Chapter 5
The Export Competitiveness of the East Asian NIEs: How Real is the China Threat?¹

Peter Wilson, Ting Su Chern, Tu Su Ping, and Edward Robinson

INTRODUCTION
CHINA AND THE ASIAN NIES
EMPIRICAL ANALYSIS
RESULTS
CONCLUSION
References

INTRODUCTION

China has enjoyed remarkable trade growth in the past two decades, with exports expanding by an average of almost 13 percent per annum between 1986 and 2001, and 20 percent between 1986 and 1995.² This coincided with substantial changes in the international landscape since the mid-1980s as globalization of the world economy led to intense competition in the East Asian (EA) region and significant changes in export competitiveness.

These developments have been heightened by the reentry of China into the global economy in the 1990s, a process begun with domestic reforms in 1978, but catalyzed by China's accession to the World Trade Organization (WTO) in 2002. The result has been an acceleration of the process of dismantling its trade barriers, opening up its market to foreign services, and reducing the weight of state-controlled enterprises in the economy.

The spectre of the “China threat” has forced other countries in the Asian region to reassess their own international competitiveness.³ The concept of competitiveness is an illusive

¹ Some of the empirical work underpinning this chapter is derived from a shift-share study focusing on Singapore, which was released as an MAS Occasional Paper (see Monetary Authority of Singapore 2002), based on a joint project between the Monetary Authority of Singapore (MAS) and International Enterprise (IE) Singapore, in collaboration with Peter Wilson from the National University of Singapore. The authors are also grateful to Ho Shih Chuan and Khor Hoe Ee for their valuable comments. The views expressed in this chapter are, however, solely those of the authors and should not be attributed to the Monetary Authority of Singapore, IE Singapore, or the National University of Singapore.

² Source: International Enterprise (IE) Singapore.

³ China also poses a threat to other developing countries. Lall and Weiss (2005), for example, argue that although at the present time the trade structure of the Latin American countries is largely complementary to that of China, the latter's success in technology-based products with strong learning gains can place it on a higher growth path in the future.

one, with its origins in the business literature analysis of corporate strategy, where trade is a “zero-sum game” in terms of the quest for increased market share. Standard trade theory, on the other hand (for example, Krugman, 1994), is adamant that in an equilibrium setting all countries gain from trade, but if the equilibrium assumptions are relaxed the picture is more complex and competitive advantages can then be created by national policies. For a recent discussion of these issues, see Lall and Albaladejo (2004).

On the one hand, China offers complementarities to the East Asian region as a market for exports, a source of tourism earnings, and indigenous foreign direct investment (FDI). It also has the potential to act as a “locomotive” for regional demand and a stabilizer against downswings in global demand. Moreover, the nature of these complementarities has changed in recent decades as product “fragmentation” and “agglomeration” in international trade, largely through the vehicle of FDI, has led to the proliferation of “cross-border production networks” and a significant increase in trade in intermediate goods.⁴ China has become the center of much of this activity but it has also benefited its trade partners in the region, especially Japan and Singapore, which are higher up the value-added chain of production.

At the same time, China is perceived as a threat as a consequence of its rapid growth in gross domestic product (GDP) of 9.4 percent on an annual average basis since 1985 (Table 5.1) and fast “catch-up” based on low costs, a seemingly endless reserve army of underemployed agricultural workers, technicians from the communist era, and a rapidly rising pool of ambitious English-speaking graduates. The result has been to transform China into the workshop of the world, particularly in lower-end manufacturing, such as textiles, bicycles, shoes, and furniture. However, China is also upgrading rapidly as it moves into high technology exports, including electronics which have increased from a negligible

⁴ See, for example, Ng and Yeats (1999), and Monetary Authority of Singapore (2005).

base in 1987 to account for 19 percent of its total exports by 2001 (Figure 5.1). Much depends then on the growth in technology in China compared with its East Asian neighbors.

China is accused of neo-mercantilism because of its rising foreign exchange reserves (US$169 billion in 2000⁵) underpinned by an undervalued currency, which has enabled it to maintain a competitive edge for its exports; and of being a “giant vacuum cleaner” “sucking up” the lion's share of FDI inflows into the developing countries (Figure 5.2), attracted by rising incomes in its vast home market, especially in the southern Pearl River delta.

