Competition or Complementarity in Exports?

1

Competition or Complementarity in Exports?

- The Case of China and Its Neighbors in East and Southeast Asia

Master Thesis for IE&B Program

By Peng Huang (1348949) October 2006

Supervised by Dr. E.H. van Leeuwen

Faculty of Economics

University of Groningen

Preface ... - 3 -

1 Trade Pattern in East and Southeast Asian Countries... - 4 -

2 Literature Review... - 8 -

2.1 Recent Studies of Export Competition and Complementarity between East Asian Economies and China...- 8 -

2.2 Research Motivation and Hypothesis ...- 10 -

3 Variable Acquiring and Model Setting Up ... - 13 -

4 Estimation and Analysis ... - 18 -

4.1 Data and Methodology ...- 18 -

4.2 Extent of mutual influences of Export between China and Asian NIEs...- 21 -

4.3 Extent of mutual influences of Export between China and ASEAN-4 ...- 22 -

5 Conclusions ... - 25 -

Reference & Literature ... - 26 -

Figures & Tables: ... - 29 -

Figure 1. Asian Flying-geese Pattern of Economic Development ...- 29 -

Figure 2 Exports of ASEAN-4 countries from 1970 ~ 1985 ...- 29 -

Figure 3 GDP Growth of ASEAN-4 countries from 1970 ~ 1985...- 30 -

Figure 4 Export from China, NIEs and AESAN-4 to industrial countries from 1985 ~ 2004...- 30 -

Figure 5 Export from NIEs and ASEAN-4 countries to China from 1985 ~ 2004 ...- 31 -

Figure 6 Export growth of Taiwan and Singapore 1982 ~ 2003 ...- 31 -

Table 1 The estimation result of China’s export impact on Asian NIEs...- 32 -

Table 2 The estimation result of Asian NIEs ’ export impact on China ...- 33 -

Table 3 The estimation result of China’s export impact on ASEAN-4...- 34 -

Table 4 The estimation result of ASEAN-4’s export impact on China...- 35 -

Table 5 China’s Trade Deficit (Exports minus Imports) with ASEAN-4 (US$) ...- 36 -

Appendix 1: Constant Market Share Analysis ... - 37 -

Appendix 2: Shift-share Analysis... - 38 -

Appendix 3: Data of Export from China and Asian NIEs/ASEAN-4 from 1981-2004- 40 - Appendix 4: Methodologies for Choice... - 44 -

Preface

This paper is Master thesis for my Doctoraal Program “International Economics &

Business” in University of Groningen.

Many thanks to Dr. E. H. van Leeuwen for supervising my master thesis and giving me considerable guide. During last few months, he showed me the way of research step by step and helped me to build up the foundation of my independent research ability. I benefited quite a lot from his solid economic knowledge and serious attitude toward work.

Many thanks to Dr. H. W. A. Dietzenbacher for giving me lots of constructive instructions on the methodology of my thesis. I am impressed by this knowledgeable, industrious professor all the time. His comments and suggestion have been of great value.

I would also like to thank my parents in China. Their understanding and supports enourage my studying and working in a foreign country.

1 Trade Pattern in East and Southeast Asian Countries

In the past three decades, substantial changes in the composition and direction of trade have been seen in East and Southeast Asian countries in western Pacific region. The rapid growth of Japan and the newly industrialized economies^* of Asia were initially associated with rapid growth in output and export of labor-intensive manufactures by these countries (Tyers, Phillips and Findlay 1987). During the 1970s the countries^† making up the Association of Southeast Asian Nations (ASEAN) emerged as major exporters of petroleum and other natural recourse-based goods (Garnaut and Anderson 1980). Then, after the late 1970s, China has been undergoing a period of high economic growth since shifting to a series of reforms on their exchange and trade systems as open door policy. And these new policies have already led to rapid growth in China’s manufactured exports and its continuation will lead to substantial increases in China’s share of world trade.

In 1962, Akamatsu^‡ developed the famous flying-geese model to describe the life cycles of industries in the course of economic development with the focus on specific industries in specific countries. Subsequently, it has been extended to study the dynamic changes in the industrial structure in specific countries and further to the shift of industries from one country to another. The expansion of economic dynamism from Japan to the Asian NIEs and then further to ASEAN-4 countries and China has come to be known as the flying-geese pattern in East Asia.

As it is stated in the flying-geese model, the composition of exports from East Asia has begun to change after the 1970s. The real wages in Japan and subsequent Asian

* New industrialized Economies of Asia (NIE) refer to South Korea, Taiwan and Singapore in this paper.

