The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean*

INTER-AMERICAN DEVELOPMENT BANK INTEGRATION AND REGIONAL PROGRAMS DEPARTMENT RESEARCH DEPARTMENT THE EMERGENCE OF CHINA: OPPORTUNITIES AND CHALLENGES FOR LATIN AMERICA AND THE CARIBBEAN* * Preliminary draft for discussion at the Conference “The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean”, October 1, 2004, Inter-American Development Bank (IDB), Washington D.C. This study cannot to be quoted or cited without the permission of the coordinators. The opinions expressed here are those of the IDB China Task Force and not necessarily those of the Bank. CHINA TASK FORCE TEAM The Integration and Regional Programs Department (INT), under the direction of Nohra Rey de Marulanda, and the Research Department (RES), under the direction of Guillermo Calvo, were responsible for the preparation of this Report. COORDINATORS The China Task Force was coordinated by: . Robert Devlin, Deputy Manager, INT . Antoni Estevadeordal, Principal Economist, Integration, Trade and Hemispheric Issues Division, INT . Andrés Rodríguez, Consultant, RES TEAM MEMBERS Other members of the Task Force were: Manuel Agosín (RE1), Andrew Crawley (INT), Jaime Granados (INT), Ernesto López Córdova, (INT), Eduardo Lora (RES), Mauricio Mesquita Moreira (INT), Alejandro Micco (RES), Marcelo Paiva Abreu (INT), Matthew Shearer (INT), Ernesto Stein (RES), and Kati Suominen (INT). Research assistants were Paula Auerbach (RES), Carolina Mandalaoui (RES), Danielken Molina (RES) Alexandra Olmedo (INT), Ricardo Vera (INT), and Christopher Vignoles (INT). María de la Paz Covarrubias (INT) provided additional editorial and formatting support. OUTSIDE AUTHORS OF BACKGROUND PAPERS . Rogelio Arellano, Bank of Mexico . Shahid Javed Burki, Woodrow Wilson Center and Former EMP Financial Advisors . Sebastián Claro, Department of Economics, Catholic University, Chile . Arturo Condo, Institute Centroamericano de Administración de Empresas (INCAE), Costa Rica . Luis Figueroa, INCAE, Costa Rica . Carlos Galperín, Fundación Capital, Argentina . Gustavo Girado, Fundación Capital, Argentina . John Hewitt, Fundación Comisión Asesora en Alta Tecnología (CAATEC), Costa Rica . David Hummels, Krannert School of Management, Purdue University . Marcos Jank, Institute of Trade Studies and International Negotiations (ICONE), Brazil . Mario Jales, ICONE, Brazil . Mauricio Jenkins, INCAE, Costa Rica . Valeria Lentini, Fundación CAATEC, Costa Rica . Ricardo Monge Gonzalez, Fundación CAATEC, Costa Rica . Luis Morales, INCAE, Costa Rica . Barry Naughton, Graduate School of International Relations and Pacific Studies, University of California, San Diego . Luis Obando, INCAE, Costa Rica . Luis Reyes, INCAE, Costa Rica . Pablo Rodas, Asociación de Investigación y Estudios Sociales (ASIES), Guatemala . Eduardo Rodríguez Diez, Fundación Capital, Argentina . Neandro Saavedra, University of Tsukuba, Japan . Peter Schott, Yale School of Management, Yale University .Shunli Yao, Center for Chinese Agricultural Policy (CCAP), PRC CONTENTS INTRODUCTION i PART I – BACKGROUND ON CHINA’S ECONOMY . CHAPTER 1. A Snapshot of China’s Economic Performance 1 . CHAPTER 2. Some of the Policies Behind the Chinese 15 Performance: An Overview PART II – COMPETING WITH CHINA IN GLOBAL TRADE . CHAPTER 3. China’s Trade Performance: Some Stylized Facts 38 . CHAPTER 4. Why is China’s Trade Performance Exceptional? 58 . CHAPTER 5. How China and Latin America Compete in the Global 77 Marketplace PART III – FOREIGN DIRECT INVESTMENT . CHAPTER 6. The Surge of FDI to China: Should Latin America Be 105 Concerned? PART IV – THE CASE OF TEXTILES AND APPAREL . CHAPTER 7. China and the Future of the Textile Sector in Latin America 125 PART V - CONCLUSION . CHAPTER 8. Where Does Latin America Go From Here? 141 PART VI – APPENDIX . Country Case Studies 165 INTRODUCTION Southeast Asia has been an important pole of economic growth and export development in the world economy since the mid-1960s. Japan, which underwent post-war transformation into an economic powerhouse, was at that time joined by a group of developing countries often called the “Asian Tigers”. The original “Tigers” included South Korea, Hong Kong, Singapore and Taiwan. A second wave of East Asian developing countries followed as Malaysia, Indonesia and Thailand emerged with impressive economic growth and export records. In the background was China, undergoing many transformations that began to attract more general notice in the 1990s. Since 2000, China’s economy has been the focal point of attention of much of the world. Barely a day goes by without major world newspaper reporting on economic developments in China. Except for a few countries, Latin America and the Caribbean’s economic links with East Asia traditionally have not been an outstanding feature of the region’s international economic profile. This is changing rapidly, since China’s emergence in the global arena has significant implications for the world and for virtually all Latin American economies. China’s size, fast growth, external openness and trade performance is being felt everywhere in Latin