China is also seen as a potential new source of shocks to the Asian region as its excess capacity and low costs translate into enhanced price competition and a fall in profit margins, and in the value of manufacturing assets⁶. Although the Chinese economy is still relatively closed in comparison with the exceptionally open Asian newly industrialized economies (NIEs), with a trade to GDP ratio of 44 percent in 2000 (Table 5.1), and its ratio of domestic consumption to world consumption quite small, the impact of China on its neighbors is magnified by the absolute size of its exports and imports (US$249 billion, and US$225 billion, respectively, in 2000⁷) and the growing interdependence in the Asian region as China becomes more integrated into the local trade matrix as both an export market and source of imports. Of course, the trade to GDP ratio is only a crude proxy for trade openness, as are export growth and increases in export market shares. China's export growth rate for manufactured products declined during the 1990s (reflecting the

⁵ Asian Development Bank (2002).

⁶ The impact of the SARS epidemic in 2003, which originated in China, on countries such as Singapore through the loss of tourism receipts is another, less traditional, transmission channel for regional shocks in an increasingly integrated world economy.

⁷ Asian Development Bank (2002).

slowdown in world trade) but its export structure shifted significantly toward medium and high technology products. The evolution of its export structure, which is becoming increasingly similar to that of its competitors, might suggest that China is getting to be more of a threat. See Lall and Albaladejo (2004), and Lall and Weiss (2005).

How real is the China threat to the Asian NIEs in the major developed country markets of the world?

To answer this, a look at the background of China's export performance relative to the NIEs since the mid-1980s is pertinent. This is followed by a presentation of some empirical results from studying China's performance in electronics exports to the developed country markets of the United States, the European Union (EU), and Japan in relation to Singapore, Hong Kong, South Korea, Malaysia, and Taiwan, which have become close competitors in these markets. The chapter closes with some concluding remarks and qualifications.

CHINA AND THE ASIAN NIES

Although there are a number of ways to group the more successful economies of East and Southeast Asia in a rapidly changing world economy, with the exception of China, the other NIEs in the region have generally matured at approximately the same pace from the mid-1980s to the present time and have become increasingly competitive as a group, especially in the developed country markets of the United States, Japan, and the European Union.

Some of the economic characteristics of these Asian NIEs are summarized in Table 5.1. All have undergone a period of rapid economic growth and structural change since the mid-1980s. The rising share of manufacturing output in GDP and the corresponding fall in the share of agriculture is an indicator of the extent of industrialization achieved

during this period. The clear exception is Hong Kong, but this is explained by the relocation of much of its manufacturing base across the border into China from the mid-1980s onwards as it de facto reintegrated economically with the mainland in advance of de jure reunification in 1997. In terms of income per capita, all have achieved a substantial level of economic development.⁸

From the trade perspective, the Asian NIEs became increasingly open to international trade and capital flows from the early 1980s, with high trade to GDP ratios. They adopted similar outward-oriented trade strategies and moved steadily over time into higher technology and capital-intensive exports, especially electronics. During the 1980s and 1990s, they also became more interdependent in trade and capital flows as a group and increasingly competed in similar categories of goods and markets. Not surprisingly, the United States, Japan, and the European Union are important markets for these countries in electronics, both individually, and as a bloc (Table 5.2). By 2000, electronics accounted for approximately 70 percent of Singapore's exports to the United States, Japan, and the European Union (excluding re-exports), followed by Malaysia (60 percent), Taiwan (57 percent), South Korea (41 percent), China (22 percent), and Hong Kong (15 percent).

⁸ In recognition of their advanced level of development, Singapore, Hong Kong, South Korea, and Taiwan were reclassified by the International Monetary Fund in 1997 with the group of countries traditionally known as industrial countries. South Korea was elevated to full OECD (Organization for Economic Cooperation and Development) membership in October 1997, which automatically brings with it developed country status.

