 PB-1% -1.484 -0.018 -1.249
PB-1.5% -0.615 0.262 -0.954 PB-2% 0.001 0.301 -0.962 PC-1% -2.151 -1.265 -2.387
PC-1.5% -1.492 -0.827 -1.967 PC-2% -0.595 -0.027 -0.971
6. Conclusion
The Euro sovereign debt crisis will influence China’s economy mainly through
international trade channel. This paper analyzed these impacts based on China’s
multi-sector CGE model and different evolutionary paths of the crisis. The Euro
sovereign debt crisis is captured by reducing a premium on exporting prices and
importing prices with countries in crisis to reflect the declining of external output and
demand in the proposed model. This treatment is in accordance with the basic
assumption for general equilibrium that prices are endogenously adjusted to achieve
market equilibrium. Moreover, the on-going Euro sovereign debt crisis has affected
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China mainly through its direct influence on imports and exports with European
countries as revealed by empirical studies.
Based on the proposed model, the impacts of the Euro crisis on China’s macro
economy, total exports and imports, and sectoral exports and imports are studied. The
results suggest that the crisis will have a negative impact on China’s overall economy
and decrease the welfare. The results also indicate that the crisis will have a
significantly negative shock on China’s international trade, larger on exports than on
imports, and the impacts will be increased with more countries involved in the crisis
and more serious of the crisis. Furthermore, the impacts on trade by industrial sector
are closely related with characteristics of the sector, i.e., sectors with intensive exports
to Europe will have a larger shock. Robustness tests are carried out and suggested that
the small- and large-country assumption will greatly affect the impacts of the crisis on
China. With an increasing of the pricing power determination, the negative effect of
the crisis will be effectively reduced.
The export rebate policies are also studied based on the proposed model. The
results suggest that although the crisis will have negative shock on China’s economy,
it can be mitigated effectively by proper policies. Two implications are revealed, one
is that a wider scope of the export rebate policy is not necessary and may bring
negative impact on the whole economy. The other is that if the adjustment of the tax
rate is too small, it may not useful to mitigate the negative shock of the Euro crisis.
These results provide significant insights for effective policy tools, i.e., a carefully
designed export rebate rate adjustment policy will mitigate the shock of the crisis
without greatly increasing the overall tax burden.
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