Has China de-industrialised other developing countries?

Adrian Wood, Jörg Mayer 28 July 2009

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The least disputable of China’s impacts on the world has been the explosion of studies of China’s impact on the world.1 Many such studies have tried to measure the effects on trade or output in other countries. They have reached widely varying conclusions by a wide variety of methods: inspection of trade data (e.g. Lall et al. 2005; Mesquita Moreira, 2007; Kaplinsky and Morris, 2008); revealed comparative advantage calculations (Lederman et al., 2008); gravity models (e.g. Hanson and Robertson, 2007; Greenaway et al., 2008); and computable general equilibrium models (e.g. Dimaranan et al., 2006).

A common concern is that China’s opening to trade has de-industrialised other developing countries. Their labour-intensive manufacturing has been hit by Chinese competition in their home markets – a complaint often heard in Africa and Latin America – and in export markets, while their primary exports have been pulled up by Chinese demand. This mixture of effects is worrying because industrialisation is vital for development, manufacturing provides jobs, and the ownership of natural resources is often highly unequal – so the net impact of China could be both slower growth and greater inequality in the rest of the developing world.

Enter Heckscher and Ohlin

Standard trade theory is consistent with these concerns. The impact of China on other countries can be interpreted in a Heckscher-Ohlin model as occurring through a shift in world average factor endowments. The comparative advantage of a country depends on its endowments not in isolation but relative to the endowments of all other countries involved in trade. This comparator group was altered by China’s emergence from near-autarky, because of its size and distinctive endowment structure, and hence so was the comparative advantage of other countries.

More specifically, China’s opening to trade effectively lowered the world average land/labour ratio and increased the share of workers with a basic education in the world labour force. The relative endowments of other countries were thus shifted in the opposite directions, which tended to move their comparative advantage away from labour-intensive manufacturing, which requires many workers with a basic education but little land. The corresponding increase in comparative advantage for developing countries was in primary production, which uses a lot of land relative to labour.2

Size matters

So both casual observation and economic theory suggest that China’s opening to trade de-industrialised other developing countries. A more important question, though, is “by how much?”, especially compared to other forces that altered developing countries’ sectoral structures during this period. Trade theory suggests a way of answering this question, which we apply in Wood and Mayer (2009). It involves estimating (a) the size of the impact of China’s opening on world average factor endowments and (b) the average effect of a country’s relative endowments on the sectoral composition of its output and trade, and then combining (a) and (b) to calculate the impact of China on the average country’s sectoral structure.

This seemingly simple method is subject to many practical difficulties and can at best yield only approximate answers, but its application shows that the de-industrialising effect has on average been fairly small. Wood and Mayer estimate that China’s opening lowered the ratio of labour-intensive manufacturing to primary output in other countries by 7-10% and the corresponding ratio of exports by 10-15%. These are proportional changes in ratios; measured in terms of percentage point changes in sectoral shares, the effects seem even smaller. The biggest possible effect would be for a country which initially produced or exported equal amounts of manufactures and of primary products, where a 15% fall in the ratio would reduce the share of manufactures by 3.5 percentage points.

These estimates are imprecise and subject to error; the true answer may lie outside their range. But there is no plausible modification of the calculations that could make the true answer much larger. This is mainly because, despite its size, China’s opening had only a modest effect on world average endowments. The upper-limit estimates, obtained by simply adding China’s endowments to the rest of the world’s, are a 9% rise (from 0.43 to 0.47) in the share of the global workforce with a complete primary or secondary education, and a 17% fall in the average land/labour ratio, from 2.9 to 2.4 square kilometres of land per 100 workers (Wood and Mayer 2009, Table 1). The average effect on the structure of output and trade in other countries is unlikely to have been larger than these world average endowment changes and was probably smaller.