Whilst China has not been a traditional competitor of the other NIEs, it is fast becoming one especially since the late 1990s, primarily as a result of its low-cost base and surge in inflow of FDI. In 2000, the income per capita for China was only one-quarter that of Malaysia, and was only 3 percent of that of Hong Kong and Singapore (Table 5.1). The share of agriculture in GDP has fallen substantially since 1985 to about 16 percent but it is still noticeably higher than in the other NIEs. Its manufacturing sector, which is domi nated by lower value-added industries, has a higher weight in national income than in the manufacturing-oriented countries of Malaysia and South Korea, and the more service- oriented Taiwan, Hong Kong, and Singapore. Although it has become noticeably more open to international trade and, notwithstanding complexities in measuring trade flows between the mainland and Hong Kong,⁹ China still remains less open than the other NIEs.

Furthermore, at the start of the sample period, as in the case of Malaysia, China's exports were concentrated mainly on primary products (SITC 012 and 34) and (as for Hong Kong and Taiwan) lower value-added manufactured goods (SITC 689), such as clothing accessories and textiles (Table 5.3). Nonetheless, China's overall performance and structural transformation in the last decade has been staggering. All the Asian NIEs grew rapidly by world standards in the late 1980s (Table 5.1), but growth slowed for all after 1996. However, China's performance stood above the rest in the 1990s, as the older “tigers” began to slow down, particularly Hong Kong and Taiwan. China's share of developing country inflow of FDI more than doubled in the early 1990s, compared with the second half of the 1980s, and accounted for approximately one-fifth, on average, between 1995 and 2000, and almost one-half of the flow to Asia (excluding Japan). Japan and India have seen their shares increase since 1985 but all of China's other competitors in the Asian region have seen a fall in their shares in the 1995–1999 period, compared with 1985–1989.¹⁰

Rapid growth and industrialization in the 1990s have thus translated into a deepening and widening of China's manufacturing base and a shift in focus toward higher value-added exports, such as machinery and equipment (SITC 7), which by 2000 accounted for half of China's total exports (Table 5.3). China's import and export structure has also changed profoundly (Table 5.4) as its dependence on Japan for imports declined in favor of its regional partners, Hong Kong and South Korea, and the importance of the United States and Europe as export markets increased, largely at the expense of Japan. By 2000, the United States, Japan, and Europe together accounted for approximately half of Chineseexports.

As far as electronics is concerned, China's share in total exports to developed country markets is still dwarfed by the other NIEs (Table 5.2), with the exception of service-oriented Hong Kong, but in absolute terms, the electronics and information

⁹ See, for example, Ho (1998), and Fung and Lau (1998).

¹⁰ The FDI data is from UNCTAD (2002), http://www.unctad.org.

technology industry is now China's largest industry, and in terms of turnover, China currently ranks third in the world.¹¹

There have also been major changes in the export product-mix in China's electronics industry (Table 5.5). Not only has there been a significant increase in the weight of electronics as a whole in total exports, from a negligible base in 1985 to about 22 percent

¹¹ Source: CEIC (2002).

by 2000, but particularly important has been the rise in the share of consumer electronics to almost 8 percent, and disk drives, printers, and personal computers (PCs) to 5.9 percent. On the other hand, printed circuit boards and semiconductors account for only 1.6 percent and 1.3 percent, respectively.

The perception that China is a threat to the NIEs stems largely from its extraordinary growth in exports and rising share in key developed country markets, especially for electronics. Table 5.6 shows the growth profile of China's exports compared with those of the NIEs over three periods—1985–1989, 1990–1995 and 1996–2000—and changes in market shares for each country as a percentage of the share of the group as a whole.

In the first period, all the Asian NIEs grew fast globally compared with the developed country markets. In the second period, China and Malaysia were the star performers, particularly in the U.S. market, but Singapore and South Korea also achieved respectable growth. Only Taiwan and Hong Kong performed poorly in comparison. Export growth slowed dramatically for the group as a whole in the most recent phase on the back of three external shocks. Exports of electronics moderated sharply in 1996 because of a serious supply glut in the global electronics industry. Before the region could fully recover, trade

was further disrupted by the Asian financial crisis of 1997–1998. After a year of exuberant growth in the international technology sector and the world economy in 2000, East Asia was again hit hard by a major correction in the global information technology market, precipitated by a synchronized slowdown in the United States, the European Union, and Japan. Taken individually, growth was moderate for South Korea, Malaysia, and Taiwan, but China again performed much better than its competitors, while Hong Kong grew at a negative rate and Singapore managed only 3 percent globally and a negative 0.5 percent in the U.S. market.

