Distinguished Speaker Seminars

Barry Bosworth, Senior Fellow, Economic Studies Program and Robert V. Roosa Chair in International Economics, The Brookings Institution, delivered a lecture on the determinants of United States (US) exports to the People's Republic of China (PRC) at a distinguished speaker seminar on 24 April 2009 in Tokyo.

The political and economic expediency of protecting one's industries from international competition appears temptingly high, more so at this time of crisis. In the US, the perceived persistent bilateral trade deficits with the PRC have been a long-standing irritant in the US-PRC relations. The dominance of PRC goods in the US market has been pronounced as US rules require products to have country-of-origin labels, although the PRC-made components may be minimal. The trade surplus that the PRC have enjoyed since the early 1990s has increased further after its admission to the World Trade Organization in 2001. But the debates on US-PRC trade imbalances have so far focused only on competitive threats to US manufacturers and recent safety concerns of PRC goods. Little attention has been paid on finding the factors contributing to the low level of US exports to the PRC. Mr. Bosworth addressed this issue in his lecture based on a paper that he wrote with a colleague entitled “Determinants of US Exports to China”. He discussed US goods trade with the PRC, focusing on export performance; and explored whether US trade with the PRC is atypical by contrasting it with those of the other two big economies in the world, namely, Japan and EU-15 .

The discussion began with an overview of trade flow patterns of the US, Japan, and EU-15 with the PRC. Mr. Bosworth showed that the share in GDP of US imports from PRC is comparable to those of Japan and EU-15. Both Japan and the US exhibited an upward trend in their imports since the mid-1980s, but only Japan mirrored the rising trend in its exports to the PRC. As a result, both the US and EU-15 had trade deficits with the PRC of 1.8% and 1% of GDP, respectively, in 2006 while Japan enjoyed a trade surplus of 0.2% of GDP.

Mr. Bosworth explored three probable factors for the poor export showing of the US to the PRC: (1) composition of US exports; (2) role of American multinational corporations (MNCs); and (3) long distance from the PRC.

In terms of the composition of US exports, Mr. Bosworth showed that the US exports the same goods to the PRC and to the rest of the world. The same pattern is observed for both Japan and the EU-15, making them competitors of the US in the PRC market. With the exclusion of agricultural goods and raw materials, the mix of export goods to the PRC of the three economies is largely similar, only that US exports are smaller to those of the other two. Export products to the PRC of the three economies are concentrated on 16 categories, particularly capital equipment, using Standard International Trade Classification (SITC) codes. Mr. Bosworth pointed out that a fifth of US and Japan exports, and a tenth of EU-15 exports to the PRC is electrical machinery. This seems to indicate that the degree of market openness to US exports of the PRC does not differ substantially with that of the global market.

As regards MNCs, the role of US foreign direct investment (FDI) in promoting US-PRC trade appeared insubstantial. FDI of US firms in the PRC averages only US$5 billion, which is equivalent to only 3% of US global FDI. US affiliates in the PRC are independent businesses with a focus on expanding their shares in the PRC market, and are not used as vehicles to promote US exports. Only 10.7% of US exports to PRC pass through MNCs' affiliates, and only 4.4% of US imports from the PRC come from affiliates. About two-thirds of total sales of US affiliates in the PRC are local, while sales to the US is only roughly a tenth of total sales.

For the third factor, it is arguable whether distance explains the poor export performance of the US to the PRC, as this should be reflected as well in the level of US imports. The asymmetry between US exports to and imports from the PRC could be interpreted as the relative success of US importers over US exporters. An example would be Wal-Mart, the largest US retailer, which directly imports from non-US foreign-invested enterprises in the PRC and does not produce in the PRC for export to the US.

In his study with Susan Collins using gravity model, results showed that had the US been situated as close as Japan is to the PRC, the share of exports in GDP would be comparable to that of Japan. But the same goes for the US import level; that is if distance were equalized, the level of US imports from the PRC would also increase proportionately.

In conclusion, Mr. Bosworth stated that the poor export performance to the PRC is not explained by the composition of trade nor by the role of US affiliates in the Chinese market. US FDI in the PRC is relatively small and, unlike Japanese MNCs in the PRC that export back to Japan, US MNCs mainly serve the domestic market. But distance was found to play a significant role, and surprisingly, distance appears to inhibit exports more than imports. Finally, Mr. Bosworth argued that the US's poor export performance to the PRC is not special to the PRC but rather the result of US global trade imbalance. The US has a trade deficit with almost all countries in the world, and Mr. Bosworth opined that uncompetitive real exchange rates may have something to do it.

