Comrades or Competitors?: Trade Links Between China and Other East Asian Economies

• Author: Prakash Loungani
• Position: Senior Economist in the IMF's Research Department

Has China's emergence as a major exporter dampened the prospects of other Asian economies? Although many have suggested that the answeris "yes," the evidence to support such an adversarial view of trade links between China and East Asian economies is hard to come by.

Two paradigms help organize the evidence on China's trade linkages with East Asia. The "flying geese" paradigm visualizes China and the other Asian countries following behind Japan as the leader in terms of the technological sophistication of its exports. Over the course of two decades, labor-intensive production and exports have moved from Japan, first to the newly industrialized economies of Korea, Singapore, and Taiwan Province of China, then to Indonesia, Malaysia, the Philippines, and Thailand (these last four are known as the ASEAN-4 owing to their membership in the Association of South East Asian Nations), and then to China. Under this paradigm, China and the others are comrades in a process of technological upgrading and of increasing specialization and intraregional trade in Asia. (See Carolan, Singh, and Talati, 1998; and Diwan and Hoekman, 1999.)

The "trade competition" paradigm posits that the East Asian economies and China have ended up specializing in fairly similar export bundles. As a consequence, a major devaluation (a price cut) by one country has an adverse impact on the export performance of other countries and ultimately forces them to devalue their own currencies to maintain their export shares.

On the face of it, this story has the potential to explain developments in Asia in the 1990s. China's devaluation of the renminbi in 1994 put pressure on the export performance of Thailand and the other crisis-affected countries, leading to devaluations of their currencies during 1997-98; in turn, these devaluations tested the Chinese renminbi's peg to the U.S. dollar and threatened to unleash-in this scenario-a "race to the bottom" in Asia (see Bhalla, 1998).

Comrades or competitors?

To what extent has China gained market share at the expense of East Asian exporters? And did the devaluation of the renminbi in 1994 provide an impetus to these gains? The analysis described below suggests-in answer to the first question-that China has indeed gained market share in major export markets over the course of the last decade. However, contrary to popular perceptions, China's gains have not...