As far as market shares are concerned, China's performance is equally impressive, increasing its share of the Asian NIEs’ global exports, from 22 percent in the first period to 30 percent in the third, and more than doubling its share in the United States and the total developed country markets, to 28 percent and 32 percent, respectively. Malaysia and Taiwan also increased their shares in global and developed country markets but in a much less spectacular fashion. Taiwan's shares actually fell between the second and third periods. Singapore's shares remained remarkably stable over the three periods, while South Korea saw a significant decline in the U.S. and Japanese markets, from a high initial base, and Hong Kong's shares in global and developed markets declined from 14 percent and 16 percent respectively in the first period to around 4 percent in the most recent period.

Has China's rapid export growth and rising share in developed country markets since 1985 been the result of increasing competitiveness? Or does it reflect a natural process of shifting comparative advantage or market diversification? Or is it just several cyclical downturns which reduced the competitiveness of China's more export-oriented competitors? The rest of the chapter will look more closely at this phenomenon with the help of shift-share analysis, which goes beyond the study of growth rates and shares in Table 5.6, by assessing China's performance against what might have been expected in comparison with a reference group of its competitors, and looks specifically at the electronics industry.

EMPIRICAL ANALYSIS

In the present context, the objective is to compare China's export performance in electronics against a reference group, which includes its main Asian NIE competitors, using a dynamic version of shift-share analysis. Shift-share analysis has been used extensively to study the differences between regional and national growth rates with variables such as export growth, employment, and productivity.¹² Although a relatively simple technique with a number of well-documented shortcomings, it has proved to be a useful descriptive

¹² For earlier reviews of the basic methodology of shift-share, see Richardson (1978), Esteban-Marquillas (1972), and Fothergill and Gudgin (1979). More recent contributions include Haynes and Machunda (1987), and Hayward and Erickson (1995).

tool for isolating trends in regional performance and for supplying data for policymakers to interpret changes in the industrial structure of their economies. Further details on the methodology used to calculate the results and its relationship with the earlier shift-share literature can be found in Wilson (2000), and MAS (2002).

The focus here is on export growth over a period of time where the “regions” are the competing East Asian NIEs (China, Hong Kong, South Korea, Malaysia, Singapore, Taiwan) and the “nation” is the combined group of these countries. Shift-share analysis is applied to five three-digit export categories of electronics as well as to total electronics exports for the six reference economies selling to the United States, the European Union, and Japan between 1988 and 2001.¹³

RESULTS

Table 5.7 shows China's average export differential to the three developed country markets for electronics as a whole, and by a three-digit subcategory during the periods 1988 to 1995 and 1996 to 2000. These differentials capture any gaps between China's performance and that part of the total change in exports which might be ascribed to the rate of export growth of the reference group as a whole, and are measured in absolute U.S. dollars. A positive differential implies an improvement in competitiveness relative to the reference group as a whole, and a negative value constitutes a deterioration in competitiveness.

The results suggest that China has now emerged as a serious contender in electronics exports, especially in consumer electronics, telecommunications equipment, and in disk drives, printers, and personal computers (except in the Japanese market). However, China's position has not been a dominant one, primarily because of its uneven performance across the product categories. In the higher-end exports of printed circuit boards and semiconductors, China has not made any significant impact in the developed country markets when measured against the performance of the other NIEs. This is not surprising since China's manufactured exports in general are still relatively concentrated in lower-end categories of products, such as clothing and textiles, compared with the other more mature industrialized reference economies. High technology exports constituted only 18 percent of China's manufacturing exports in 2000, substantially less than the other more established manufacturers of Malaysia (58.2 percent) and South Korea (34.2 percent).¹⁴

Table 5.8 summarizes the results of the shift-share analysis for the other NIEs. Taking Tables 5.7 and 5.8 together for electronics as a whole, the principal gainers after 1995, summed across all three export markets, appear to be the newcomers, China and Malaysia, at the expense of the older “tigers,” Hong Kong and Singapore. Hong Kong is clearly no longer a serious contender in any category of electronics, while for

¹³ The export data were extracted from the U.N. Combase online database (http://unstats.un.org/unsd/comtrade).

