China’ ’s Real Exchange Rate and Implications for s Real Exchange Rate and Implications for China East Asian Regional Trade and Investment Flows East Asian Regional Trade and Investment Flows David Roland- -Holst Holst David Roland UC Berkeley and Mills College UC Berkeley and Mills College Third Annual Conference on China Economic Policy Reform Third Annual Conference on China Economic Policy Reform Palo Alto October 14- -16, 2004 16, 2004 Palo Alto October 14 sponsored by sponsored by Stanford Center for International Development Stanford Center for International Development Stanford University Stanford University Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Contents Contents I. China’ ’s Emergence and the Asian Trade s Emergence and the Asian Trade I. China Triangle: Projections to 2020 Triangle: Projections to 2020 II. Strategies for East Asian Regionalism II. Strategies for East Asian Regionalism III. Implications of Real Exchange Rate Implications of Real Exchange Rate III. Appreciation Appreciation IV. Conclusions Conclusions IV. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Introduction Introduction China’ ’s accession to the WTO is a watershed event, s accession to the WTO is a watershed event, China for the global economy generally and for East Asia for the global economy generally and for East Asia in particular. in particular. Initial reactions of regional partners, who perceive Initial reactions of regional partners, who perceive China as a strong export competitor and magnet China as a strong export competitor and magnet for FDI, have been somewhat defensive. for FDI, have been somewhat defensive. This research reveals a more complex picture of This research reveals a more complex picture of China’ ’s emergence, one that may present as many s emergence, one that may present as many China opportunities as threats to East Asian policy opportunities as threats to East Asian policy makers. makers. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Introduction Introduction Three issues are of particular relevance in this context: Three issues are of particular relevance in this context: 1. It will stiffen export competition in a broad It will stiffen export competition in a broad 1. spectrum of products, particularly in extra- -regional regional spectrum of products, particularly in extra markets. markets. ’ s economy will make it the The growth of China ’ 2. The growth of China s economy will make it the 2. ’ s largest importer, and this absorption will region ’ s largest importer, and this absorption will region create unprecedented opportunities for regional create unprecedented opportunities for regional exporters. exporters. 3. In the baseline growth trends, emergent In the baseline growth trends, emergent 3. imbalances portend real exchange rate imbalances portend real exchange rate adjustments that could alter regional trade and adjustments that could alter regional trade and growth patterns. growth patterns. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
I. China’ ’s Emergence and the s Emergence and the I. China Asian Trade Triangle Asian Trade Triangle Regional economic projections to 2020. Regional economic projections to 2020. Baseline GDP growth scenarios are Baseline GDP growth scenarios are evaluated with a dynamic global CGE evaluated with a dynamic global CGE model. model. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Baseline Real GDP Growth Rates Baseline Real GDP Growth Rates (Normalized to 100 in 2000) (Normalized to 100 in 2000) 450 400 350 China 300 Japan 250 200 NIE 150 ASEAN 100 50 0 2005 2010 2015 2020 Sources: DRI, WB, Oxford Econometrics Sources: DRI, WB, Oxford Econometrics Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Real GDP Real GDP (billions of 2000 USD) (billions of 2000 USD) 7000 6000 5000 China 4000 Japan NI E 3000 ASEAN 2000 1000 0 2005 2010 2015 2020 Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Real Exports Real Exports (billions of 2000 USD) (billions of 2000 USD) 1200 1100 1000 China 900 Japan 800 700 NI E 600 ASEAN 500 400 300 2005 2010 2015 2020 Source: Author’ ’s estimates. s estimates. Source: Author Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Real Imports Real Imports (billions of 2000 USD) (billions of 2000 USD) 1200 1100 1000 China 900 Japan 800 700 NI E 600 ASEAN 500 400 300 2005 2010 2015 2020 Source: Author’ ’s estimates. s estimates. Source: Author Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
The Asian Trade Triangle The Asian Trade Triangle These forecasts indicate the emergence of a These forecasts indicate the emergence of a systematic pattern of triangular trade between systematic pattern of triangular trade between China, the Rest of East and Southeast Asia, China, the Rest of East and Southeast Asia, and the Rest of the World and the Rest of the World This Trade Triangle reveals that China’ ’s export s export This Trade Triangle reveals that China expansion offers significant growth leverage to expansion offers significant growth leverage to its neighbors. its neighbors. Chinese absorption will emerge to dominate regional Chinese absorption will emerge to dominate regional demand. Provided Asian economies do not demand. Provided Asian economies do not isolate themselves from this process, the net isolate themselves from this process, the net effect of China’ ’s growth can be hugely positive. s growth can be hugely positive. effect of China Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Trade Triangle 2000 Trade Triangle 2000 Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Trade Triangle 2020 Trade Triangle 2020 Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
II. Regional Strategic Scenarios II. Regional Strategic Scenarios How can regional economies best respond to China’ ’s s How can regional economies best respond to China global initiative? global initiative? A variety of alternative regional arrangements were A variety of alternative regional arrangements were examined empirically. All include the first scenario. examined empirically. All include the first scenario. CNWTO: China joins WTO, status quo elsewhere CNWTO: China joins WTO, status quo elsewhere 1. 1. AFTA : ASEAN Free Trade Area AFTA : ASEAN Free Trade Area 2. 2. AFTAPC : AFTA plus China AFTAPC : AFTA plus China 3. 3. NEAFTA : Northeast Asian Free Trade Area NEAFTA : Northeast Asian Free Trade Area 4. 4. - China, Japan, and Korea China, Japan, and Korea - ASEAN+ 3 : ASEAN, China, Japan, and Korea ASEAN+ 3 : ASEAN, China, Japan, and Korea 5. 5. PAC3 : Pacific Trilateralism PAC3 : Pacific Trilateralism - - China, Japan, USA China, Japan, USA 6. 6. GTL : Global Trade Liberalization GTL : Global Trade Liberalization 7. 7. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
East Asian Regionalism and East Asian Regionalism and China China China is in a relatively unique position. This China is in a relatively unique position. This country can apparently “ “go it alone go it alone” ” to to country can apparently globalization. It also possesses two carrots and globalization. It also possesses two carrots and one stick in regional negotiations: one stick in regional negotiations: – Carrots: Access to domestic market and the Carrots: Access to domestic market and the – “bandwagon bandwagon” ” effect, selling into China effect, selling into China’ ’s export growth. s export growth. “ – Stick: Denial of access. Stick: Denial of access. – However, this strategic leverage appears to be However, this strategic leverage appears to be limited for two reasons: limited for two reasons: – Chinese imports are essential to its export capacity Chinese imports are essential to its export capacity – – WTO standards will not sustain exclusion WTO standards will not sustain exclusion – Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
Regionalism and and Globalism Globalism Regionalism East and Southeast Asia can capture most of the East and Southeast Asia can capture most of the absolute export growth expected from full absolute export growth expected from full globalization by just forming ASEAN+ 3. globalization by just forming ASEAN+ 3. Thus, head- -to to- -head export global competition is head export global competition is Thus, head less important than leveraging opportunities less important than leveraging opportunities presented by East Asia’ ’s fastest growing s fastest growing presented by East Asia internal market. internal market. The best strategy for East and Southeast Asia is The best strategy for East and Southeast Asia is to pursue globalism through more to pursue globalism through more comprehensive regionalism. comprehensive regionalism. Roland- Roland -Holst Holst October 15, 2004 October 15, 2004
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