† Refer to Indonesia, Malaysia, the Philippines, Singapore and Thailand. Throughout this paper we use ASEAN-4 refer to Indonesia, Malaysia, the Philippines, and Thailand.

‡ “A Historical Pattern of Economic Growth in Developing Countries”, Japanese economic history, 1600-1960.

Volume 1. Japanese prewar growth: Lessons for development theory? 1998, pp. 1-23, New York and London:

Garland

NIEs have grown and the exports of capital and technology intensive manufactures has risen at the expense of labor-intensive manufactures, while the labor-intensive manufactures of ASEAN-4 in total exports began to rise as that of natural resource-based goods subsided (Tyers and Phillips 1986). Thus, the development of ASEAN-4 countries will follow the path of Asian NIEs, especially labor-intensive manufactures will become an increasingly important source of economic growth (See Figure 1).

It is obviously a golden age for ASEAN-4 countries from 1970 to 1985 (See Figure 2).

The exports have increased even 3 or 4 times (Indonesia; Malaysia) during this period.

Most of export was contributed by labor-intensive manufactures and natural resources (i.e. petroleum) (Tyers, Phillips and Findlay 1987). Moreover, the real GDP of ASEAN-4 countries also increased sharply from 1970-1985, especially Malaysia (See Figure 3). Therefore, according to these historic data from Asian Development Bank, we can find that increased export from 1970-1985 contributed to the growth of these Asian economies significantly.

The fast emergence of mainland China as an exporter of manufactures from the 1980s brought great impact on the trade pattern of East Asia. Owing to receive substantive direct foreign investment, together with many other favorable resources ( such as relative lower labor cost, etc.), China has been gaining competitiveness not only in labor-intensive products, but also in some sectors such as IT and other technology-intensive products. Thus, there has been some disruption^* in the conventional orderly catch-up process of the flying-geese pattern which led by Japan, following by the Asian NIEs, ASEAN-4 countries and China, due to rapid growing of China’s economy through the classical flying-geese pattern.

Regarding the direction of East Asia’s exports, China as well as the NIEs and

* View point from 2001 White Paper on International Trade published by Japan’s Ministry of Economy, Trade and Industry. It agues that, in short term, increasing competition between China and ASEAN members could have negative repercussions on the latter, as illustrated by the 1997-98 Asian financial crisis.

ASEAN-4 rely heavily on the industrialized countries^* as their export destination. By exporting similar products to identical destinations, these economies tend to experience some forms of rivalry or competition among themselves (Voon and Yue 2003). Especially after China’s entry to the World Trade Organization (WTO), the exports to industrialized countries from ASEAN-4 economies are facing more competition from their giant neighbor. There is considerable overlap in the composition of their major export items, particularly in textiles and apparel and other labor-intensive manufactures. As China’s manufacturers climb the technology ladder, the overlap is spilling over into electrical and electronic products, where ASEAN-4 countries had initially established a lead.

On the other hand, some economists think both China and its neighbors share mutual benefits from increased incomes of Chinese consumers and from the potential of greater integration of product lines across the region, both of which are reflected in the expanding intra-regional trade in Asia (see Appendix 3). However, China’s tremendous growth has indeed translated into rising imports from the rest of Asia.

Especially, these have skyrocketed in recent years since World Trade Organization (WTO) accession was completed in December 2001. In addition, as China continues its rapid development, other economies in the region have an incentive to try to move up the value chain as their comparative advantage shifts to higher-value added, less labor-intensive industries. Taiwan, for example, is attracting more investment in high-tech research facilities as opposed to pure manufacturing, and Singapore and (to a lesser extent) Malaysia is trying to broaden the scope of their manufacturing sectors to include bio-technology and other emerging technologies (Ahearne, Fernald, Loungani and Schindle, 2003).

There has been a sharp increase in the share of Asian exports to China, from 6% in 1985 to 13% in 2004. This is especially significant for the Asian NIEs, whose share of exports to China rose from 1% to 10% over the period, with the largest gains in

* Throughout this paper we use United States, Japan and E.U. refer to industrialized countries.

Taiwan (from 1% to 30%), South Korea (from 0% to 15%). Singapore has shown less of an increase, from 1% to 5%. On the other side, the ASEAN economies have also played a great role in the expansion of intra-regional trade, with exports to China rising by five percentage points, from 1% to 6%, over the period.

