the emergence of china: opportunities and challenges for latin america and the caribbean...
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The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean
Coordinators:
Robert Devlin, Deputy Manager (INT)
Antoni Estevadeordal, Principal Economist (INT)
Andrés Rodríguez (RES)
Inter-American Development BankInter-American Development Bank Integration and Regional Programs Department (INT)Integration and Regional Programs Department (INT)
Research Department (RES)Research Department (RES)
An increasing importance in world trade…
0
20
40
60
80
100
120
140
160
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Year
China Exports China Imports World ExportsSource: IMF.
Growth of Trade: China vs. World(1970 = 1)
Liberalization of China’s Trade Policy Regime
MFN Tariff Liberalization (unweighted averages)
CHINA WTO ACCESSION
0
5
10
15
20
25
30
35
40
45
50
Per
cent
China Latin America
China as a Market…
6 (5)
4 (11)
1 (24)
1 (51)
1 (60)
2 (25)
3 (26)
1 (43)
2 (37)
0 200,000 400,000 600,000 800,000 1,000,000
BRAZIL: Soya beans
CHILE: Refined copper, unwrought
ARGENTINA: Soya beans
BRAZIL: Iron ore and concentrates, not agglomerated
ARGENTINA: Soya bean oil
BRAZIL: Iron ore agglomerates
CHILE: Copper ores and concentrates
CHILE: Chemical wood pulp, bleached
ARGENTINA: Leather of other bovine cattle
Top LA Exports to China
Thousands US Dollars
2002
Mkt. Share(%)
Importer Rank
Competing with China in Global Trade
A highly diversified export basket
0
100
200
300
400
500
600
700
800
OECD United States LAC Mexico Argentina Chile China
20022002
Export Concentration Index
Comparing Chinese and LAC Export Structure by Technological Content
0% 20% 40% 60% 80% 100%
China 1987
China 2002
LAC 1987
LAC 2002
Primary prod. Resource-based manuf.Low-tech manuf. Medium- and high-tech manuf.Other
China as a whole is extremely labor abundant…it should compete with the world’s lowest wage countries
CHINA
LA
US
LABOR
CAPITAL
But China’s provinces exhibit substantial endowment heterogeneity…Shanghai may compete with some OECD countries!
LA
US
LABOR
CAPITAL
Shanghai
CHINA
Guizhou
Market Share in the US (Manufacturing)
0
10
20
30
40
50
60
70
80
90
100
1972 1981 1991 2001
OECD Latin America Asia (incl. China)
Product Penetration in the US Market (Manufacturing)…
0
10
20
30
40
50
60
70
80
90
100
OECD LatinAmerica
China OECD Latin America China
Number of Products in the Manufacturing Sector
19726,136 goods
200113,242 goods
Product Penetration in the US Market (Manufacturing)…
0
10
20
30
40
50
60
70
80
90
100
OECD LatinAmerica
China OECD Latin America China
Number of Products in the Manufacturing Sector
19726,136 goods
200113,242 goods
Product Penetration in the US Market (Manufacturing)…
0
10
20
30
40
50
60
70
80
90
100
OECD LatinAmerica
China OECD Latin America China
Number of Products in the Manufacturing Sector
19726,136 goods
200113,242 goods
Head-to-Head Product Competition with China in the US Market…
0
5
10
15
20
25
30
OECD S.E. Asia Latin America
1972
1981
1991
2001
Export Similarity Index
Head-to-Head Product Competition with China in the US Market…
0
5
10
15
20
25
Pe
rce
nt
Mexico Brazil CostaRica
Argentina Chile
1972
1981
1991
2001
Export Similarity Index
FDI Competition?
The Surge of FDI to China
There is a surge of FDI to ChinaThis due to China’s clear competitive
advantages and recent reforms, most recently WTO accession
Should Latin America be concerned?
Should Latin America be Concerned?
Conceptually, reforms that allow FDI in a country such as China could divert investment…
But magnitudes would be small… at most 4% reduction in FDI flows to the region
But it could be that some countries are affected more than others…
Are Some Countries More Likely to be Affected?
FDI competition may be stronger across countries with same FDI sources
It may also be stronger across countries that get FDI in the same sectors…
… especially if these are traded sectors
FDI sources differ greatly
A comparison of sources of FDI in Latin America and China reveals large differences:– FDI to China is predominantly from Asia– FDI to Latin America is predominantly from U.S. and
EuropeThe reduction in investment flows from general
FDI competition is thus likely to be even lower than the 4% mentioned earlier…… Asian countries (e.g., Korea, India) have much more to worry!