Regional variation

The significance of the China effect varied widely among developing countries. This is partly because its size varied with the composition of each country’s manufacturing and primary production – how closely its industrial products competed with Chinese exports, and how much demand there was from China for its primary exports (more, say, for copper than for coffee). It is also because there were many other forces acting on sectoral structures – including changes in countries’ own trade policies – whose effects often outweighed those of China.

Table 1. Changes in logged ratios of labour-intensive manufacturing to primary output and exports, 1980-2000, unweighted regional averages

  Output (33 countries) Exports (differences)
  1980-1990 1990-2000 Difference For 33 countries For 70 countries
All developing countries 0.14 0.08 -0.06 -0.21 0.07
East Asia (except China)  0.43  0.24  -0.19  -0.45  -0.34
South Asia  0.00  0.29  0.29  0.04  -0.05
Latin America and Caribb  0.10  -0.07  -0.17  0.69  0.39
Middle East and N. Africa  0.21  0.07  -0.14  -1.00  -1.19
Sub-Saharan Africa  -0.08  0.08  016  -0.59  0.45

Source: Woode and mayer (2009), Table 5.

Table 1, which divides developing countries into five regional groups, shows average changes in ratios of labour-intensive manufacturing to primary production in the 1980s and 1990s, and the differences between these decades, for output and two sets of export data (one covering the same 33 countries as the output data and the other including 37 additional countries which lack output data). The impact of China can reasonably be assumed to have been concentrated in the 1990s. Thus if other causes of structural change during the 1980s had simply continued into the 1990s, the impact of China should be visible as negative numbers in the difference columns.

For developing countries in total, the differences between the decades are indeed negative for the countries for which there are both export and output data, and are of roughly the sizes predicted by the calculations of China’s impact. In the 70-country data, however, the export difference is positive, probably because 28 of the extra countries are in Latin America or sub-Saharan Africa, where there were many changes of trade regimes in the 1990s.

The numbers also vary among the developing regions in the table. In East Asia, the consistently negative differences can plausibly be attributed to the impact of China, because of similarity of endowments and trade patterns, though the differences may be exaggerated by the crisis of 1997.3 In South Asia, a region largely closed to trade, the positive difference for output must have had internal causes, and the smallness of the differences for exports, of which clothing is a big share, could be because the impact of China was restrained by the Multi-Fibre Arrangement.4

In Latin America, the negative difference for output fits with the popular view that labour-intensive manufacturing was hurt by competition with increased imports from China and other Asian countries.5 However, this rise in imports was as much a result of Latin America’s liberalisation of its own trade policies as of China’s opening. Moreover, the differences for exports are positive, probably because of regional trade agreements that opened North America to Latin-American-manufactured exports.

In the Middle East, both output and export differences are negative, but China is unlikely to have been the main cause, since its effect on the oil price was small up to 2000. The average differences for sub-Saharan Africa are based on only a few countries, some with dubious data. But for three important producers of manufactures – Kenya, Mauritius, and South Africa – the changes in both output and export ratios are negative, which is consistent with the expected impact of China, though again as a result also of reduction of their own policy barriers to imports.

Past and future

China’s opening was a one-off event, which caused a step change in the comparative advantage of other countries. In contrast, its rapid growth, based on accumulation of more skills, capital, and modern technology, is a continuing event, and one whose effects will change with the passage of time. Thus far, China’s growth has mainly amplified the effects of its opening, raising both its supply of labour-intensive manufactures and its demand for primary products. Over the longer-term future, this rising demand for primary products will continue, but China’s accumulation of skills will move it out of labour-intensive manufacturing, tending to increase the size of this sector in other developing countries, rather than reducing it as the country’s opening initially did.

