1. China and its neighbors: evolving patterns of trade and investment John Weiss ADB Institute, Tokyo

2. Trade and investment Is a fast growing large neighbor opening to the world economy a good thing? Standard trade theory says definitely Demand effects Regional specialization and comparative advantage

3. Are there doubts? Allowing for real world assumptions may alter the story Dynamic comparative advantage Competitive effects Overlapping exports and market share Terms of trade FDI diversion

4. Trade Structure PRC structure closest to that of Taipei, China and Korea in 1990 Most different from Indonesia and Philippines 2002 Technology structure 2002 45% low tech and 24% high tech

6. Demand effects Evidence thus far mostly supports positive case Strong import demand growth from China Modeling exercises project trade surpluses for neighbors with China, whilst US and EU have strong trade deficits Chinas WTO accession and regional FTAs shown to be positive for neighbors

8. Specialization China importing high tech goods from Japan and Korea Food, raw materials and parts and components from ASEAN

9. Competitive effects Loss of market share – eg textiles and clothing, electronics Terms of trade – rising oil, metal and mineral prices FDI diversion – potential productivity impact

10. Competitiveness in third markets PRC rise in share of world trade 1990-2002 from 1.9% to 6.4% Export-led growth Direct threat 25% of exports Korea, Singapore, Malaysia, Taipei, China Constant market share shows in most cases exports more than double if kept pace with PRC

12. Competitiveness in third markets ASEAN losing markets in their most specialized product ranges - viz RCA ratios However rising surplus with PRC – triangular trade – parts and components to PRC for export as finished goods – supply chain Exports of precision instruments and electrical machinery from neighbors grew six-fold 1995- 2003

13. FDI diversion argument Is FDI a fixed sum? Does the theory stand up? Surveys and anecdotes but lack of objective evidence Roundtripping FDI up to 40% Econometric results imply positive not negative association Complementarity in global production chains

14. Conclusions Does competitiveness matter? Only flexible firms and economies can maximize potential gains from expansion of China Technological upgrading- productivity growth to minimize competitive effect Strong potential for regional income gains