Implications of China’s Accession to the WTO for Sectoral Adjustment in China and USA

1. Implications of China’s Accession to the WTO for Sectoral Adjustment in China and USA Anwar Hussain Shuji Kasajima

2. Introduction • Shocks: • CHN2005・・Tariff reduction + Quota elimination during 2000 and 2005 • SFG2010・・ Tariff reduction + Quota elimination during 2000 and 20１０ • Objectives: 1. Trade liberalization and return to capital investment 2. Short-term effects vs. long-term effects 3. IS balance, trade balance and capital mobility 4. Inter-sectoral resource allocation in China and USA 5. Factor substitution under capital mobility

5. National account identity • Saving-Investment Balance = Trade Balance + Net Foreign Income • yqht(r): regional (China) household income from equity in the global trust • yqtf(r): global trust’s income from equity in firms located in region r (China) in China

8. wqht(r): equity held by regional household in global trust wqtf(r): equity held by global trust in firms located in region r

9. Sectoral Output: CHN2005

10. Factor Demand: CHN2005

11. Sectoral Output: SFG2010

12. Factor Demand: SFG2010

13. Conclusion • Trade liberalization helps China to achieve efficient resource allocation toward textile products with strong comparative advantage • Higher return to capital associated with expansion of textile industry attracts more foreign capital which is used to substitute for other factors of production • Availability of capital especially in the later phase of liberalization facilitates expansion of manufacturing in China which becomes major exporting industry. • Higher productivity of capital results in capital intensive textile and manufacturing production • Delayed liberalization results in relatively lower efficiency advantages in China

14. Evolution of Factor Price in China

15. Memo 1 • Dynamic relationship between trade liberalization, return to capital, capital inflow and investment in the short-run and long-run. • Focus on return to capital, capital inflow and sectoral resource allocation with factor substitution in the short run and long run.

16. Memo 2 • Trade liberalization and quota elimination • Resource moves into textile industry which China has comparative advantage. Pro-competitive effects in import competing industries • Rental price of capital increases and price of investment goods fall (because of import of cheaper foreign products) • Rate of return to capital increases • Foreign capital flows into China • With more capital, not only textile industry but also forward and backward linkage industries invest in productive facilities and expand production • With expansion of textile industry, real wage increases and rate of return to capital continue to rise. • The capital labor ratio of both textile industry and other manufacturing industry rise. Use more capital intensive technology. • Due to rising real wage, textile industry gradually lose international competitiveness, and instead other manufacturing industry with more capital grow to become export industry. • In the medium and long run, rate of return to capital gradually fall, but still keep attracting foreign capital making manufacturing industry more capital intensive • In the long-run, textile industry loses international competitiveness to other countries and manufacturing industry expand production and export. • Investment relative to saving gradually falls, but net foreign payment continues to be high which is covered by trade surplus in the long-run.