¹⁴ High technology exports involve high research and development (R&D) intensity, such as aerospace, computers, pharmaceuticals, and scientific equipment. See World Bank (2002).

Singapore, the loss of competitiveness appears to be more recent. Its overall electronics exports performed well between 1988 and 1995 in all markets, compared with the reference economies, coinciding with a period when there was substantial foreign investment in the electronics sector and positive spillovers from other economies in the region, which were expanding strongly during this period. These were “golden” years for Singapore's electronics exports, which benefited from its first-mover advantage by switching into higher value-added and capital-intensive electronics exports earlier than its competitors, enabling it to gain a significant foothold as an important production and export center. However, the general trend of positive export differentials for Singapore electronics seems to have reversed around 1996 in all three export markets. In fact, Singapore was the only economy among the reference economies to experience continuous negative export differentials between 1996 and 2001 (MAS, 2002). The only bright spot for Singapore was semiconductor exports, which experienced positive average differentials during all periods.

In the cases of South Korea and Taiwan, the results are less clear-cut. For South Korea, a negative differential in electronics prior to 1996 turned positive in the second period but was insufficient to offset the earlier negative position as far as the whole period is concerned. Apart from consumer electronics and semiconductors, however, there were positive performances in the other categories in the second period. Taiwan did well in disk drives, printers, and PCs, and in semiconductors (and to a lesser extent in printed circuit boards) but closer examination of the data suggests that the positive differentials overall were largely determined by sizeable absolute gains in the Japanese market in the late 1990s. After the 1998 Asian financial crisis, many Japanese electronics firms began to outsource their manufacturing operations and Taiwanese contract manufacturers were the main beneficiaries.

Although China and Malaysia stand out in terms of overall performance in electronics since the mid-1990s, no single reference economy appears to have dominated all categories of electronics exports. Malaysia and Taiwan (and perhaps South Korea) are competitors with China in disk drives, printers, and PCs; Taiwan in consumer electronics (positive differentials from 1996 are offset by a large negative value in 2000); and Malaysia and South Korea in telecommunications equipment. In the higher value-added sectors of semiconductors and printed circuit boards, where so far China has not been

so competitive, Singapore, Taiwan, and Malaysia dominate the former,¹⁵ while Malaysia, South Korea, and Taiwan are still the key players in the latter.

CONCLUSION

The findings suggest that China has now emerged as a serious contender in the export market for electronics goods but its position is not a dominant one. Its main gains have been in consumer electronics and telecommunications equipment and, to a lesser extent, disk drives, printers, and PCs. However, in the higher-end exports of printed circuit boards and semiconductors, China has not yet gained a significant stronghold in the developed country markets, at least to the extent that the growth in its overall exports and increase in market shares might suggest.

Has China become a serious threat to its East Asian competitors in electronics exports?

For electronics as a whole, the results of the analysis suggest that the principal gainers after 1995 across all three export markets appear to be the relative newcomers of China and Malaysia, at the expense of Hong Kong and Singapore, with more ambiguous implications for South Korea and Taiwan. However, no single reference economy seems to have dominated all categories of electronics exports by the second half of the 1990s. Interpreted in this way, as growth in the older Asian “tigers” slows to its medium-term potential, their export performance is also likely to moderate, relative to other economies in the region. This is a natural transition and is largely dictated by supply-side considerations. A negative export differential within a broad manufacturing category need not signify a loss of competitiveness overall but rather conceal a natural process of changing comparative advantage, or a process of “catching-up” as rising real wages and productivity result in a restructuring away from labor-intensive industries toward higher value-added activities within a given manufacturing category. This is also the case if the diversification takes the form of a movement out of manufacturing and into services, or into markets which may not be included in the analysis.

An important question is how long it will take before China catches up in higher value-added production and how successfully its competitors use the breathing space to make the necessary structural adjustments. In the East Asian region, the less developed members of ASEAN would appear to be at the highest risk in the immediate future since they compete head-on with China in lower-end manufacturing and for FDI, and are in danger of being “leapfrogged” in the value-added chain. China has already overtaken ASEAN as a low-cost export production base and attractor of FDI. Much will depend on how quickly wages in China rise with productivity increases. Given a large potential labor

¹⁵ Malaysia's differentials after 1995 are overwhelmingly positive in semiconductors but the averages are turned negative by a very sizeable fall in 2000.

supply from the rural sector and the absence of price pressures from an appreciating currency, it could be some time.