As a new comer, the exports of China may bring negative or positive effects to other Eastern Asian economies’ exports. And other Asian countries’ exports may also affect the exports of China. In this paper, the negative effects can be taken as export competition, and positive effects can be taken as export complementarity. In a word, the fast emergence of China will provide good opportunities or impart serious competition on export^* from these economies. This is a critical issue relevant to Eastern Asian economies. Therefore, the research question of this paper can be formulated as follow:

Competition or Complementarity? How China and its neighbors in East and Southeast Asia influence each other in terms of export to industrialized countries?

In the next section of this paper, I will review other recent researches of East Asian economies’ export. The following sections provide the methodology to estimate the hypothesis and analyze the results for mutual influence of export between China and each of other Asian economies by using this model. Then, the remainder of the paper will focus on the discussion and implications of my estimation results and find the mutual influence of export between China and each of ASEAN-4 countries, as well as Asian NIEs. The conclusions are presented in the final section.

* Throughout this paper, we use “export” refer to “export to industrialized countries”.

2 Literature Review

2.1 Recent Studies of Export Competition and Complementarity between East Asian Economies and China

Since the end of the 1980s, a number of studies have researched the issues of export competition between China and other East Asian countries. Some influential researches are summarized as following:

The emergence of China as an exporter of labor-intensive manufactures in the

1980s may present the ASEAN-4 exporters with increasing competition on market of industrialized countries. By using the Constant Market Share analysis^*, Tyers, Phillips and Findlay (1987) hypothesized that ASEAN-4 may be crowded out of the labor-intensive manufactures (LIM) markets by China. They first present and analyze the available data on commodity composition and country distribution of ASEAN and Chinese LIM exports and then examine the respective patterns of comparative advantage and consider the likely future impact of China’s entry into world LIM trade on ASEAN development. Therefore, they concluded that China and ASEAN-4 do compete directly for shares of LIM exports.

Herschede (1991) investigated the degree of direct competition among ASEAN-4, China, and the NIEs, in the labor-intensive manufactures (LIM) markets by using Japan as proxy of the industrialized countries as destination market. He used the shift-share analysis^† to measure the magnitude of Asian economic rivalry. The results showed that China enjoyed a significant competitive advantage relative to ASEAN-4.

Due to its relative adverse industry structure and competitive disadvantage, ASEAN-4 suffered more than other Asian economies (such as NIEs) from China’s entry into the

* See Appendix 1

† See Apendix 2

Japanese import market of both primary and manufactured products.

Moreover, Voon (1998) analyzed the changing patterns of export competitiveness among China and ASEAN-4 in primary goods, labor-intensive and technology-intensive manufactures with the same methodology using U.S. market as import market. Over the two time periods (1982-86 and 1990-94), it was found that China performed better than ASEAN-4 in the U.S. import market. This implies that ASEAN-4 experienced competitive pressure from China’s exports. Although the competitions exist between ASEAN-4 and China, ASEAN-4’s total exports to U.S.

had been increasing more than two times in that period.

The most recent comprehensive studies in this field are done by Ahearne, Fernald, Loungani and Schindle (2003). At first, they examine this issue by looking at correlations between China’s exports growth and that of other emerging Asian economies. They regress export growth of individual Asian economies on the growth rate of world GDP, its own effective exchange rate and China’s exports using pooled GLS. All variables are in real terms and in annual changes:

0 1 2 3

it it it t it

Export =α +β ForeiginDemand +β ER +βChinaExports +ε

WhereExport imply export growth of emerging Asian country i at period t. _it

ForeiginDemand imply world GDP excluding country i at period t. It should be it

positive correlation with Export , i.e. the higher foreign demand will lead to higher _it export of country i. ER is the real effective exchange rate of country i at period t. _it Exchange rate is one of the important indicators in international trade. In principle, depreciation of local currency will stimulate export of reference country in a certain period. ChinaExports represent exports of China at period t. It is used as an _t indicator of the impact of China’s export to Asian country i. A positive significant

coefficient implies export Complementarity between China and Asian countries, and a negative coefficient means export competition between China and Asian countries.

ε is error term for country i at period t. it

The authors find a positive coefficient on Chinas exports growth after controlling for world income growth and competitiveness^* (although it is not significant), which they interpret as evidence of complementarity between China and other emerging Asian economies of exports at aggregate level. Furthermore, they also examine specific products at industrial level by using shift –share analysis and find that a considerable shifting of trade patterns is taking place, consistent with a “flying geese”

pattern in which China and ASEAN-4 move into the product space vacated by Asian NIEs. So the export emerging of China took a positive impact on the exports of other Eastern Asian economies. Therefore, they conclude emerging China bring more opportunities than competition for other Asian economies. E.g. they think the endowments of China and Eastern Asian countries are complementary, the fast growing of China’s export must led to the increasing of import from other Asian countries.