References

Broadman, H. (2007). Africa’s Silk Road: China and India’s New Economic Frontier. Washington DC: World Bank.
Devlin, R., A. Estevadeordal and A. Rodriguez-Clare (eds) (2006). The Emergence of China. Opportunities and Challenges for Latin America and the Caribbean. Washington, DC: Inter-American Development Bank.
Dimaranan, B., E. Ianchovichina and W. Martin (2006). “Competing with giants: who wins, who loses?” In L. Winters and S. Yusuf (eds), Dancing with Giants. China, India, and the Global Economy. Washington DC: World Bank and Institute of Policy Studies.
Dimaranan, B., E. Ianchovichina and W. Martin (2007). “China, India, and the future of the world economy: fierce competition or shared growth”. Policy Research Working Paper 4304. World Bank. Washington DC.
Eichengreen, B., Y. Rhee and H. Tong (2007). “China and the exports of other Asian countries”. Review of World Economics. 143(2): 201–226.
Freund, C., and C. Ozden (2006). “The effect of China’s exports on Latin American trade with the world”. Mimeo
Goldstein, A., N. Pinaud, H. Reisen and X. Chen (2006). The Rise of China and India: What’s in it for Africa? Paris: OECD Development Centre.
Greenaway, D., A. Mahabir and C. Milner (2008). “Has China displaced other Asian countries’ exports?China Economic Review. 19(2): 152–169.
Hanson, G., and. R Robertson (2007). “China and the manufacturing exports of other developing countries”. Forthcoming in R. Feenstra and S. Wei (eds), China’s Growing Role in World Trade. Chicago: University of Chicago Press.
Humphrey, J., and H. Schmitz (2008). China: its impact on the developing Asian economies. Working Paper 295, Institute of Development Studies.
Ianchovichina, E., and T. Walmsley (2003). The impact of China’s WTO accession on East Asia. Policy Research Working Paper 3109. World Bank. Washington DC.
Kaplinsky, R., and M. Morris (2008). “Do the Asian drivers undermine export-oriented industrialization in SSA?World Development. 36(2): 254–273.
Lall, S., J. Weiss and H. Oikawa (2005). “China’s competitive threat to Latin America: an analysis for 1990-2002”. Oxford Development Studies. 33(2): 163–194.
Lederman, D., M. Olarreaga and E. Rubiano (2008). “Trade specialization in Latin America: the impact of China and India”. Review of World Economics. 144(2): 248–271.
Mesquita Moreira, M. (2007). “Fear of China: is there a future for manufacturing in Latin America?” World Development. 35(3): 355–376.
Winters, L., and S. Yusuf (eds) (2006). Dancing with Giants. China, India, and the Global Economy. Washington DC: World Bank and Institute of Policy Studies.
Wood, A., and J. Mayer (2009). “Has China de-industrialised other developing countries?”, Working Paper 175, Queen Elizabeth House, Oxford University.
Yusuf, S., K. Nabeshima and D. Perkins (2006). “China and India reshape global industrial geography”. In L. Winters and S. Yusuf (eds), Dancing with Giants. China, India, and the Global Economy. Washington DC: World Bank and Institute of Policy Studies.


1 Good bibliographies are available in Goldstein et al. (2006) and Winters and Yusuf (2006).
2 For developed countries, by contrast, the increase in comparative advantage was mainly in skill-intensive manufacturing and services, which need workers with more than a basic education.
3 For example, Ianchovichina and Walmsley (2003) and Eichengreen et al. (2007). Greenaway et al. (2008) and Humphrey and Schmitz (2008) by contrast conclude that China had little effect on exports from other Asian countries.
4 Yusuf et al. (2006) and Dimaranan et al (2007) emphasise that the effect of China on South Asia’s manufactured exports varies among products, and conclude that the future evolution of these exports will depend heavily on the speed at which China upgrades its own exports
5 Lall et al. (2005), Devlin et al (2006), Freund and Ozden (2006), Lederman et al. (2008).
6 E.g. Goldstein et al. (2006), Broadman (2007).

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Topics:  Development International trade

Tags:  China, manufacturing, industrialisation

Professor Emeritus of International Development at the University of Oxford

Senior Economic Affairs Officer in the Division on Globalisation and Development Strategies, UNCTAD

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