The problem here is not simply higher relative costs in ASEAN but the fact that they are still competing directly with China, both in their domestic markets and in third markets, especially in lower-end electronics goods. Much will depend on their ability to raise their value-added and find more niches which are complementary to China's manufacturing production than competing with the latter, and to improve the quality of their infrastructure and the transfer of technology from multinational corporations (MNCs).¹⁶ The past record of Malaysia and Thailand in areas such as the automotive industry suggests that they are better placed than Indonesia and the Philippines, and the least developed members of ASEAN, that is, Vietnam, Cambodia, Laos, and Myanmar; but even Malaysia is finding it difficult to broaden its manufacturing base away from low-cost manufacturing and natural resources, and to increase the technology transfer from MNCs.

Notwithstanding political tensions, the Asian “tigers,” with their close proximity to China, are probably better placed to adjust to China's manufacturing dominance since they are no longer low-cost back-end producers competing in “commodities” but are already competing in front-end marketing, design, product innovation/differentiation, quality semiconductors, logistics/hub activities, and are integrating more successfully with China and finding complementarities. Lall and Albaladejo (2004), for example, found that China's gains in export market share in the 1990s, compared with its neighbors in East Asia, were mainly in low technology products and differed by country. The mature “tigers,” such as Singapore, Korea, and Taiwan, suffered most, particularly in low technology goods, but were already losing competitiveness in these goods, and they benefited significantly from China's role as an engine of growth and from complementarities. These are not guaranteed in the future unless they can keep their technological edge over China. The main threat is to the less technologically advanced new “tigers,” such as Thailand and Malaysia, that have much higher wages than China but lack the domestic capabilities to keep ahead. A large proportion of Taiwan's electronic products are now manufactured in China, including those of electronics giant ACER, and South Korean firms, such as Samsung, are also producing in the mainland.

Singapore does not have the advantage of geographic proximity to China, the natural resources of Malaysia, or the deeper financial markets of Hong Kong, but has an impressive record for adjusting to changes in the external environment. It is currently nurturing high value-added manufacturing clusters in electronics, chemicals, and biomedical sciences, and diversifying its exports to give them a more global dimension, while continuing to promote Singapore as a premier financial center.¹⁷

It is also important to bear in mind when assessing the “China threat” that trade is not a zero-sum game akin to a competitive sport since trade between a group of countries usually generates symbiotic benefits to all concerned, depending on the direct and

¹⁶ Indonesia, for example, has been trying to establish itself as an attractive offshore base for Singapore's lower-end manufacturing under the umbrella of the 2003 free trade agreement between Singapore and the United States.

¹⁷ See Peebles and Wilson (2002).

indirect stimuli through mutual imports. Thus, whilst the NIEs are export competitors of China, the latter is simultaneously an important market for their final goods and for their intermediate exports, which are ultimately destined for other markets, as well as a source of tourists and China-registered FDI.

Many of the East Asian economies, such as Singapore and Malaysia, have been major beneficiaries of “growing neighbors” in the region in the last two decades because of their relatively high trade openness and strong trade multiplier linkages with the regional economies (Abeysinghe and Wilson, 2002). Moreover, the strong growth in these countries’ exports to China has partly resulted from a strengthening in the production network within the region as they have been increasingly exporting intermediate components, such as semiconductors and disk drives, to other Asian countries which then assemble them into end products, such as PCs and telecommunications equipment. MNCs typically decentralize their electronics production within the region in order to capitalize on the comparative advantage of each country. Higher-end intermediate electronics components (typically semiconductors) are produced in one country and are then shipped to other Asian countries for assembly into final products for export to the developed country markets. Thus, whilst Singapore, for example, has seen a decline in the growth of its overall exports in recent years, this has been offset by a rise in the importance of intermediate exports of electronics components, or re-exports, to countries in the East Asian region, including China (MAS, 2002).

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