2.2 Research Motivation and Hypothesis

From former studies, the methodologies of most researches in this field focus on Constant Market Share Analysis or Shift-share Analysis and their derivatives to examine the relationship between China and ASEAN-4 countries on export to industrialized countries at industry level. In this paper, Competition and Complementarity are analyzed at aggregate level. This approach intends to uncover the general interaction between China and ASEAN-4/Asian NIEs. Moreover, there are seldom researches in this field for each specific Asian economy at aggregate level, a research on aggregate level for each specific economy may present us some new findings from different perspective.

* The authors use real effective exchange rate of exporter as an indicator of competitiveness.

Moreover, the methodology of former researches at aggregate level didn’t show very clear theoretic origin. Hereby, I will develop an econometric model derived from classic gravity theory to examine the mutual influence on export between China and each of Asian NIEs/ASEAN-4 countries. Besides, the researches are addressed not only on China’s export influence to Asian economies, but also on Asian countries’

export influence to China. The author will introduce this econometric model and methodology in detail in next chapters.

In this research, the seven Asian economies (ASEAN-4 and three Asian NIEs - South Korea, Taiwan and Singapore) are selected instead of ASEAN-4 in preceding studies to get more comprehensive results of mutual influences of export between China and Asian economies. According to the data from Asian Development Bank and U.N.

Comtrade^*, the other developing economies in East and Southeast Asia account for very small portions of the total export to industrialized countries within this region.

However, Hong Kong, as an important entrepot between China and the world’ trade, has very unique economic characteristics in Asian economy, especially before the 1990s. Entrepot trade of Hong Kong is quite different from the export of other Asian economies, so we will exclude Hong Kong as one of countries in this research to avoid misestimating.

Furthermore, most former studies only choose one industrialized country, such as the U.S. or Japan, as proxy of industrialized countries in their research. In order to acquire more accurate results, the author will choose two industrialized counties instead of a single country as proxy of export destination in this research. For example: Both the United States and Japan rank top 4 in export partners of China and NIEs/ASEAN-4 countries. And the export from these countries to the United States and Japan contribute more than 30% of the total amount in average during past 24 years (1981-2004, see Appendix 3). However, most of the rest exports from these countries

* http://unstats.un.org/unsd/comtrade/

more focus on the intra-regional trade within Asia (see Appendix 3), they are not direct relevant to my research question. Therefore, the research of this paper actually concentrates on the export to industrialized countries.

In this research, export competition or rivalry is defined as competitive relationship of export from China or NIEs/ASEAN-4 countries to industrialized contraries. i.e. both parties experience some forms of rivalry or competition when they export similar products to identical destinations. Whereas trade Complementary is defined as that both parties (China and NIEs/ASEAN-4 countries) share mutual benefits from emergence of China’s economy. It is reflected in the closer economic relationship between China and NIEs/ASEAN-4 countries. For instance, China’s tremendous growth has indeed translated into rising imports from its Asia neighbors. These imports are not only for its growing domestic market but also as components or parts of the final products to export.

On the whole, the hypotheses of this paper can be summarized as follow:

• H1: The growth of China’s exports has negative impact on its neighbors’

export.

• H2: The growth of neighbors’ exports has negative impact on its China’s export.

3 Variable Acquiring and Model Setting Up

The current rise of trade flow has led to an increase in the number of studies investigating the sources of trade. The gravity model, pioneered by Tinbergen (1962) and Linnemann (1966), has been the workhorse model used to explain bilateral trade since the 1960s. Based upon Newton's Law of Gravitation, the gravity model predicts that the volume of trade between two economies should increase with their economic size, determined by GDP and population, but decreases with distance between them, which may represent a proxy of transport costs.

( , , 1)

ij i j ij

TF = f GDP GDP GD ⁻ (1)^*

Where TF_ij is the value of total bilateral trade flow (i.e. imports & exports) between country I and J, GDP_i and GDP_j are country I and J ' s respective national incomes (Gross Domestic Products), GD_ij is a measure of the geographical distance between the two economies.

