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China, India, and the future of the world economy :
fierce competition or shared growth?
Although both China and India are labor-abundant and dependant
on manufactures, their export mixes are very different. Only one
product-refined petroleum-appears in the top 25 products for
both countries, and services exports are roughly twice as
important for India as for China, which is much better
integrated into global production networks. Even assuming India
also begins to integrate into global production chains and
expands exports of manufactures, there seems to be opportunity
for rapid growth in both countries. Accelerated growth through
efficiency improvements in China and India, especially in their
high-tech industries, will intensify competition in global
markets leading to contraction of the manufacturing sectors in
many countries. Improvement in the range and quality of exports
from China and India has the potential to create substantial
welfare benefits for the world, and for China and India, and to
act as a powerful offset to the terms-of-trade losses otherwise
associated with rapid export growth. However, without efforts to
keep up with China and India, some countries may see further
erosion of their export shares and high-tech manufacturing
sectors.
The rapid economic growth of China and India
has been associated with much more rapid growth in
their trade. In some cases, this has created enormous
opportunities for their trading partners. In others, it
has created strong competition either in home markets, or in
third markets. Those who face increases in
competition are frequently more vocal, but a balanced assessment
is needed to help develop appropriate
policy responses. If some countries lose from increased
competition, which countries and which industries will face the
most serious competition? And where will the largest
opportunities be found?
A key determinant of the distributional implications of global
competition is the extent to which countries' baskets of goods
overlap. Traditional trade models where comparative advantage
follows from countries' relative endowments imply that extremely
labor-abundant countries like China and India will manufacture
and export labor-intensive goods, while skill- and capital-abundant
developed countries will specialize in skill- and
capital-intensive products. According to these models, developed
economies have little reason to be concerned by the emergence of
China and India as global economic powers. However, other labor-abundant
developing economies have much to lose as traditional theory
highlights expansion of existing products (the intensive margin)
as the only source of export growth.
Many of these expectations about the potential impact of the
expansion of exports from China and India may be biased or
exaggerated. The expansion of China and India's trade is quite
different from the expansion of developing country exports
considered in much of the development literature. It involves,
for instance, two-way trade in manufactures and services, which
make the recipient countries the beneficiaries of improvements
in efficiency in their trading partners. It also involves
fragmentation and global production sharing, where part of the
production process is undertaken in one economy, and subsequent
stages are undertaken in another. This makes participants in
this process beneficiaries from, rather than victims of,
improvements in the competitiveness of their partners. And new
trade theory now recognizes that export expansion does not
involve just increases in exports of the same products. Rapidly
growing economies expand the range of products they export,
improve product quality, and export to additional markets as
their exports grow.
Complicating the analysis is the fact that, while both China and
India are more labor-abundant than developed economies, relative
factor endowments and income levels vary substantially across
regions within these economies. China's coastal areas may place
it in a different category compared to the much more labor-abundant
inland provinces. This heterogeneity can influence the range of
goods China produces and exports, and therefore helps explain
the disproportionate similarity of China's export bundle with
that of the developed countries. India's large number of skilled
workers also implies that there may be a lot more competition
between India and developed economies than suggested by its
relative endowment shares.
Much can be learned by examining China's and India's trading
patterns. Although it turns out that both have been quite
successful in expanding their exports and imports, they have
done this in very different ways. Broadly, China has relied
primarily on exports of manufactures, frequently as part of an
East Asian production sharing network. By contrast, India has
concentrated more heavily on services. Within manufactures,
China has relied heavily on exports of finished goods, while
India has focused much more on exports of intermediate inputs.
India's exports are frequently of capital- and skill-intensive
goods, while China has emphasized exports of labor-intensive
goods -- although these are increasingly sophisticated (Rodrik
2006). Indeed recent research suggests that China's export
bundle overlaps with that of developed countries much more
substantially than one would expect given either its level of
development or its size, and this excess similarity has
increased with time. China's rank in terms of the similarity of
its export bundle with the OECD jumped from nineteen in 1972 to
four in 2001. No other country's growth in product penetration
comes close to the increase observed for China. Quality
differences between Chinese and developed country exports
however suggest that competition between China and developed
countries may not be as direct as suggested by the overlap of
their export baskets.
Although China and India do not appear to be in direct
competition, reforms under way in India may intensify
competition between them as well as intensify competition
between these two giants and the rest of the world. Accelerated
growth in China and India may create opportunities for some and
threaten others and the outcomes may differ depending on whether
this growth is accompanied by quality improvements and variety
expansion, and whether it is driven by physical or capital
accumulation. Who will win and who will lose from these
developments? We undertake the analysis in this paper with these
questions in mind.
No analysis of potential future developments can reliably be
undertaken without an examination of the key features of the
current situation, and how it arose. Therefore, this paper first
reviews some key features of China's and India's trade, in
particular, the recent rapid export growth; the changing
relative importance of goods and services; and the changing
composition of exports within merchandise and services. With
this as background, we use a global economy-wide modeling
approach to take into account all of the potential impacts of a
number of policy reforms and likely scenarios. First, the
implications of the reforms under way in India are examined to
see if they might result in greater competition between China
and India. Then, we generate a baseline and examine the
potential global implications of higher-than-expected growth
rates in these two economies. We consider first the impact of
more rapid economy-wide growth in China and India. We then
examine the implications of two different types of growth, first
growth focused on relatively sophisticated products, and
subsequently growth driven by increased accumulation of physical
and human capital.
Unlike other approaches used to analyze these issues, the global
applied general equilibrium model used ensures consistency while
including important industry detail, each region's exports of
particular goods equal total imports of these goods into other
regions (less shipping costs); global investment equals the sum
of regional savings; regional output determines regional income;
global supply and demand for individual goods balance; and in
each country/region demand for a factor equals its supply. These
accounting relationships and the behavioral linkages in the
model constrain the outcomes in important ways not found in
partial equilibrium analyses--increased exports from one country
must be accommodated by increased imports by other countries;
broad-based increases in.
At the time this analysis took place there
were no papers that used a global applied general equilibrium
model to study the implications of China's and India's growth on
global trade. More recently, McDonald, Robinson and Thierfelder
(2007) employed a global AGE model to analyze the impact of the
dramatic expansion of trade by India, China and the developing
East and Southeast Asia. Their findings are consistent with ours
although they do not investigate the impact of India's increased
integration into the global economy, alternative growth
scenarios, and the impact of growth at the extensive and quality
margins. Instead they focus on a 10 percent improvement in total
factor productivity in the value added function of
non-agricultural sectors in China, India and developing Asia and
the effect of regional trade agreements in East Asia on the rest
of the world.
Source: World Bank -
Martin, Will ; Ianchovichina,
Elena ; Dimaranan,
Betina (for the whole article)
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