America, but perceived in different ways. South American commodity producers see China mostly as a new market that is favorably affecting export volumes and world prices. Mexico and the Caribbean Basin, on the other hand, are perceiving head-to-head competition at home and in third markets for many of the products they produce and export. And everyone has questions about whether China’s massive attraction of foreign direct investment (FDI) will be at the expense of flows to the region. The purpose of this Report is to make a first and necessarily preliminary assessment of the strategic implications – the opportunities and the challenges – of China’s economic performance for growth and development in Latin America, now and in the near future. A vast array of topics could be broached. Here the focus is mostly limited to effects on trade and investment, which are the areas of most immediate potential impact. Other important areas of interest that can affect the region, such as the sustainability of China’s macroeconomic policy and growth, exchange rates, external finance and so on, are not addressed in any detail in this initial effort. The Report is divided into five parts. Part One covers the background to the Chinese economy and economic policy; it draws largely on secondary information. Part Two presents an extensive analysis of the key question of whether China’s growing penetration of world markets poses a challenge or an opportunity to different Latin American countries. In particular, it analyzes trade links between China and Latin America, identifies areas of competition and complementarity in third markets, and assesses sources of trade competitiveness. It also offers some selected Latin American trade policy responses to the opportunities and challenges raised by China’s emergence in the global economy. Part Three examines the implications of China for FDI flows to the region, and considers whether serious FDI diversion is a problem. Apart from the analysis of data on FDI flows, it presents the results of a survey of foreign investors in a Central American country on the factors that they deem important in locating in China versus Latin America. Part Four is a special study of the implications of China, and the elimination of the Multifiber Agreement in 2005, for the region’s exports of textiles and apparel, an issue that appears to be of critical importance to countries in i Central America and the Caribbean region. Part Five contains the concluding chapter, which focuses on the challenges of China and strengths in Latin America, and outlines some responses to address weaknesses. The Appendix presents several country case studies on the impact of and response to China. It should be mentioned that, although Hong Kong is now part of China, all data and analysis in the study, unless otherwise indicated, refer only to mainland China. Another caveat is on the data themselves. There is much discussion of the accuracy of some data on China, which partly reflects continuing improvements in data collection and closer evaluation of that data. This study does not enter into that debate, and draws largely on official national or multilateral data sources. The report was prepared by a Joint Task Force formed by the Inter-American Development Bank’s Integration and Regional Programs Department and Research Department. Special studies by staff and outside experts were also undertaken; they are acknowledged at the end of the chapters in which those inputs have been used. Finally, this Report is being issued as a preliminary draft for discussion in this conference, and should not be cited or quoted without the permission of the Task Force Coordinators. The opinions expressed herein are those of the Task Force and do not necessarily reflect the opinions of the Bank. ii China, P.R. Mainland: Basic Indicators 90-94 95-99 2000 2001 2002 2003 National Accounts Annual Percent Change (%) GDP 12.48.38.07.58.09.1 GDP per capita 10.7 7.3 7.3 6.7 7.3 8.4 Exports Goods & Services 21.9 7.1 30.6 9.6 29.4 22.7 Imports Goods & Services 25.8 5.8 24.5 10.8 27.5 31.0 Consumer Prices (a) 10.4 5.2 0.3 0.5 -0.8 1.2 National Accounts Share of GDP (%) Final Consumption 60.3 57.9 61.0 59.1 56.6 56.8 Household Consumption 47.4 46.0 47.9 45.7 43.4 44.1 General Gov't Consumption 12.8 11.9 13.1 13.4 13.2 12.7 Gross Domestic Savings 39.7 42.1 39.0 40.9 43.4 43.2 Gross Fixed Capital Formation 31.5 34.8 36.5 37.8 40.2 42.2 Exports Goods & Services 19.8 22.5 25.9 25.5 28.9 33.0 Imports Goods & Services 18.1 19.1 23.2 23.1 25.9 32.0 Exports, Net 1.7 3.4 2.7 2.4 3.0 1.0 External Current Account 1.4 2.1 1.9 1.5 2.8 … Fiscal Stance Overall Fiscal Balance -1.0 -2.4 -3.6 -2.9 -3.0 … Central Gov't Fiscal Balance 1.9 1.9 1.8 3.3 3.6 … Bank Money & Finance (a) Money 42.6 46.4 61.0 62.6 71.0 74.1 Quasi Money 50.5 77.2 91.1 96.1 111.5 117.5 Bank Claims on Government 3.0 5.0 8.2 13.1 14.8 13.3 Bank Claims on Other Sectors 92.1 103.9 124.7 123.7 139.7 148.0 National Accounts Billions of dollars GDP (constant 1995) 504.9 833.4 1,041.2 1,119.3 1,208.9 1,318.9 GDP per capita (con.

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