The gravity model was popular in the 1960s (Tinbergen, 1962 and Poyhonen, 1963) but after that the interest faded, although the model regularly captures bilateral trade flows quite well (Deardorff, 1998). The faded interest was due to the fact that the model was regarded as ad hoc and as lacking in theoretical underpinnings.

Nevertheless, the view that the gravity model lacks a theoretical foundation is less reasonable today. A great contribution of theoretical underpinnings were provided as early as the late 1960s and the 1970s, by Linnemann (1966), Leamer and Stern (1970) and Anderson (1979). More theoretical works were done in the 1980s and 1990s

* Poyhonen, P. (1963). A Tentative Model for the Volume of Trade Between Countries. Weltwirtschaftliches

Archiv 90: pp.93-99.

(Bergstrand, 1985 and 1989; Helpman and Krugman, 1985; Merkies and van Beers, 1994; and Deardorff, 1998). These works contributed to a revival of the interest in the model and brought respect for it as well. Moreover, the reasons for its popularity have been summarized in following four-fold. First, modern theories of trade based on differentiated products provide an improved theoretical foundation for the gravity equation. Second, the gravity model has proved quite successful in explaining bilateral trade flows. Third, there has been an increased interest in empirically testing the trade effects of regional trading arrangements. Fourth, there has been a new interest among economists in the subject of geography and trade (c.f. Frankel, 1997).

The core of gravity model predicts that bilateral trade should increase with GDP and decrease with distance. But researchers, however, have added other variables to it to control for differences in geographic factors, historical ties, exchange rate risk and trade policy. For example, Frankel (1997) described three types of transaction costs faced by the firm: shipping, time elapsed in transporting and cultural unfamiliarity.

Geographical factors such as land area, common border, and being landlocked affect the first two costs, while linguistic and historical ties such as common language and former colonial ties impact the third cost. Furthermore, Rose (2000) spoke of an

"augmented" gravity model, which consists of Frankel's variables plus colonial ties, exchange rate volatility, and common currency. For the purposes of this research, the study will focus on the export from China and Asian economies to industrialized countries. So we will use Export (E_ij, i.e. export from China, Asian NIEs and

ASEAN-4 countries i to industrialized countries j ) instead of total bilateral trade flow (TF_ij) .

In addition, the influences of external environment factors, such as historical ties, export of neighbor countries or competitor, etc., are very important for the research of international economics. To assess the extent of competition or complementarity between China and ASEAN-4’ export to industrialized markets, we follow the way of

Ahearne, Fernald and Loungani, (2003) and add China’s export growth as the most crucial variable in this model. The positive coefficient implies China’s export don’t bring harm to other Asian economies’ export to an identical destination. i.e. there are more complementary than competition of export between China and other Asian economies; and the negative coefficient implies that more competition than complementary of export between China and other Asian economies.

Besides, there are many other factors that might be taken into account this model. The exchange rate is one of the key relative indicators in an economy, which defining the rate of exchange between domestic goods and their foreign counterparts. As a result, changes in the exchange rate have significant effect on the international trade. i.e. in principle, the depreciation of local currency will promote foreign export of the reference country in a certain period, and vice versa. Empirical trade equations consistently have found that the exchange rate is one of the key determinants of both exports and imports. So I decide to use exchange rate of export country toward destination as another variable. Thus, the "extended" model can be formulated as

1 2 3

4 5

ln( ) ln( ) ln( ) ln( )

ln( ) ln( )

α β β β

β β ε

= + + +

+ + +

ij i j ij

cnj ij ij

E GDP GDP GD

E EX (2)

where E_ij is exports from country i^* to country j^† in a certain period. And

Ecnjrepresent the exports from China to destination countries J in a certain period.

GDij is a measure of the geographical distance between the two economies. Where EXij represent the exchange rate of currency between Asian exporter I and destination countries J.

* In this paper, country i refer to Asian NIEs or ASEAN-4 countries.

† In this paper, country j refers to the U.S., Japan, which I use as proxies for industrial countries.

In order to solve the non-stationary problem, we decide to use relative percentage growth instead of the real value of exports, GDP and exchange rate. Then, we can transform the equation as below:

1 2 3 4 5

α β β β β β ε

∆ = + ∆E_ij GDP_i+ ∆GDP_j + GD_ij + ∆E_cnj+ ∆EX_ij + _{ij (3)}^*

where ∆E_ij is export growth from country i^† to country j^‡ in a certain period. And

GDPi

∆ and ∆GDP_j are Asian exporter I and industrialized country J ' s national

incomes (Gross Domestic Products) growth respectively. ∆E_cnjrepresent the export growth from China to destination countries J in a certain period. Where ∆EX_ij represent the exchange rate of currency between Asian exporter I and destination countries J.

