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China’s growing role in Asian trade and its impact

The ongoing trade dispute between the US and China is of particular concern for emerging Asian economies which have prospered by being active participants in regional and global value chains (GVCs).

Asia’s dependence on the triad (the US, Europe and Japan) as sources of technology, management and organization expertise—which are embodied in multinationals from these countries—as well as final export markets remains critical. However, China’s importance to the development of the region is no less significant. The economic giant has become a key assembling hub in many Asian supply chains and has played a major role in ensuring that manufactured exports from Asia have remained cost-competitive globally.

China’s role in intra-regional trade

Measured by value, intra-regional trade flows in Asia have risen in importance over the past two to three decades. On average, the share of intra-regional trade in total Asian trade in goods has risen from under 50% in 1990 to around 60% in 2017, comparable to that of the European Union (EU). Meanwhile, Asia’s share of world exports has risen from almost 23% in 1990 to more than 37% in 2017. Nonetheless, much of this increase was due to China’s emergence as an export powerhouse and a key player in both intra-regional and extra-regional trade. Excluding China’s exports as well as intra-regional export flows to China, Asia constituted only about one-fifth of total world exports throughout the 1990-2017 period. A similar pattern can be observed for imports.

Indeed, China has assumed an increasingly prominent role in the intra-regional trade landscape, especially after it joined the World Trade Organization (WTO) in 2001. China’s merchandise exports to the rest of Asia (ROA) rose from around 12% of total intra-regional exports in 1990 to around 15% in 2001. Thereafter, it has climbed steadily to close to 30% by 2017. Moreover, exports by the ROA to China have increased significantly in tandem with China’s emergence as the “Factory of the World”.

As a result, China’s trade performance has had a major impact on Asia’s intra-regional trade as a whole. Indeed, the recent trade slowdown in Asia has been driven in part by the stagnation and contraction of ROA’s exports to China between 2012 and 2016.

Role of value chains

As noted, trade in Asia over the past 30 years has been shaped by GVCs. Complex production networks have knitted these economies together through a system of criss-crossing trade flows in intermediate goods. In particular, GVCs are chiefly responsible for the expansion in trade in East and South-East Asia as GVC participation rates among these economies in supply chains are among the highest in the world.

In terms of “backward participation”, which is measured by the share of foreign value-added content in total gross exports, East and South-East Asian economies averaged almost 30% based on the WTO’s Trade in Value-added (TiVA) database. Meanwhile, the average “forward participation” rate among these economies, which captures the domestic value-added content embodied in the exports of other economies, reached 23% by 2011.

China has served as the key node in Asian GVCs as a centre of processing and assembling intermediate inputs for re-exporting to the world market. Nevertheless, China’s role in the intra-Asian trade network will evolve over time due to ongoing structural shifts of its economy.

First, with rapid growth in per capita domestic incomes, the country is emerging as an important destination for final exports. Second, it is experiencing a transition from investment to consumption and manufacturing to services. Since consumption and services sector are less import-intensive, these structural shifts may lower Chinese import growth even without a change in overall economic activity levels. Third, progress in China’s technological sophistication has enabled the economy to utilize an increasing share of domestic capital and intermediate goods in export production (onshoring).

China’s Asian trade partners will need to adapt to its changing trade profile, especially upstream suppliers of intermediate goods for Chinese export-processing industries who will be adversely affected by the country’s continuous onshoring.

Implications for India

To date, unlike China, India has not been able to fit prominently into the Asian GVCs. The initial expectation was that the Regional Comprehensive Economic Partnership (RCEP) would be the catalyst for this to happen. However, there is a growing belief in policy circles in India that such trade agreements have been the cause of and may be part of the reason of the limited success of the much-touted “Make in India” scheme launched by Prime Minister Narendra Modi in September 2014 as well as the ongoing “job crisis”.

However, while India is certainly not wrong to push for greater services liberalization in the RCEP, the trade agreements per se ought not to be used as a scapegoat for India’s manufacturing and employment slump. Rather, what is to blame for India’s anaemic manufacturing performance and inability of India to plug effectively into regional global supply chains is the sustained supply-side distortions and rigidities as well as relatively high trade costs in India. Indian manufacturers consequently have found it hard to benefit from the trade liberalization efforts and instead have been faced with large-scale imports of cheaper goods.

The fourth industrial revolution appears to be disrupting and shortening GVCs (unlike between 1980s and 2000s where the product life-cycle was being sub-divided into many tasks). Consequently, India should focus on leapfrogging and getting prepared for this Industry 4.0. One hopes that the proposed Make in India version 2.0 will be relatively more successful than the original version.
Source: Livemint

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