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Exposure of belt and road economies to China trade shocks

By Paulo Bastos, World Bank Group
 
Abstract
 
The Belt and Road Initiative seeks to deepen China's international integration by improving infrastructure and strengthening trade and investment linkages with countries along the old Silk Road, thereby linking it to Europe. This paper uses detailed bilateral trade data for 1995-2015 to assess the degree of exposure of Belt and Road economies to China trade shocks. The econometric results reveal that China's trade growth significantly affected the exports of Belt and Road economies. Between 1995 and 2015, the magnitude of China's demand shocks was larger than that of its competition shocks. However, competition shocks became more important in recent years, and were highly heterogeneous across countries and industries. Building on these findings, the paper documents the current degree of exposure of Belt and Road economies to China trade shocks, and discusses policy options to deal with trade-induced adjustment costs.

Concluding remarks

This paper characterized the dynamics of China’s bilateral trade relationships over the 1995-2015 period and assessed the implications of China trade shocks for exports of B&R economies. Between 1995 and 2015, B&R economies accounted for about a third of China’s export revenue. They have been more important for China as export markets than as sources of Chinese imports (although the share of imports originated in B&R economies has observed upward trend in recent years). China is an important trade partner for many B&R economies, especially as a source of imports. Over this period, exports of B&R economies were significantly impacted by China’s trade shocks. Between 1995 and 2015, the magnitude of China’s demand shocks was larger than that on supply (or competition) shocks, implying that the overall net impact of China trade shocks on the exports of B&R economies during this period was significantly positive. However, the magnitude of competition shocks associated with China’s trade became stronger in 2005-2015. The impacts of China trade shocks were heterogeneous across B&R economies and industries.

Although one must be cautious in extrapolating from historical data, the econometric results suggest that the trade similarity indexes we employed contain useful information for capturing the current degree of exposure of B&R economies to China trade shocks. Looking forward, these measures suggests that several B&R economies currently exhibit a relatively high degree of exposure to competition shocks associated with further integration with China. This is the case of Hong Kong SAR, China, Vietnam, Malaysia, Philippines, Thailand and Indonesia, which source a relatively large share of imports from China and have an export structure that is more similar to that of China. These B&R economies are therefore likely to be relatively more exposed to import competition from China in their own markets in several industries. Further integration with China will likely involve stronger competitive pressures in final goods markets, which may also have important implications for the adjustment of factor markets. There are nevertheless various important sources of mutual gains from further integration: consumers would gain access to a wider range of product varieties within sectors; firms and countries would obtain efficiency gains due to further specialization in different varieties or stages of production.

Other B&R economies are only weakly exposed to competition shocks associated with further integration with China. Tajikistan, Myanmar, the Islamic Republic of Iran, Kyrgyzstan, Bangladesh, Mongolia, and Timor-Leste source a sizable share of imports from China, but have an export structure that differs considerably from that of China. To the extent that differences in export structure reflect underlying differences in production structures, these economies are only weakly exposed to Chinese import competition in their own markets, even though they source a large share of imports from China. Mutual gains from further integration with China are likely to derive mainly from further exploitation of the corresponding comparative advantages. The degree to which B&R economies are exposed to competition from China in third-country markets is relatively higher in Vietnam, Thailand, Malaysia, Philippines, India, Singapore and Indonesia. If Chinese exports become relatively more expensive (e.g. due to further increases in labor costs or exchange rate movements), these countries would likely gain market share in their corresponding export markets. Conversely, if Chinese investments in robotization make its exports more competitive, these economies may lose market shares.

Mongolia, Hong Kong SAR, China, the Islamic Republic of Iran, Oman, Turkmenistan, and the Republic of Yemen are highly exposed to demand shocks from China. A large share of exports from these economies is to the Chinese market, and the export structure of these countries displays a high degree of similarity with China’s overall import demand. China is also an important destination for Lao PDR, Uzbekistan and Myanmar and Iraq, although the export structure of these economies is quite different from the structure of China’s overall import demand. Finally, Malaysia, Philippines and Singapore export a sizable share of exports to China and have an export structure that is relatively close to the structure of Chinese multilateral imports, suggesting that these economies are also strongly exposed to China’s demand shocks.

While deeper economic integration typically generates gains at the country-level, it also imposes adjustment costs within countries. These costs are associated with reallocations of workers across sectors, regions and occupations triggered by sector-specific competition and demand trade shocks. Countries more exposed to competition shocks from China are likely to face stronger adjustment costs. Policies to deal with these trade shocks may include general inclusive policies, such as social security and labor policies (including education and training). Well-designed credit, housing and place-based polices may also facilitate adjustment. Trade-specific adjustment programs may play a complementary role. B&R economies more exposed to competition shocks should consider whether their inclusive policies are appropriate to deal with the adjustment costs imposed by trade shocks, and potentially include these policies in the negotiated trade package. While this paper aimed to provide a general overview of the exposure of each B&R economy to supply and demand shocks associated with further integration with China, more definite conclusions require complementary analysis based on production and employment data, along with a deeper assessment of country-specific institutions.

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