In this econometric model,α ^, β¹, β2, β3,β4 and β5 are coefficients to be estimated. According to gravity model, trade increases with size and decreases with distance, β1 and β2are predicted to be positive and β3 negative. The error termε_ij

captures any other chance events or shocks that may influence bilateral trade between the two economies. Equation (3) provides the core set of variables that are included for estimation purposes.

The coefficient β5 is predicted to be negative. In theory, depreciation of local currency will enhance price competitive advantage of exporter’s products, so relative lower value of local currency can promote export in a certain period. And the coefficient β4 is the most important in this model. If China’s exports bring benefit

* ∆ in the equations of this paper refer to percentage of variables’ growth.

† In this paper, country i refer to Asian NIEs or ASEAN-4 countries.

‡ In this paper, country j refers to the U.S., Japan, which we use as proxies for industrial countries.

for the Asian economies in a certain period, the coefficient β4 should be positive.

With the same methodology, we also estimate the impacts of Asian exports to industrialized countries on China’s export to industrialized countries. Thus, the model can be formulated as

1 2 3 4 5

α β β β β β ε

∆E_cnj = + ∆GDP_cn+ ∆GDP_j + GD_cnj + ∆ + ∆E_ij EX_cnj+ _{cnj (4)}

Where ∆E_cnj refer export growth from China to industrialized country j in a certain period. And ∆GDP_cn and ∆GDP_j are China and industrialized country J ' s national incomes (Gross Domestic Products) growth respectively, GD_cnj is a measure of the geographical distance between the two economies. ∆E_ij represent the export growth from a specific Asian economy to destination country J in a certain period. Where

EXcnj

∆ represent the exchange rate growth of currency between China and destination countries J.

Therefore, the positive significant β4 in the two models elaborate the correlations between China and specific Asian economies are more trade complementary than direct competition, and the negative significant β4 in the two models elaborate the correlations between China and specific Asian economies are more direct competition than trade complementary.

In summary, the equation (3) examines the impact of China’s exports on Asian countries’ exports. And equation (4) examines the impact of Asian countries’ export on China’s export.

4 Estimation and Analysis

4.1 Data and Methodology

The main data sources of this paper, such as the growth of export, GDP and exchange rate of China, Asian NIEs and ASEAN-4 countries from 1982-2004, are from Asian Development Bank in Manilla (Key Indicators 2005: Labor Markets in Asia:

Promoting Full, Productive, and Decent Employment & Key Indicators of Developing Asian and Pacific Countries 1999^*). The time series research start from 1982 because China as an exporter of manufactures emerged significantly from the mid-1980s (Tyers, Phillips and Findlay 1987). Moreover, the relevant data prior to 1982 of Asian Development Bank are made with different statistical method. Regarding to GDP of export destination countries (the U.S. and Japan), these data can be obtained from International Monetary Fund (IMF) database.

Stationary Process^†- Since we use macroeconomic variables in consecutive time periods, which may suffer from nonstationary series and produce spurious results, and we also compare the R square for each regression and its corresponding Durbin-Watson statistics. For example, R square for Equation (2) of Indonesia export to the Japan is 0.540, which is much small than the Durbin-Watson statistics (1.88), suggesting no presence of spurious result. We further test the regression residual and find a significant augmented Dickey-fuller test statistics, -4.30, at 1% level. That’s another proof that we are free from the problem of spurious regression. With the same method, we find the same results for all other equations (see Table 6 - 8 in Appendix 4).

Heteroskedasticity^‡ - From the White test results of equation (3) and equation (4), the

* http://www.adb.org/Documents/Books/Key_Indicators

† See Appendix 4.

‡ See Appendix 4.

regression won’t suffer from heteroskedasticity (see Table 9 and Table 10 in Appendix 4). Therefore, the Ordinary Least Squares (OLS) regression, which corresponds to the problem of finding a line or curve that best fit a set of data, can be applied to estimate this model.

However, the geographical distance GD_ij from export country to either destination country will not change along with time development in my research. This variable can be seen a constant in this model. SoGD_ij can be taken into constantα , the equation (3) and (4), can be formulated as

1 2 3 4

α β β β β ε

∆ = + ∆E_ij GDP_i+ ∆GDP_j + ∆EX_ij + ∆E_cnj + _ij (5) and

1 2 5 4

α β β β β ε

∆E_cnj = + ∆GDP_cn+ ∆GDP_j+ ∆EX_cnj + ∆ +E_{ij cnj} (6)

Autocorrelation^* - Since my observations follow a period of twenty three years, there is always a possibility that successive errors will be correlated with each other.

