Chimericasia

The term “Chimerica” has recently come into vogue, thanks to the Harvard historian Niall Ferguson (see here, for example). He uses it to summarize the increasingly important and prominent economic bond between China and the US. Functionally, this bond has two parts: the United States’ merchandise trade deficit with China, and a countervailing flow of Chinese savings into US treasuries and other assets. The former has been a function of American overspending relative to income, and the latter have contributed to making overspending possible – or more accurately, cheaper to finance – by holding US interest rates low.

However, this bilateral bond of trade and financial flows, while impressively large, is not free-standing. It exists only because of many other economies, especially in the developing world, have become counterparties to North Pacific trade. It’s worth devoting a few minutes to thinking about these corollary links and some of their implications.

The global boom in trade with China

In the West, most discussion of China’s rise as a global trading power has focused exclusively on its success as an exporter of labor-intensive manufactures. From a developing world perspective, however, China is often more properly seen as a major importer, of raw materials and of manufactured components for final assembly in Chinese factories. The majority of developing economies have been drawn into this international production network. For many, this has resulted in major changes in production structure and the volume and direction of their international trade. These changes, in turn, have implications for their long-term development.

The reorientation of developing economies toward China has had three big types of impact. First, just as in rich countries, the producers of labor-intensive manufactures have encountered intense competitive pressures. Second, natural resource export industries have enjoyed a sustained commodity price boom (recent fluctuations notwithstanding). Third, manufacturers of skill-intensive goods such as components for computers, phones, and other electronic devices have found opportunities to expand through participation in so-called “fragmentation trade” (i.e. trade in partly finished manufactures) with China.

The first impact is obvious. Producers of garments, footwear, furniture, low-end electrical appliances and similar low-tech products everywhere, whether in Raleigh or Rawalpindi, are locked in competition with Chinese factories operating on razor-thin margins. The end of the Multi-Fiber Arrangement, under which the USA and the EU imposed “voluntary” quotas on garment exports from developing countries, removed a big barrier to China’s growth in this product category, thereby intensifying competitive pressures on producers in other countries. The overall expansion of Sino-American and Sino-European trade has also conferred advantages on Chinese producers by creating and enhancing trade networks and other forms of market infrastructure. Some of this growth has come at the expense of firms elsewhere (e.g. Indonesia).

The second impact, on global markets for natural resources, is also pretty clear, but the numbers are big enough to merit review. China is now the world’s largest consumer of most of the main metals (accounting for a quarter or more of world imports), and a major consumer of energy. It is the largest world consumer of many agricultural products (including wheat, rice, palm oil, cotton and rubber), and the second largest in others (soybeans, soybean oil, tea). Between 1990 and 2003, Chinese demand for major metals grew at an average of 14.7 per cent yearly; since 1999, it has grown at over 17 per cent and absorbed around two thirds of incremental global output. For any country that is specialized in primary commodity exports, China is a major destination and the driver of a sustained export boom. Brazil’s exports to China (mainly iron ore, soybeans, crude oil, wood pulp and bovine leather) grew by 800% in the first 5 years of this century. Other resource exporters have similar stories.

The third impact is more subtle. As global trade and transport costs have fallen, firms have been quick to abandon the old manufacturing model in all (or nearly all) stages of production take place within a single economy. Increasingly, parts and components are manufactured in specialized plants located wherever economic logic or business expediency dictates, then shipped to China (or another low labor cost location) for final assembly and packaging. The more advanced Asian economies (Korea, Japan, Taiwan) are leaders in this trade, but even such latecomers to industrialization as Malaysia and Thailand have significant exports of skill-intensive electronics parts and components to assembly plants in China. The more China’s factories grow, the more they draw in imports from locations such as these.

Putting it all together helps us understand China’s trade balances with the rest of the world. China runs a substantial merchandise trade deficit with Brazil, and a smaller one overall with South America as a whole (see table below). Its trade balance with Africa is a wash: China’s massive imports of African energy and minerals are about matched by its earnings from low-end manufactures exported to the continent. With Asia, however, China runs a huge deficit: $US187bn in 2007 ($178bn, if we exclude Japan), almost as large as its surplus with the US ($220bn in 2007). The growth rate of China’s exports to the US (23% annually in 2000-07) was lower than that of its exports to South America (33%), C.I.S. (47%), Africa (33%) and Asia other than Japan (26%). Meanwhile, China’s merchandise imports from developing Asia also grew at about 26%, while those from resource-rich Africa expanded at 31% and S. America 38%. So the Chimerica phenomenon is not independent: during boom times, the growth of Chinese trade with the wealthy West has also supported the emergence of Chinasia, Chinafrica and Chilatinamerica.