FDI sector coincidence varies greatly across countries
A Case Study
Are multinationals in L.A. moving to China?A survey in Costa Rica: representative sample of
41 MNCs out of a total of 100 in the EPZ systemTwo MNCs said they were moving to ChinaThe threat is in sectors that rely on cheap labor
and inputs coming from AsiaCountries whose main advantage in attracting
FDI is low wages should be most concerned
Summing Up
Overall FDI competition is modestMain competition is for countries in AsiaL.A. countries that will be more affected
are those specializing in exports dependent on cheap labor (e.g., Mexico, Central America)
The Future of Textiles in Latin America
Several countries in L.A. have experienced high growth in exports of textiles and apparel to U.S.
This has been one of the main sources of new formal jobs in several countries in CA
Unfortunately, this growth was a result of preferential access to the U.S. market that is about to be considerably weakened
January 2005: elimination of remaining U.S. MFA quotas on textiles and apparel
What will happen? What should be done?
A Snapshot of the Current Situation
“The region” (Mexico, CA, DR) is heavily oriented towards the U.S., and is based on maquila (little vertical integration) and low wages
China is tremendously competitive: it has much lower wages and is vertically integrated (cluster)
When U.S. has removed quotas on some items recently, China’s share of the market has boomed
Advantages and Opportunities
The region has two advantages: geography and market access
But NAFTA and CAFTA are not enough: tariff preference is small compared to cost gap with China
Differential transport costs represent a small advantage
The best opportunity is a large difference in the time it takes to ship the product to the U.S.– Specialize in product lines where “speed to market” is
critical
Policies
Avoid protective measures and allow market to come up with solutions that take advantage of region’s advantages (geography, market access)
Policies (may require sub-regional cooperation):– Customs facilitation with U.S. and within region– Infrastructure (roads, ports, electricity)– Long term capital– Specialized human resources (engineering, design,
marketing, procurement, etc.) In addition, promote export diversification
Conclusions
China The Market: Opportunities for Latin America
Systemic Factors– New Stimulus to Growth of World Economy in Face
of Sluggish or Uncertain OECD Growth
– Openness and X M
– Cost Effective Supply Finished Goods and Inputs
– Savings Finance U.S. Treasury Bonds and Help Keep International Interest Rates in Check
China The Market: Opportunities for Latin America
Latin America Specific– Bouyant World Commodity Prices– 1.3 Billion Consumers; Demand for
• Agriculture and processed foods• Raw and processed materials• Services, especially tourism
– FDI• Host (e.g. Embraer)• Source (e.g. Shanghai Bao Steel)
– Cooperation• Support for multilateralism (e.g. G-20)• Policy best practices• Interchange (education, sciences and technology, etc.)
China The Competitor Endowments Give China Competitive Edge in Low, Medium and
High-Tech Manufactures Long-Term Policy Drivers of Competitiveness
– Education• Small surplus in “predicted” secondary enrollment (L.A. has big deficit)• Like L.A., deficit in terciary but
– Extremely high per student expenditure ratio for terciary education– Scale: 1.3 million graduates of higher education– 45% in science and engineering– World competitive test scores
– Innovation• R & D researchers and patent applications in U.S. > L.A.• R & D expenditures % GDP > 1% (> L.A.)• Absolute R & D expenditures South Korea
– Investment (incl. Infraestructure)
Coping with Chinese Competition
Coping with Chinese Competition
China’s (and S.E. Asia) Success Raises Anxiety over Current and/or Future Competition– Intensify Criticisms of Washington Consensus?– Risk Protectionist Backlash?