China’s export may present impact on Asian countries’ export for more than one period. To test the presence of autocorrelation we apply Durbin-Watson test. The null hypothesis is ρ=0 in Equation (6) as follow,

(6)

Then the Durbin-Watson statistics d ≈2, which is taken as an indication that the model errors are not autocorrelation. If Ho is rejected, we implement GLS along time dimension for both regression equations. Specifically, we estimate ρ for each equation and transform variables into x_i^*₁ = 1−ρ_i²x_i1 for observations in 1981 and

1 ,

*

− −

= it i it

it x x

x ρ for observations in the remaining twenty three years. In this way

* See Appendix 4.

it t i i

it = ρε _,−1 +v

ε

transformation does not have to sacrifice observation of the first year and the transformed errors have the same variance as the errors v (Hill, Griffiths & Judge, _it 2001). In addition, we will regress dependent variables on one-year lagged term of independent variables for consideration of the possibility that it can take a substantial period for one country’s export and/or other explanatory variables to take effect on another country’s export.

First, we run regression of Equation (4) and (5) with OLS to assess the extent of mutual influence of export between China and each Asian economy respectively.

Second, we find the Durbin-Watson statistics are 1.41 and 1.10 in the results of South Korea and Philippines respectively, when we set U.S. as their export destination ( Equation 4). Hence, it reject the null hypothesis that ρ=0 and conclude the presence of autocorrelation (H1: ρ>0). Then, we try to implement GLS for these equations, the results of Durbin-Watson statistics have improved significantly to 1.69 and 1.62 respectively. Therefore, the autocorrelation doesn’t exist in correspond estimations.

However, we regress dependent variables on one-year lagged term of independent variables after GLS transformation. But we didn’t obtain better results of the Durbin-Watson statistics in this way.

As for the estimation results of variables other thanβ4, such as real GDP growth and real exchange rate growth are mixed and no distinct track here, however, they are no direct concern with my research question of this paper, so I will focus my analysis on the coefficient β4.

After validation of the methodology, the estimation results can be summarized in four tables (Table 1 - 4). The first two tables present the extent of mutual effects of export between China and Asian NIEs. And the last two tables present the extent of mutual influences of between China and ASEAN-4 countries.

4.2 Extent of mutual influences of Export between China and Asian NIEs

Does China’s export have any impact to Asian NIEs? The estimation results of Table 1 reveal the impact of China’s export on Asian NIEs. Regarding South Korea, we can see the coefficients of China’s export growth β4 is not enough significant when we use the U.S. as its export destination. And Taiwan and Singapore have the same situations. But the coefficients of China’s export growth β4 are significant positive when we set Japan as export destination for all three Asian NIEs.

On the other hand, we can get similar estimation results from Table 2. It reveals the impact of Asian NIEs’ export on China. The coefficient of South Korea’s export growth β4 is significant positive at 5% level when we use Japan as export destination, and insignificant when the U.S. as export destination. In addition, the estimation results of Taiwan and Singapore’s export growth are similar as Table 1.

They are not significant when we set the U.S. as export destination. But the coefficients of Taiwan and Singapore’s export are significant positive when we set Japan as their export destination.

Actually, the export structure of South Korea is different from its giant neighbor. In the world market, China increased its market shares across all categories during the last 20 years, but it achieved the largest gain in labor-intensive products like textiles, clothing, footwear and toys, etc. While South Korea has more comparative advantage of export in semiconductors, automobiles and other high-value-added products (Nam, 2004). So China’s export emergence has seldom negative impact on the export of South Korea.

However, the estimation results also reveal the export relationship between China and Taiwan or Singapore. Actually, the two economies have very close connection with

China on history and culture aspect. Both of them invest to Mainland China intensively after China adopted open-door policy at the end of 1970s. Many labor-intensive manufactures of Taiwan and Singapore move to China mainland gradually since then, especially after Asian financial crisis in 1997. For example: most investment from Taiwan and Singapore are focus on Pearl River Delta and Yangtze River Delta. More and more products which are produced in the factories with Taiwan and Singapore’s background export to third market directly from China instead of re-export of Taiwan and Singapore.