Fan Gang, Director of the National Economic Research Institute and Chairman of the China Reform Foundation, delivered a lecture on “Short-term Anti-crisis Policy and Long-term Growth of China” at a distinguished speaker seminar on 24 April 2009 in Tokyo.

Mr. Fan addressed key questions surrounding the current recession in the People's Republic of China's (PRC), particularly on getting through the global financial and economic crisis in the short-run, as well as on the country's macroeconomic policy responses. He offered reasons for a sanguine outlook on PRC's long-term capacity to continue its economic growth after the crisis; and discussed his ideas on the next stage of economic and social development for the country.

While PRC's growth rate slowed to 6.8% in the fourth quarter of 2008 from 11.8% in 2007, Mr. Fan remains optimistic that in the long term, PRC's growth rates will get back on track. His confidence stems from results of a study using growth accounting that examined the PRC's approximately thirty-year record (1978–2005) of unprecedented high economic growth, growth that was even faster than Japan's own during its economic heyday.

The study revealed two factors behind the PRC's high gross domestic product growth rates—total factor productivity (TFP) and input growth— and found that TFP averaged at roughly 3–4%, and input growth at about 5–6% during this period. This approach of analyzing long-term prospects of the PRC's growth differs from previous studies that did not take into account TFP contribution to growth. Mr. Fan further explained that in analyzing input growth, human capital was used instead of labor force to emphasize the education component.

He attributed the relatively high TFP contribution to the PRC's growth rate to several factors including market-oriented reforms, spillover effects of foreign direct investment, human capital, and trade; more research and development (R&D) spending, better infrastructure, and urbanization. He added two interesting factors affecting, albeit negatively, TFP growth—government administrative costs and economic structure. Legacies of a centrally planned economy, such as big government, impeded the growth of businesses. Only when dramatic structural reforms in property rights were gaining momentum in the 1990s, which resulted in increased privatization of state-owned banks and state-owned companies, did economic structure reverse its effect on TFP. He emphasized that in reforming the PRC, it is important to note that the country faces the conundrums both of an economy in transition and of a developing one. The accumulated developments undertaken in R&D, infrastructure, and urbanization are expected to raise their share in TFP growth, and their benefits will eventually spread throughout the economic system in the near future.

No doubt, the PRC's environmental issues and its need to import resource-based inputs are pressing concerns, but for Mr. Fan, given the country's massive population and continued industrialization and urbanization, the real constraints are land and water. Competition for these limited resources is expected to intensify.

Mr. Fan then proceeded to examine the structural impediments that the PRC needs to address in order to recover from the crisis. One pressing concern is the PRC's high savings rate and low consumption rate. It does not help that the household savings rate as a percentage of income has stabilized at a relatively high rate of 30%. To promote household spending, he proposed increasing the minimum wage and welfare spending, while reducing income tax rates, particularly of the middle class. In the short-run, the government can hand out consumption coupons for low income families, and increase infrastructure investments.

Further complicating the PRC's recovery is that corporate savings are also very high. It should be noted that both public and private firms are beneficiaries of favorable tax laws and taxing them is difficult owing to their powerful political clout. For instance, resource extraction companies do not pay the government royalty or resource taxes, nor do state-owned corporations pay out dividends, which would further increase their surplus funds. Problems may arise when these corporations increase their investment rates in the current context of considerable fiscal stimulus packages. He suggested that firms must coordinate their investments plans with the government.

Finally, he gave his policy recommendations and scenarios for 2009 for the global economy. He remains optimistic that globalization will persist, despite some possible backlash of protectionism. He believes that the crisis has already bottomed out in the PRC as is evident in the 30% growth in investments in the real sector, although recovery is expected to be slow. Mr. Fan thinks that domestic consumption will stabilize due to deflationary pressures driven by falling commodity prices. The government's lax monetary policy mainly addresses this deflationary tendency.

On a cautionary note, if the slowdown continues unabated next year, government policies are likely to be blamed. Mr. Fan noted that current public investments may not be enough to sustain growth until 2010, thus current expansionary policies should be continued at least for another year. To quell inflationary fears from lax monetary policy, he urged central banks of highly liquid economies to be ready to take back this excess money as soon as the world recovers from the crisis. In terms of economic policies to combat the crisis, he added that the PRC is using not only a textbook prescription, but has complemented them with a host of other measures, such as administrative, financial, and industrial policy reforms.