In global perspective, developing Asia is just as important a destination for Chinese exports as the US (both account for about 25%). Developing Asia sells China 1/3 of its merchandise imports – over $500bn worth in 2007, against just $70bn imported from the US. Put another way, all of China’s trade (imports plus exports) with North America amounts to less than 2/3 of its trade with developing Asia — $409bn in 2007, as opposed to $653bn.

In other words, a very large part of what Americans count as “imports from China” is in fact imports of minerals, energy, timber, processed ores, basic chemicals, and electrical and electronic parts and components from elsewhere in the developing world which have passed through China, and in passing, have been transformed with the help of Chinese labor into products recognizable by American consumers. Want to verify this? Next time you dispose of a worn-out or broken “made in China” electronic device, disassemble it first and count the countries from which its interior parts originate. The primary goods that China sources from the rest of the world are harder to identify, but they’re in there too: pulp and paper used in packaging and printed products; minerals and ores used in metal and electrical products; palm oil, rubber, soybean, and other industrial crops used in tires, inks, processed foods; plywood and timber used as formwork in construction of China’s factories, ports and warehouses; and so on. Far from being a bilateral relationship, Chimerica’s trade is just the tip of the global trade iceberg.

The global financial crisis

During the global recession, the “rebalancing” of China’s economy (the term used to refer to an increased reliance on domestic demand rather than exports) has sustained its growth and maintained the relationships with the rest of China’s trading partners, insulating them (to an extent) from the worst effects of the global trade downturn. The most recent IMF World Economic Outlook (July 2009) predicts China and India to grow in 2009 at 7.5% and 5.4% respectively—in the case of China, ten percentage points faster than the United States. Once the global recession is over, developing Asia’s share of global GDP will have risen even faster than in previous years. Prof. Ferguson asks whether China’s robust growth in the face of a US recession spells the end of “Chimerica”. One could with equal validity see these differences as further evidence that the strength of the link was always—well, chimerical.

Chimericasia and the environment

There is an important coda to this story that is about trade not in goods, but in services—specifically, environmental services. Much of the growth of China’s imports from the developing world has been in resources, including tropical timber, minerals, and agricultural produce. Resource extraction by miners, loggers and so on draws down natural capital, and the expense of doing so is being borne not by Chimerica but by the source countries themselves. In this way, both America and China have “offshored” many of the natural resource costs of their own consumption, even as they implement more restrictive environmental policies on their own domestic industries. Sustained demand growth for tropical timber and agricultural products have catapulted some resource-rich developing countries way up the global league table of greenhouse gas emitters: according to the Stern Review, land use conversion accounts for 18% of global GHG emissions; 20% of this from Brazil and 30% from Indonesia, making that country the world’s third-largest emitter of GHGs. That’s a very significant downside of resource-based development.

China’s merchandise trade balances with regions and selected countries ($US billion)

Balance of trade	1997	2003	2004	2005	2006	2007
World	40.4	25.5	32.1	102.0	177.5	261.8
North America	16.6	90.4	121.9	167.5	214.6	242.4
— United States	16.4	85.2	115.0	156.1	195.7	219.8
— Other North America	0.1	5.2	7.0	11.3	19.0	22.6
South & Cent. America	0.6	(4.7)	(6.5)	(6.7)	(4.8)	(8.4)
— Brazil	(0.4)	(3.7)	(5.0)	(5.2)	(5.5)	(7.0)
— Other South & C. Am.	1.0	(1.0)	(1.5)	(1.6)	0.7	(1.4)
Europe	6.5	41.6	64.2	106.9	146.8	197.3
— European Union (27)	5.9	41.6	63.9	104.3	140.7	188.2
— Other Europe	0.6	0.1	0.3	2.6	6.0	9.1
Cwealth of Indep States (CIS)	(2.7)	(3.8)	(2.4)	0.7	5.2	20.0
— Russian Federation	(2.0)	(3.7)	(3.0)	(2.7)	(1.7)	8.8
— Other CIS	(0.6)	(0.1)	0.6	3.4	6.9	11.2
Africa	0.7	1.8	(2.0)	(2.5)	(2.6)	0.2
— South Africa	(0.0)	0.2	(0.0)	0.4	1.7	0.8
— Other Africa	0.7	1.6	(2.0)	(2.9)	(4.3)	(0.7)
Middle East	(0.2)	(1.2)	(4.7)	(8.9)	(11.3)	(3.9)
Asia	21.9	(98.6)	(138.6)	(155.2)	(171.3)	(186.9)
— Japan	(15.5)	(3.3)	(4.7)	1.9	(3.6)	(9.1)
— Six E. Asian traders*	55.1	(72.3)	(96.0)	(102.7)	(101.0)	(106.3)
— Other Asia	11.3	2.1	0.8	0.7	6.7	14.3

* Hong Kong, South Korea, Malaysia, Singapore, Taiwan and Thailand.

Source: WTO.