From Figure 6 we can see the trend of export growth of Taiwan and Singapore. In the 1990s, they don’t increase as fast as it in the 1980s. Due to the benefiting from China’s economic emergence and their investment in China mainland, Taiwan and Singapore have updated their industrial structure quickly. So the export structures of the two economies are different from China’s as well. Together with the estimation results, we may conclude that China’s exports to the U.S. and Japan (industrialized countries) don’t have significant negative impact on that of Taiwan or Singapore. And Taiwan or Singapore’s exports to industrialized countries also don’t have negative impact on that of China.

4.3 Extent of mutual influences of Export between China and ASEAN-4

Does China export emerge at the expense of ASEAN countries? Claims are often heard that China‘s export emergence poses threats to ASEAN countries. “Fear”

from AESAN countries result mainly from the fact that China has the comparative advantage of low labor cost and complete industrial structure compared to them. So that China’s further expansion of manufactured exports would imply export reduction for them, as they have similar export structure but higher production cost.

Table 3 and Table 4 reveal the impact of China’s export and ASEAN-4’s export respectively. The mutual influences of export between China and Indonesia are significant positive. However, the mutual influences of export between China and Thailand, Philippines and Malaysia are positive, but significant levels are low, no matter export destination as the United States or Japan. These estimation results can be explained by the different export structure of corresponding country. The export products from Thailand, Philippines and Malaysia are more concentrated on labor intensive and rural products which compete with similar products from China in markets of the U.S. and Japan; while the main export products of Indonesia are resource products, such as petrochemical products and etc., which have no direct competition with China’s manufacturing products’’ export . (Liu and Luo 2001).

However, China’s emerging also creates many opportunities for East Asian economies.

While China has been emerging as a strong export competitor in third markets, it has also risen as a prominent importer at the same time. The expansion of production in China and the rising income of China’s population create increasing demand for products for Asian economies. For example, the total exports from East Asia to China rose at an average annual rate of 11.5% from 1995 to 2001, which is far above the corresponding 3.8% growth rate of world trade (Ng and Yeats 2003). China’s economy is only one-third the size of Japan’s, but its import-to-GDP ratio is 2.5 times that of Japan. From Figure 5, we may find the tendency of export growth from Asian NIEs and ASEAN-4 is positive obviously. Especially, the export of ASEAN-4 increase seven times from 1982 to 2004. Table 5 shows that China has trade deficit with the ASEAN-4 countries. Given these trends, China’s economic growth is beneficial to expansion of exports of East Asian economies and accelerates the bilateral trade within this area.

From above we believe more intensive bilateral trade within East Asia may bring common prosper for each economy in this area. China has become a source of demand for final goods produced in emerging Asia. From this perspective, the

emergence of China is a positive factor for growth in emerging Asia. For example, Korea export steel products to China surged recently, reflecting robust spending on infrastructure and other construction projects in China. But, by the same token, a significant downturn in China’s economy would be expected to have a negative impact on the exports of emerging Asian economies (Ahearne, Fernald and Loungani, 2003). Currently, economies throughout Asia are more dependent on economic developments and policies in China than they were previously. The economic relationship of China and its neighbors is much closer than ever.

5 Conclusions

In this paper we use industrialized countries – the United States and Japan as export destination to estimate the mutual influences of export between China and Asian NIEs as well as ASEAN-4 countries. The research objective is to find out whether China’s emerging export at the expense of other East Asian economies.

In order to assess the extent of mutual influences of export between China and Asian economies, I developed an econometric model derived from famous gravity model of international trade theory to estimate it at aggregate level. According to my analysis, China’s exports didn’t show any significant negative impact on Asian exporters. The export emerging of China didn’t bring competition to these economies at aggregate level from 1982-2004. Especially, Indonesia and China are strongly complemented to each other. And most of the other Asian economies concerned in this paper have certain mutual positive interaction in Japanese market.

Nevertheless, many other studies at industry level showed the results when they only focus their research on export structure. It may imply the export competition between China and its neighbors maybe exist in the other industries. Given all of the above, China’s export emerging didn’t bring negative influences to other Asian countries. In addition, as China’s economy continues its rapid development, other economies in the region have an incentive to try to move up the value chain as their comparative advantage shifts to higher-value added, less labor-intensive industries. The growth of the East Asian regional economy and its global export markets might be able to accommodate simultaneous expansion of Chinese and Asian export capacity.

Therefore, I am not in agreement with that claims that China emerges at the expense of other East Asian economies. The emergence of China seems to bring more opportunities than challenges for its neighbors in East and Southeast Asia.

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