A Better Response: Treat China as a “Wake-up Call” to Rethink Development Policy
L.A. Does Not Face Challenge Unarmed– During Reforms Acquired or Reinforced Assets to Compete– Must Strategically Combine Existing Assets and Create New
Ones to Become More Offensive Player in Global Economy
Towards a Policy Framework to Compete
A Public-Private AllianceNational Social ProcessHorizontal and Vertical Policies
A Public-Private Alliance
Goal: A Constructive Partnership Between Public Sector and Private Sector
A Requirement: A Government with a Capacity to Engage the Private Sector in Pursuit of Policies to Compete– Long-Term Strategic Focus (strengths and weaknesses)– Experimentation– Learning– Development of Capacities
Focus: Identifying and Overcoming Market Failures that are a Binding Constraint
A Public-Private Alliance
Bottom Line– China and East Asia Successes not based on purely
market forces– Few Economic Success Stories are Entirely a Market
Phenomenon– No Formulas for Proactive Policy –local creativity and
adaptations– But a Strong State with Focus on Support of Industrial
Diversification and Upgrading has been Important in China and East Asia Generally
– Don’t Forget Services
Strategic National Social Process
Strategic National Social Process
Start a National Social Process– Create Space for Active Collaboration Between Public and Private
Sectors– Work Towards Forward Looking and Focused National Policy
Framework to Compete Globally– Process Must Allow for Competition of Interests, Visions and
Capacities in the Private Sector (broadly defined)– Government Must Ultimately Arbitrate with:
• Predictability• Transparency• Accountability• Technical Criteria• Test of the International Market Place
Strategic National Social Process
– For Longer Term Focus Governments Need More Fiscal Space, Public Savings and Strengthening Public Sector Human Resources
– Gradualism• All Governments Have Some Capacity to Engage in Intervention and
Alliance Building• Try Pilot Programs First that Allow for Tests Against the Marketplace,
Learning and Adaptation. • The Weaker Government Capacity, the Fewer and Simpler the
Interventions Should be Until Capacity Develops
– Beware of Unproductive Rent Seeking and Corruption– But Risks of Rent Seeking Lower than Past When
• Protectionism much higher• Competition minimal• Little or no democracy• Little government accountability
Horizontal and Vertical Policies
Horizontal and Vertical Policies
Horizontal Enabling Policies not Controversial
Vertical Policies are More Controversial Because of the need for Selectivity– Governments cannot intervene in all sectors– Fiscal resources are scarce– Public sector human resources limited
Horizontal and Vertical Policies
Choosing Sectors for Support – Some Considerations– Support investment in activities that are
socially very beneficial but unlikely to happen without public action
– Selection of sectors not “picked” by government – must emerge from national social process
Horizontal and Vertical Policies
– Requirement: Cooperation from private sector Associations which have market based knowledge and experience
– Sunset and performance clauses for support programs
Some Policy Areas to Support Industrial and Services Upgrading and Competitiveness
Dealing with the Dutch Disease
What is it?– A market failure
– Happens when high commodity prices push economy away from more knowledge-based non-traditional agriculture and manufacturing
What to do?– When systemic could tax commodity to finance
support for diversification• Chile proposal: tax copper and use for an “Innovation Fund
for Competitiveness”
Provision Public Goods
Intervene to Overcome Classic Coordination Problems in Supply of Public Goods and Services Critical for Growth of Sectors– Overcoming free riding problems – Infrastructure– Identifying and supporting strong
complementarities (e.g. hotel-airports)
Education
Recent Emphasis: Primary EducationMore Emphasis: Secondary and Higher Education
– China’s advantage in low wage labor raises skill premium in Latin America
– More focus on secondary and higher education deficits for supply of skilled professionals and development of R & D capacities
– Upgrade curriculums (math, science and engineering)– Collaboration between universities and private sector for
curriculums and research– More Equality of access
Export Development and Investment
Need more than macro stability, financial deepening, property rights, etc.– Specific support for discovery/investment/activities where social
benefits of spillovers > benefits to single entrepreneur
– Mechanisms = market credit, grants, specialized promotion agencies and programs for discovery of export markets, investment, and attraction FDI
– Competitive real exchange rate
– Predictable rules of the game for investors – role of investment contracts
– Transport systems and infrastructure (scale, hub & spokes, etc)
Innovation
Innovation activities generate substantial externalities and are under-produced by market
Horizontal policies like IPR and across the board corporate tax breaks not enough– Shift attention from traditional improvement of supply
capacities to promoting demand driven innovation– Make supply relevant to demand– Focus support in universities and research centers on
existing industry groups with comparative advantage– Support public-private collaborative innovation in
potential cluster areas
Role of Economic Integration
Regional Integration: Subregional; Latin America; Interregional FTAs (FTAA, EU, U.S., Japan).
Regional Markets facilitate– Scale – Agglomeration– FDI Attraction– Reduce distance (tariffs and preferences, transport and search costs)– Cooperation (education, R & D, X promotion, clusters, joint negotiation,
etc.)– But be careful of overly restrictive rules of origin
Role of WTO: Leveling Playing Field with China– Market Opening– Rules– Dispute Settlement