Competing with Giants: Who Wins, Who Loses?

1. Competing with Giants: Who Wins, Who Loses? Betina Dimaranan, Elena Ianchovichina, and Will Martin National University of Singapore 15 September 2006

2. Export Growth: China and India • Two giant labor-intensive exporters, growing rapidly, but some important differences • Services much more important in India • Only China integrated into global networks • But both now rapidly integrating into world production networks • What will be the implications for them, and for other countries?

3. Importance of Services

4. Import Share: Parts & Components

5. Radically different export patterns 6-digit

6. Major reforms under way in India • Reductions in non-agricultural protection • Improvements in the operation of duty exemption/drawback schemes • Improvements in infrastructure/lowering of trade costs

7. Questions to be addressed • What are the likely effects of India’s move to greater integration in the world economy? • What will be the effects of rapid growth by two large, globalized exporters? • On each other? • On other developing countries?

8. Methodology • Modify the GTAP-6 model to allow duty exemptions on intermediates used for exports • Move from 2001 base to 2005 incorporating agreed reforms– especially China’s WTO commitments • Examine globalizing reforms in India • Project the global economy forward to 2020 • Compare with higher-than-expected growth in China and India • Allow for increases in the variety of goods exported from China and India • Consider growth biased to physical or human capital

9. India’s Reforms • Reductions in non-agricultural tariffs • Making duty exemption/drawback schemes more effective • Modeled as introduction of such schemes for all exported goods • 20% reduction in trade costs

10. Changes in India’s Exports • Big increases in exports of metals, machinery and electronics • But the correlation with China’s exports of manufactures declines from 0.01 to -0.02

11. Implications for the composition of India’s exports

12. Baseline simulation, % pa, 2005-20

13. Baseline simulation, % pa, 2005-20

14. Impacts of higher growth in China & India on other countries • Benefits from increases in direct trade • Strengthening of demand for exports • Greater supplies of goods from China & India • Challenges from third market competition • Quality and variety growth based on Hummels and Klenow (2005) • Quality of exports represented as an increase in the effective services provided • Variety growth based on H-K assessment that 2/3 of export growth from new varieties

15. Implementation • Primary exogenous shock an increase in GDP 2005-20 growth of 2.1% per year in China &1.9% in India • Based on a model of potential growth rates • Designed to replicate Hummels-Klenow increase in varieties 66% of growth rate & increase in actual prices of 0.09% for each 1% of growth • Quality & variety shocks introduced through changes in λ & N in Hummels-Klenow price aggregator

16. Impacts on world welfare

17. Impacts on exports, 2005-20

18. Impacts on industry output, 2005-20

19. Productivity growth likely biased • We consider scenarios where growth is biased towards more advanced sectors • Sectorally, or through capital growth • Perhaps the most interesting is bias towards strong export sectors in China and India • metals, electronics, machinery and equipment, motor vehicles and commercial services • Consider 2% productivity growth per year

20. Growth in strong export sectors, 2005-20

21. Impacts on sectoral outputs, 2005-20%

22. Conclusions • China and India currently compete relatively little, despite being labor-intensive giants • Increasing globalization by India looks unlikely to greatly intensify that competition • Higher growth by China and India likely to be beneficially for the world as a whole, and for most developing countries • Especially when improved quality and variety of exports is considered • But substantial adjustments in production and exports required in some cases